A new peer-reviewed study examines a potential enforcement gap in the UK Contracts for Difference (CfD) scheme, one of the country's most important policy tools for supporting low-carbon electricity generation.
The study, titled Termination amounts and the enforcement gap in the Contracts for Difference scheme: Insights from offshore wind project finance in the United Kingdom, explores whether termination payments under the CfD scheme would be fully recoverable if an offshore wind project company entered financial distress or insolvency.
Under the UK CfD scheme, low-carbon generators receive a stable revenue per unit of electricity through a pre-agreed strike price. When wholesale electricity prices fall below the strike price, generators receive a top-up payment. When market prices rise above the strike price, generators are required to pay the difference back to the Low Carbon Contracts Company (LCCC). This two-way mechanism is designed to support investment while protecting consumers and public interests when electricity prices are high.
The paper focuses on what happens if a generator exits a CfD contract early. In principle, the generator may be required to pay a termination amount, calculated as the present value of expected future payments back to the LCCC. This is intended to discourage generators from leaving the contract when market prices are high. However, the study argues that the deterrent effect of this provision depends not only on the size of the termination amount, but also on whether it can be recovered in practice.
Many UK offshore wind projects are financed through highly leveraged special purpose vehicles (SPVs). These project companies often pledge their assets and cash flows to senior secured lenders. If such a company enters financial distress or insolvency, the LCCC's claim for a termination amount may rank behind secured creditors. As a result, a termination amount may be large in contractual terms but difficult to recover in practice.
"The key message is that a large contractual liability does not necessarily mean a large practical recovery," the authors explain. "The effectiveness of CfD termination provisions depends on recoverability, not just on the formula used to calculate the amount owed."
Using a stylised quantitative framework calibrated to publicly available information on large UK offshore wind projects, the study distinguishes between financial resilience, measured by the debt service coverage ratio, and termination exposure, measured by the present value of expected future paybacks. It identifies two important channels. Lower generation can weaken a project company's ability to service debt, while high wholesale prices can increase the termination amount without directly improving the project company's financial resilience under the CfD.
The authors emphasise that no generator insolvency case involving CfD termination amounts has been documented under the UK CfD regime to date. The paper therefore identifies a potential vulnerability rather than an observed failure of the scheme.
"This is not an argument that the CfD scheme has failed," the authors note. "Rather, it is a warning that contract design, project finance and insolvency rules need to be considered together, especially as offshore wind becomes increasingly central to the UK's low-carbon transition."
The study suggests that future policy design should strengthen the practical recoverability of termination claims while preserving project bankability. Possible areas for further consideration include clearer credit support arrangements, stronger monitoring of project financial stress, and a more explicit treatment of the LCCC's position in restructuring or insolvency scenarios.
By highlighting the difference between contractual obligations and practical enforcement, the study offers a new perspective on the long-term governance of renewable energy support schemes. Its findings are relevant to policymakers, regulators, investors and consumers as the UK continues to expand low-carbon electricity generation.
DOI Link:
https://doi.org/10.26599/ECM.2026.9400034
