Contract for Differences (“CfD”)

A contract between two parties, stipulating that each will pay to the other the difference between an agreed price and the market price on a given payment date, depending on the market price at the time. A good example in project financing is the CfD mechanism used to support renewable power in the UK. Under this system, if market power prices fall below an agreed “strike price”, generators receive a payment from a body funded by a levy on UK consumers. The payment received by the generator will be the difference between the strike price and the market price. If the market price rises above the strike price then the generator is required to pay the difference between the strike price and the market price to the levy-funded body. The net effect is that the generator receives the strike price at all times. This provides high predictability of revenue, at least as far as price is concerned.