Contracts for difference
Time Matters
UK electricity prices are traditionally determined by the cost of producing electricity from gas. High gas prices means expensive electricity. Low gas prices means cheap electricity.
This is problematic for wind and nuclear energy. It is expensive to build a wind turbine or nuclear plant, but both are cheap to run. If gas is cheap, electricity prices won’t cover their construction costs. Fearing that outcome, the free market will supply inefficiently too little wind or nuclear power.
Enter “contracts for difference”, usually shortened to CfDs. When market electricity prices are lower than a pre-agreed price, the government gives nuclear and wind extra money to cover the difference. When market prices are higher, those producers pay the government the difference. Wind and nuclear industries get the price certainty they need to invest.
This benefits us all. We get much-needed zero-carbon energy. In addition, when gas prices are high - as recently - the government gets a financial windfall allowing it to cut bills for consumers and businesses.
We can however improve how we do this - here is my policy recommendation:
