Contracts for difference (CfDs) can facilitate nuclear and renewable energy deployment in Bulgaria

The European Commission with Regulation 2024/1747 has introduced the two-way Contract for Difference (CfD) as a direct price-support scheme to facilitate the transition to renewable and nuclear energy and expedite net neutrality.  The two-way CfDs are expected to stimulate energy investments by shielding producers from price volatility, thus ensuring the realisation of investments while maintaining acceptable electricity costs for consumers. Analysts are declaring CfDs a crucial tool for the development of nuclear and renewable energy.

The design of the CfD is based on a strike price, which reflects the lowest price the project would be feasible to implement. The winning projects and the respective lowest strike price are determined through a competitive bidding procedure (e.g. a tender or auction). Another important element of the CfD design is the reference price, which indicates the electricity market price. The mechanism of the contract requires a payout by the state when the strike price is above the reference market price and a clawback by the producer when the reference price rises above the strike price.

The benefits of CfD lay in that it preserves the market economy by not interfering with electricity market prices, thus preventing consumers from incurring additional costs while developing clean energy generation projects with the necessary technologies.

Such mechanisms have been discussed or implemented in central and eastern European markets such as Romania, Czech Republic and Poland. Although national circumstances justify implementation of the direct price support scheme, there are other underlying reasons for the state to consider CfDs. The countries may be planning to phase out and decommission high-carbon electricity generation plants. States may be concerned with becoming a net importer of electricity and not able to meet increasing electricity demands, thus raising concerns about energy security.

The design of the CfD varies.

The Romania’s scheme is focused predominantly on supporting solar and onshore wind development via two rounds of auctioning in 2024 and 2025 with the total capacity of 5 GW. Applicant are ranked based on their proposed strike price and are selected according to the lowest bid until the auction volume is reached. The strike price can be adjusted to reflect the economic impact of changes throughout the 15-year contract period. A maximum strike price is set for each competitive bidding process to ensure proportionality.

The Czech Republic supports the Dukovany II nuclear power plant project through a purchase contract with a remuneration formula that has the same effect as a CfD. The strike price is initially determined by the contract based on a financial model submitted by the state. Later, however, the value of the strike price can change significantly depending on the changes of the input parameters. A support period of 60 years is expected.

Poland also envisages the introduction of a CfD to ensure the financing of the Lubiatowo-Kopalino nuclear power plant. A 60-year CfD is planned corresponding with the expected lifetime of the asset. The initial strike price is set by the national regulatory authority. Although not explicitly indicated, a mechanism for the strike price’s formation is provided based on incurred costs and can vary according to changes in the parameters (e.g. reduction in the capital expenditure compared to the base scenario, postponing the start of operation, variation in the exchange rate). The strike price will be adjusted prior to the start of operation. Taking into account the market volatility risk, a two-way load factor strike price adjustment mechanism will be used.

Currently, only Poland awaits a decision by the European Commission concerning state aid.

For more information on this new CfD scheme, contact your CMS client partner or these CMS experts: Kostadin Sirleshtov, Borislava Piperkova.

Petya Petkova contributed to this article.