Understanding Contracts for Difference in Electrical Reform

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The European Union (EU) electricity market is set for reform, marking its 20th anniversary. The market had its worst year on record in 2022 following the Russian invasion of Ukraine, with gas prices skyrocketing and causing financial difficulty for households and companies across the EU. The proposed reform will not be a fundamental review, but multiple changes to current regulations, including the mandated use of contract for difference (CfD) for new renewable and nuclear power projects. The two-way nature of CfDs will help guarantee stable income for investors by compensating for extreme fluctuations in the electricity market. However, the potential for extended compensation may put pressure on state budgets, necessitating CfDs with “cap up” and “penalty clause” provisions. The proposed reform has been recommended as a priority by the European Commission.

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