The UK’s electricity system relies on two major policy mechanisms — Contracts for Difference (CfD) and the Capacity Market (CM) — to deliver clean electricity and ensure security of supply.
For most businesses, these mechanisms appear only as obscure lines on an energy bill. But behind them sits billions of pounds of investment, stabilising the UK power market and shaping the price every organisation ultimately pays for its electricity.
This article breaks down what the CfD and CM charges actually are, how they’re calculated, why they matter, and — most importantly — the practical steps organisations can take to understand, forecast and manage them.
Contracts for Difference (CfDs) are long‑term agreements between renewable generators (such as offshore wind farms or solar parks) and the Low Carbon Contracts Company (LCCC). They guarantee a “strike price” for electricity.
Full explanation from LCCC:
🔗 https://www.emrsettlement.co.uk/schemes/contracts-for-difference/
The CfD scheme is funded through levies placed on licensed electricity suppliers, who usually pass these charges through to business customers.
CfDs reduce investment risk for renewable generators, enabling the UK market to secure low‑carbon capacity at scale. They have been crucial for driving down the cost of offshore wind and supporting national decarbonisation targets.
Types of CfD charges you may see:
These represent the ongoing costs of running the scheme, plus adjustments for how much is owed to or from the generator pool.
Now, onto CM charges.
The Capacity Market (CM) provides payments to generators (and flexible consumers) to guarantee they are available during periods of high demand.
Without it, the UK would risk supply shortages during cold winters or low-wind periods.
NESO explanation available at https://www.neso.energy/what-we-do/energy-markets/electricity-market-reform-emr-delivery-body/capacity-market
Like CfDs, the CM is funded through levies on suppliers, then passed onto end users.
The CM acts as an insurance policy. It ensures that:
Types of CM charges you may see:
Detailed settlement process available at https://www.emrsettlement.co.uk/document/working-practice/wp1-overview-of-settlement/
1. CfD Charges
CfD charges depend on:
Suppliers must maintain credit cover and pay levies that vary quarter by quarter depending on projected scheme requirements.
When market prices are high (e.g., during the gas crisis), CfD generators often pay money back into the system — meaning charges can decrease.
2. CM Charges
CM charges depend on:
Detailed explanation available at https://www.e2b.uk/capacity-market-charges-uk-guide/
For half‑hourly metered sites, charges typically correlate with usage during winter peak hours (November–February, 4–7pm).
These costs are then reconciled based on actual demand after the delivery year.
1. They shape business energy budgets
Non‑commodity costs (levies, policy, network charges) now make up over 50% of the electricity bill for many organisations. Misunderstanding them leads to inaccurate budgeting and unexpected variances.
2. They influence contract structures
Suppliers may offer:
Knowing how CfD/CM operate helps you choose the right model.
3. They drive future market behaviour
CfDs have driven down renewable costs; the CM has improved grid resilience.
Understanding these mechanisms helps businesses anticipate policy shifts and price impacts.
4. They impact sustainability reporting
CfDs contribute directly to lower-carbon electricity generation, which affects a business’s ability to report reductions in market-based emissions.
1. Understand Your Contract Structure
Ask your supplier:
Knowing this helps you forecast correctly and eliminates surprises.
2. Track Half-Hourly Consumption
For CM charges especially, your consumption during winter peaks heavily influences your costs.
High-level strategies:
3. Forecast CfD/CM Costs Annually
Useful resources can be found at https://www.emrsettlement.co.uk/settlement-data/settlement-data-roles/
Building these into annual budgets prevents underestimation.
4. Leverage On‑Site Generation or Flexibility
On-site solar, storage or demand response can reduce:
Under P415, aggregators can even bid flexibility directly into wholesale markets.
5. Validate Your Supplier’s Calculations
Errors in:
can significantly impact CfD/CM charges.
Periodic verification can uncover overcharges and support claims for refunds.
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While CfD and CM charges often appear as obscure line items, they are the backbone of the UK’s transition to a secure, low‑carbon electricity system. Understanding them isn’t optional anymore — it’s essential for:
By learning how these charges work and implementing practical management steps, businesses can reduce exposure, take control of their energy strategy, and position themselves ahead of future market changes.
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