Contracts for Difference Levy Explained: The CfD Charge on Your Bill

How the UK funds low-carbon power, and why the levy can sometimes turn into a credit

What the Contracts for Difference levy is

The Contracts for Difference levy is the cost of the UK’s main scheme for funding low-carbon power, recovered from electricity suppliers and passed on to your business bill. It pays for the support given to offshore wind, solar, nuclear and other low-carbon projects.

Like most green and social policy costs, it sits inside your unit rate as a pass-through charge. It is one of the cluster of non-commodity costs that make up a growing share of what businesses pay for electricity.

The scheme is run by the Low Carbon Contracts Company, a government-owned body that holds the contracts with generators and collects the levy from suppliers.

How the Contracts for Difference scheme works

Each supported project is given a guaranteed price for its electricity, called the strike price. This is set when the project wins its contract, usually through a competitive auction, and reflects the cost of building and running that technology.

Against that sits the reference price, which is roughly the average market price for electricity. The scheme simply pays the difference between the two.

When the market price is below the strike price, the generator is topped up to the strike price. The contracts typically run for 15 years, which gives developers the certainty they need to invest. You can read the government’s overview of the Contracts for Difference scheme for the full mechanism.

How the Contracts for Difference levy is calculated

Suppliers fund those top-up payments through a daily levy, charged per megawatt hour of electricity they supply. The Low Carbon Contracts Company forecasts what the scheme will cost each quarter and sets the rate accordingly.

Because it is a forecast, the rate is trued up later against what actually happened. If the scheme cost more or less than expected, the difference is reconciled in a future period.

Suppliers pass the Contracts for Difference levy straight through to customers. On most business contracts it is folded into the unit rate rather than itemised, which is why few buyers realise they are paying it at all.

When the CfD levy can become a credit

Here is the part that surprises people. The payments flow both ways. When wholesale electricity prices climb above a project’s strike price, the generator pays money back into the scheme rather than receiving a top-up.

During the energy crisis of 2022, market prices ran so far above many strike prices that CfD generators handed hundreds of millions of pounds back. For a time the levy turned into a credit, reducing rather than adding to supplier costs.

That will not happen in a normal year, but it shows the Contracts for Difference levy is not a one-way street. As more cheap renewable capacity comes online under fixed strike prices, the scheme is designed to shield consumers when markets spike.

The Contracts for Difference levy on your business bill

For most businesses the levy is a modest but steady part of the bill, a few pounds per megawatt hour depending on the period. It is not the largest non-commodity cost, but it is a real one and it is rising as the low-carbon fleet grows.

It pairs closely with the way larger buyers approach renewable energy procurement, since both are tied to the same shift toward low-carbon generation.

As with every pass-through charge, the thing to check is that your supplier is applying the correct published rate and not quietly inflating it.

Managing the Contracts for Difference levy

You cannot opt out of the Contracts for Difference levy, but you can make sure you are not overpaying on it or on any of the other charges bundled into your rate. That starts with understanding what each line is and what it should cost.

A proper review of your energy procurement and bill validation is the practical answer. Catalyst checks the non-commodity costs on business bills across the UK and challenges anything that looks wrong. Get in touch with our team to have your charges reviewed.