PPA vs CfD: How the UK's Two Price Contracts Differ
A PPA and a government Contract for Difference both fix a price for renewable power. Who signs each, how each settles, and how the two combine.
Two long-term contracts fix a price for renewable electricity in Great Britain, and they are easy to confuse because the arithmetic of one looks like the other. A power purchase agreement is a private deal between a generator and a buyer. A Contract for Difference is the government's support scheme. A business can sign the first but never the second, and many generators hold both.
How a CfD works
A CfD is a long-term contract between a low carbon generator and the Low Carbon Contracts Company, the government-owned counterparty. Generators win contracts in competitive allocation rounds. The contract sets a strike price. When the market reference price is below it, the generator is paid the difference; when the market price is higher, the generator pays the difference back. Electricity suppliers fund the scheme through a levy.
From Allocation Round 7, contracts for solar and wind run for 20 years; earlier rounds used 15.
Sources: Low Carbon Contracts Company — about the CfD; DESNZ — AR7 reforms, government response (July 2025). Verified 27 Sep 2026.
How a PPA works
A power purchase agreement is a contract between a generator and a buyer, the offtaker, to buy the generator's output or its value at an agreed price for an agreed term. Nobody awards it; the two sides negotiate it. The buyer can be a business, a public body or an electricity supplier. For a business the most common form is an on-site solar PPA, where the array sits on its own premises.
The differences that matter
| PPA | CfD | |
|---|---|---|
| Parties | Generator and buyer | Generator and the Low Carbon Contracts Company |
| How you get one | Negotiation | A government allocation round |
| Does electricity change hands? | Yes in a physical PPA; no in a virtual one | No. The CfD pays or collects a price difference only |
| Who pays for it | The buyer, through the price | Electricity suppliers, through a levy |
| Term | Whatever the parties agree | 20 years for solar and wind from AR7; 15 before |
| Can a business sign it? | Yes | No |
Why a CfD generator still needs a PPA
A CfD settles a price difference; it does not buy the electricity. The generator still has to sell its physical output, typically to a supplier or trader under a route-to-market PPA. The government recognised the risk of a generator failing to find that buyer: the Power Purchase Agreement Scheme Regulations 2014 created a backstop "to promote the availability to electricity generators of power purchase agreements". A generator holding a CfD or an investment contract that cannot find a buyer can obtain a short backstop PPA from a licensed supplier chosen by auction, the offtaker of last resort. Ofgem's latest annual report says the backstop has never been used.
Sources: Power Purchase Agreement Scheme Regulations 2014 (S.I. 2014/2511); Ofgem — Offtaker of Last Resort annual report, April 2024 to March 2025. Verified 27 Sep 2026.
What this means for a business buyer
- You cannot buy into a CfD. If you want a long-term renewable price, the contract you sign is a PPA.
- For most businesses that is an on-site solar deal, priced per kWh with no capital outlay. The overview of solar power purchase agreements explains how UK deals are priced.
- If you are offered a virtual PPA on an existing farm, ask whether its output is already under a CfD before comparing strike prices. How a virtual PPA works covers why that matters.
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