The Impact of Two-Sided Contracts for Difference on Debt Sizing for Offshore Wind Farms

Abstract

Two-sided Contracts for Difference (CfD) are a remuneration mechanism that stabilizes revenues and leads to better financing conditions for offshore wind farms. Despite the EU Commission’s efforts to make two-sided CfDs a mandatory remuneration scheme, many leading offshore wind markets in Europe still apply one-sided CfDs, which, combined with competitive auctions, often result in zero bids and merchant risk exposure. We contribute to the debate on the two-sided CfD effect on financing by quantifying their impact on debt size. Our approach combines a stochastic power price and wind-power feed-in model with cash flow liquidity management in a project financing setting. We show that offshore wind farms with two-sided CfDs experience less financial distress, increasing debt size between 15 and 27 percentage points compared to a project with merchant revenues. The leverage increase could save consumers between 12 and 19 EUR/MWh in electricity generation costs. This emphasizes the importance of continuing revenue stabilization measures to ensure a cost-effective mobilization of investments for financing Europe’s energy transition.