OIES Podcast – Contracts for difference in the energy transition: balancing market efficiency and risk mitigation

Podcasts - Oxford Institute for Energy Studies

In this latest OIES podcast from the Electricity Programme, Dimitra Apostolopoulou talks to the Director of Research at the Electricity Programme and Senior Research Fellow Rahmat Poudineh about his latest paper co-authored with Abolfazl Khodadadi titled “Contracts for difference – CfDs – in the energy transition: balancing market efficiency and risk mitigation”. Contracts for Difference (CfDs) have emerged as a key policy instrument to incentivize renewable energy investments by mitigating revenue volatility. However, conventional CfDs, while effective in fostering growth in renewable energy sources, can introduce market distortions like the “produce-and-forget” mentality. In this podcast we discuss alternative CfD designs that address these challenges. We also talk about how they introduce basis risk and the implications it has for generators, consumers, government and financial providers. We stress the challenge that policy makers face between market efficiency and risk mitigation, necessitating a balanced approach to the design of CfDs. Last, we discuss the future role of CfDs in renewable dominant power systems.