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Contracts for Difference (CfDs) are a government mechanism designed to provide long‑term price stability for low‑carbon electricity generators by guaranteeing a strike price for eligible projects. Under a CfD, if market prices are below the strike price the generator receives a top-up; if market prices exceed the strike price the generator pays back. This arrangement reduces wholesale price exposure and can make project financing easier for larger projects that meet eligibility and allocation criteria.
Smaller or distributed projects commonly do not access CfDs because of project size thresholds, allocation rounds and eligibility constraints. Those projects typically rely on merchant revenues from wholesale markets or on private offtake arrangements such as corporate or municipal power purchase agreements (PPAs). PPAs can offer fixed or indexed contract terms that provide partial revenue certainty, but they vary by counterparty credit risk, contract duration and shape of delivery profiles.
The revenue mix affects project valuation, financing and investor risk-return expectations. Merchant exposure can deliver upside when wholesale prices rise but also introduces volatility and basis risk. Conversely, long‑dated PPAs provide predictability but may discount future market improvements. Developers and investors assess these trade-offs when structuring projects, often blending short‑term merchant sales with contracted volumes to optimise returns and manage risk.
For retail investors considering fractional exposure to renewables, understanding whether a project has a CfD, a long‑term PPA or merchant revenue exposure is critical. Each revenue model implies different levels of cashflow certainty, sensitivity to wholesale prices and operational risk that will influence the investment profile.