CFD exists as a long-term business contract between an electricity generator and the Low Carbon Contracts Company (LCCC). It is a levy that was introduced to replace the Renewables Obligation. The CFD will provide consumers, generators and suppliers with clear and stable energy prices over time. It will stop unpredictable fluctuation of prices of energy derived from renewable resources and ultimately encourage investment in renewable generation.
Under the CFD scheme, if the price of electricity becomes too low to effectively support most costly generation through renewable energy sources, payments from the LCCC will be made to all CFD recipients. This will suffice as compensation for the lower price. So, the CFD does what it says on the tin- it guarantees payment for all differences in prices. The difference is measured against the ‘floor price’. Electricity prices are not allowed to fall below this price without a consequential compensatory payment being granted.
The Renewables obligation will be levied until 2037- the scheme was created with a 20 year lifespan, although, the CFD will eventually replace the Renewables Obligation in its entirety. Until this occurs however, it will exist as an extra cost on all energy bills, so it is important that you know what its purpose is.