Third Party Costs Explained costs explained

The information in this video and article was accurate as of 1 April 2025. We update our TPCs Explained hub every Spring to reflect any changes.

What’s the Contracts for Difference (CfD) scheme?

The CfD scheme supports low-carbon electricity generation across Britain. By funding most new-build, large-scale wind farms, solar parks, and other renewable and low-carbon technologies, the scheme supports the government in achieving its decarbonisation goals.

As of 1 May 2025, the CfD scheme is funding 6GW of renewable electricity. In 2024/25, CfD-backed renewables supported 12% of total GB demand.

How does the CfD work?

Renewable project developers/generators compete in auctions by bidding for a strike price – a fixed price that they hope to earn per megawatt-hour of electricity produced. If successful, the generator signs a long-term contract with the government-owned Low Carbon Contracts Company (LCCC).

Each quarter the LCCC sets:

• A total reserve amount that suppliers must pay up front to cover 90% of eventualities
• An interim levy rate, charged on every eligible unit of power demand consumed by customers

Once the project is operational, it receives the strike price for every unit of power generated:

• If the wholesale market price for electricity is below the strike price, the LCCC tops up the difference to the generator
• If the market price is above the strike price, the generator pays back the difference to the LCCC

This creates price stability for the generator and cost control for consumers. However, depending on the contract, some generators aren’t paid if the wholesale market prices go negative.

The money paid out (or received) by the LCCC is funded through the CfD Supplier Obligation. They pass on this cost to end users through their energy bills.

How much of your energy bill does CfD account for?

The CfD charge is expected to make up around 5% of the total energy bill in 2025. It will become one of the fastest growing charges on the bill as the country deploys more low carbon generation throughout the next decade.

Will you know about CfD costs in advance?

Yes. The interim levy rate is known 90 days in advance. The operational cost is known a few months to several years in advance, as the Government consults on the costs in three-year tranches. However, changes can be made within period, with a month’s notice.

What drives the CfD charge?

The CfD charge depends on:

• Day-ahead (and, to a lesser extent, season-ahead) power prices
• Renewable generation volumes
• Total eligible demand on the system

To learn more about the other TPCs in your energy bill, head to our TPCs explained hub using the button below. Or, to understand more about electricity prices, download our latest bi-annual Electricity Prices Explained guide.

Disclaimer

We’ve used all reasonable efforts to ensure that the content in this article is accurate, current, and complete at the date of publication. However, we make no express or implied representations or warranties regarding its accuracy, currency or completeness. We cannot accept any responsibility (to the extent permitted by law) for any loss arising directly or indirectly from the use of any content in this article, or any action taken in relying upon it.