Contracts For Difference Research Articles

Scientific production on risks and financial instruments for commodity management

Introduction: Commodity management benefits from a variety of financial instruments and tools that allow companies to mitigate risks and optimize their operations. Among the most used are futures contracts, contracts for difference, risk management tools such as insurance and investment funds. The objective of this article is to analyze the scientific production on risks and financial instruments for the management of raw materials. Methodology: The research paradigm is mixed, through the combination of qualitative and quantitative methods. A bibliometric analysis was carried out which was complemented with a documentary review. The study was synthesized in three stages and was carried out in the Google Scholar, Scielo and SCOPUS databases, during the period from 1991 to 2024, without limitations in language. Results: The literature review shows an increase in the adoption of digital technologies to improve internal communication and employee engagement, with Brazil as a leader in the Latin American region. In addition, endomarketing is identified as a key element for attracting and retaining talent, especially in sectors with high competition and a shortage of specific skills. Likewise, its contribution to organizational sustainability is highlighted, focusing on the social dimension by promoting the well-being and development of employees. Conclusion: These findings reflect how endomarketing has been integrated into business strategies to align corporate objectives with the values ​​of social responsibility and job satisfaction, consolidating itself as an essential tool in improving productivity and long-term commitment.

Optimal strategies for virtual power plants to participate in medium- and long-term power trading in the context of contracts for difference (CFDs)

Abstract In the context of virtual power plants gradually joining the medium-and long-term power market transactions, the decision-making problem of this new subject in the transaction process has attracted wide attention. Since virtual power plants possess distributed power sources on the supply side, as well as variable loads, energy storage, and other resources on the customer side, they are able to participate in both the sale and purchase of electricity in the medium-and long-term electricity market at the same time, which leads to the need for the relevant analysis to be divided into the two cases of sale and purchase of electricity. At the same time, due to the wide application of the CFD mechanism, power transactions should also take into account the compensation adjustment brought by this mechanism in addition to the market price. To sum up, this paper constructs a static game model for the virtual power plant’s power sales and purchasing strategies in the medium-and long-term power market under the premise of the CFD mechanism. The analysis shows that the optimal trading volume is related to the CFD volume, the total volume of power supplied by the bidding, the market price, etc. The relevant conclusions will help market managers to grasp the market price. The conclusions of the analysis help market managers grasp the key transaction information and assist virtual power plants to participate in medium-and long-term power transactions in an orderly manner.

Electricity contract design and wholesale market outcomes in Australia's National Electricity Market

AbstractThe emergence of variable renewable energy (VRE) technologies has created a range of different energy contracting techniques. Within Australia's National Electricity Market (NEM), Run‐of‐Plant (RoP) Power Purchase Agreements (PPAs) became the most common form of contract with purchasers of wind and solar energy agreeing to pay a fixed price for energy irrespective of when it is produced and, therefore, its actual value to the market. In November 2023, the Commonwealth Government adopted a 32 GW RoP PPA Contract‐for‐Difference (CfD) underwriting policy that aims to effectively shield the generator from market price risk. This article discusses different contract structures and their impact on participant behaviour during periods of material oversupply and negative prices. We find that embedded solar PV exports into the distribution network, which are not required to dynamically participate in the wholesale market, have increased wholesale energy supply, enabling profit maximising vertically integrated renewable firms to drive prices lower in a manner that partially strands the output of RoP PPA CfD generators with a $0/MWh price floor. A key conclusion from our analysis is that requiring embedded solar PV to effectively participate in the wholesale market appears to be a pre‐condition for the efficacy of government‐initiated RoP PPA CfDs.

EU legislators approve the electricity market reform

The European electricity market is on the brink of transformative regulatory changes designed to reshape its landscape fundamentally. These changes encompass measures aimed at ensuring market stability, enhancing efficiency, promoting investment in clean energy, and safeguarding stakeholders from energy crises. Central to these reforms is the promotion of Power Purchase Agreements (PPAs) and Contracts for Difference (CFDs) to stabilize markets. Considering that existing barriers are impeding PPAs widespread adoption, the new design of the electricity market prompts regulatory adjustments to streamline access while maintaining fair competition. Concurrently, the design of CFDs must navigate competition distortions and ensure long-term viability, posing challenges for the European Commission in aligning them with State aid rules. Efforts to boost market efficiency include the reduction of intraday gate closure times, effective January 2026, and the establishment of minimum bid sizes to optimize resource allocation and pricing mechanisms. Moreover, the regulatory framework prioritizes incentivizing investments in clean energy, underscoring Europe’s commitment to sustainability. Member states will wield the power to implement non-fossil flexibility support schemes, offering payments for available non-fossil flexibility capacity, thereby fostering the transition towards cleaner energy sources. Lastly, protective measures are being instituted to shield consumers and undertakings from energy crises, emphasizing the need for resilience and stability in the sector. As these reforms unfold, policymakers must delicately balance fostering innovation, ensuring competitiveness, and safeguarding stakeholders’ interests. This article delves into the complexities of these reforms, offering insights into their implications and challenges.

Investigating Financial Risk Behavior Prediction Using Deep Learning and Big Data

This paper introduces a sophisticated deep learning model designed to predict high-risk behaviors in financial traders by analyzing vast amounts of transaction data. The model begins with an unsupervised pre-training phase, learning distributed representations that capture complex data relationships autonomously. It then utilizes a deep neural network, enhanced through supervised learning, to classify and predict traders' risk levels effectively. We specifically focus on financial spread trading related to Contracts For Difference (CFD), identifying potential misuse of insider information and assessing the risks it poses to market makers. By distinguishing between high-risk (A-book) and lower-risk (B-book) clients, the model supports strategic hedging decisions, crucial for market stability. Our extensive evaluations confirm the model's robustness and accuracy, highlighting its significant potential for practical implementation in dynamic and speculative financial markets where past trading performance may not predict future outcomes. This advancement not only refines risk management strategies but also contributes broadly to the domain of financial technology.

Hydrogen and carbon capture utilisation and storage policy for progress on climate change mitigation

This paper highlights the need for Australia to enhance its climate change policies, arguing that the introduction of Contracts for Difference (CfD) policy mechanisms is an appropriate successor to Hydrogen Headstart and would support the development of hydrogen and carbon capture, utilisation and storage (CCUS) industries. CfDs are financial agreements designed to provide price certainty, support investment, and bridge the cost gap between new and established technologies. With explanation of different CfD structures and examples from other countries the paper argues that implementing CfDs could attract investors, provide confidence to the sector, and ultimately help Australia meet its climate change obligations.

Assessing the Costs of Commercialising Tidal Energy in the UK

There is a need for increased renewable energy to meet net-zero targets and decarbonise the economy. Harnessing the predictable power of the tides with tidal stream turbines can contribute to this. Tidal energy is a nascent technology with higher costs at present. However, cost reductions have been observed with an increased deployment in other renewable energy technologies that have received financial support, and it is postulated that similar will happen with tidal energy. The first tidal stream projects have been awarded market support in the UK through the Contracts for Difference (CfD) scheme, with almost 100 MW expected to be commissioned by 2028. This work uses learning rates to investigate how much investment in ongoing market support might be needed to achieve cost reductions through subsidised deployment alongside research and innovation. Using a range of informed ‘what if?’ scenarios, it shows sensitivity to key inputs. The results show that the support needed is most sensitive to the learning rate, reducing it from 15% to 12.5% or 10% doubles or more than quadruples the investment required, respectively. The support is also highly dependent on the starting cost from which learning occurs, taken as the CfD Strike Price in 2025. Varying this between 156 and 220 GBP/MWh results in total investment of GBP 6.7 and 22.3 bn, respectively. Most importantly, a balance is needed between subsidising deployment to drive down costs through learning and funding innovation to maintain a high learning rate.

Agnieszka Ason and Julio Dal Poz, Contracts for Difference: The Instrument of Choice for the Energy Transition.

Agnieszka Ason and Julio Dal Poz, <i>Contracts for Difference: The Instrument of Choice for the Energy Transition.</i>

Hedging Price Risk Using Contracts for Difference with Volume Uncertainty

Hedging Price Risk Using Contracts for Difference with Volume Uncertainty

Investigation on survivability of the entity investing in integrated energy system service under contract for difference

As an important measure of promoting renewable energy sources (RESs), Integrated Energy System (IES) has caused wide concern. However, investors are staying on the sidelines due to the shortage of the details about investment returns. Therefore, here investigates the survivability of investment entity in Chinese IES service under contract for difference (CFD). Integrated with the intricate relationship of different entities, here constructed three evaluation models including the dynamic payback period (DPP), net present value (NPV) and internal rate of return (IRR). Considering the multipath feature of IES operation, the priority of energy utilization is proposed to promote RES consumption. According to the existing circumstance of RESs and IES, 12 operation scenarios are classified to investigate economic benefit of investment entity. Plenty of simulations show that the project benefit is affected by the contract tariff risk bigger, by the contract cycle risk slighter. Also, RESs absorption rate and RESs increase have significant influence on the investment benefits. The performances of IES with combined supply mode (CSM) are superior to that with sub-supply mode(SSM). With Chinese existing technologies and policies, the optimal scenario is S2 of which the payback period is about 6.38 years, and the internal rate of return is 18.47 %.

MECHANISMS OF STATE STIMULATION FOR RENEWABLE ENERGY DEVELOPMENT

The paper is devoted to the analysis of directions for stimulating the development and attracting investment in the renewable energy sector of Ukraine. For the energy sector during the recovery period, the development of renewable energy sources will be fundamental. The problems associated with this development can be divided into such groups as: the formation of mechanisms that will ensure controlled, efficient development; and technical connection issues.&#x0D; Currently, a wide range of strategies is being applied in different countries. However, which of the various instruments is the most effective and efficient for increasing the share of RES is still a topic of research. They should be implemented in a market-based manner without interfering with the economic activities of entities and with maximum benefit to the power system.&#x0D; At present, the construction of renewable energy facilities is carried out at the expense of the feed-in tariff and solely from the standpoint of commercial attractiveness, without considering the technical parameters of the grid, and further uncontrolled growth of their capacities poses risks to the normal functioning of the country's energy system. The priority of such tariff regulation, which actually launched the era of intensive development of renewable energy, has exhausted its potential and needs to be replaced by other mechanisms of state regulation.&#x0D; Incentive mechanisms should be implemented in a market-based manner without interfering with the economic activities of entities and with maximum benefit to the energy system. These mechanisms include auctions for the distribution of support quotas and for the sale of electricity from RES; corporate power purchase agreement; contracts for difference; feed-in premium; provision of balancing and ancillary services.&#x0D; Each of these mechanisms has its own component of influence on the controlled and stable development of renewable energy. Therefore, it is necessary to use a combination of these incentive mechanisms that can be adjusted in accordance with the current state of the power system at any long-term point in time.

Investigating the Operation of an LNG Carrier as a Floating Power Generating Plant (FPGP)

The paper provides a novel alternative solution for the old generation turbine LNG carriers (LNG/Cs) in order to extend their life cycle, thus avoiding their demolition. Nowadays, the use of liquefied natural gas (LNG) as fuel for the production of electricity is predominant against other fossil fuels. LNG has been widely recognized as the most promising alternative fuel, combining both high efficiency and environmental friendliness. The old generation of steam turbine LNG/Cs with the distinct disadvantage of a low thermal efficiency ratio, leading to higher fuel costs, are coming to a crossroad, which is either to keep the vessel on duty until the end of their life cycle, earning low fares as those are not preferred from the charterers, or to change the use of the vessel, converting them either to a FSRU (floating storage regasification unit) or to a FPGP (floating power generating plant). In this paper, the last alternative is proposed via a holistic examination of the techno-economical (the CBA performed calculates all related metrics) but also in terms of the electric energy market by utilizing power purchase agreements (PPAs) and the contracts for difference (CfDs). This conversion into an FPGO is a novel approach providing a ‘win–win’ solution scheme, on the one hand, to areas with the non-economical bunkering chain of LNG along with non-expensive electricity production, while on the other hand, it provides an extension of the profitable life cycle of the LNG/Cs under study, which would otherwise have been considered of obsolete technology. The proposition is supported by figurative numerical case studies that help extract tangible conclusions regarding the degree of the investment viability.

Establishing a Framework of the Open Maritime Electric Energy Market

The paper introduces a framework of operation of maritime-related enterprises like port authorities and ship-owning or operating companies along with electric energy providers in the electric energy market as a consequence of the global decarbonization effort and, in particular, due to the implementation of ship electrification at berth. Within this context, the main rules of this energy market framework will consist of a proper combination of power purchase agreements along with contracts for difference in an attempt to obtain transactions that are mutually beneficial at least on a mid-term basis. The methodology, which is fully compatible with the electric energy market rules of the European Union, is enriched by a variety of alternative scenarios on the selling prices of electricity, showing that even when monthly or annual periods are used for reference, it is highly possible that all parties engaged have benefits.

The salience of informed risk: an experimental analysis

PurposeExpanding on the real-world financial market framework and considering the current market turmoil, with cryptocurrencies (where contracts for difference (CFDs) are extremely common) (Hasso et al., 2019) displaying unprecedented volatility, the authors aim to test in an online laboratory setting whether displaying a risk warning message is truly effective in reducing the level of risk taken and whether the placement of this method makes a difference.Design/methodology/approachTo explore the impact of risk disclosure framing on risk-taking behavior, the authors conducted an online pair-wise lottery choice experiment. In addition to manipulating risk awareness through the presence or absence of risk warning messages of varying intensity, the authors also considered dynamic inconsistency, cognitive ability and questionnaire-based financial risk tolerance (FRT) scores. The authors aimed to identify potential relationships between these variables and experimentally elicited risk aversion. The authors' study offers valuable insights into the complex nature of risky decision-making and sheds light on the importance of considering dynamic inconsistency in addition to risk awareness and aversion.FindingsThe authors' results provide statistical evidence for the efficacy of informative and very salient messages in mitigating risky decision, hinting at several policy implications. The authors also provide some statistical evidence in support of the relationship between cognitive abilities and risk preferences. The authors detect that individual with low cognitive abilities scores display great risk aversion.Originality/valueThis study investigates the impact of risk warning messages on investment decisions in an online laboratory setting – a unique approach. However, the authors go beyond this and also examine the potential influence of dynamic inconsistency on decision-making, adding further value to the literature on this topic. To ensure a comprehensive understanding of the participants, the authors collect data on cognitive ability and FRT using questionnaires. This study provides a simple and cost-effective framework that can be easily replicated in future research – a valuable contribution to the field.

Cumulative effects of offshore renewables: From pragmatic policies to holistic marine spatial planning tools

To alleviate climate change consequences, the UK government is pioneering offshore renewable energy developments at an ever-increasing pace. The North Sea is a dynamic ecosystem with strong bottom-up/top-down natural and anthropogenic drivers facing rapid climate change impacts. To ensure the compatibility of such large-scale developments with nature conservation obligations, regulatory processes set out that all effects need to be evaluated through cumulative impact assessments (CIA). However, by excluding climate change impacts and bottom-up effects of renewable developments, the CIA lacks spatio-temporal baselines linking oceanic ecosystem indicators to population dynamics, leading to uncertain predictions at population levels. CIA is currently required in Europe under the Strategic Environmental Assessment and the Marine Strategy Framework Directive (MSFD), suggesting that these two policy areas should be more closely aligned. This study presents an overview of the current CIA policy framework, enabling an ecosystem-based approach linking lower ecosystem components to top-predator populations using the UK as a case study. At the UK level, CIA requirements mirror the EU ones under the Marine and Coastal Access Act, the UK Marine Policy Statement, and the UK National Policy Statement. Firstly, we show how CIA and MSFD requirements are integrated into the UK licensing and maritime planning frameworks. Secondly, we provide policy pathways embedding the MSFD as a baseline for CIAs with European and UK regulations. Thirdly, we propose a framework encompassing a shared monitoring effort, an ecosystem modelling approach connected with two existing online databases supported with funds from Contracts for Difference. This integrated approach will enable a holistic and pragmatic ecosystem-based framework for more accurate and rapid methods for producing CIAs for offshore renewable energy developments.

Efficient Renewable Electricity Support: Designing an Incentive-compatible Support Scheme

Most existing renewables support schemes distort location and dispatch decisions. Many impose unnecessary risk on developers, increasing support costs. Efficient policy sets the right carbon price, supports capacity not output, ensures efficient dispatch and location. The EU bans priority dispatch and requires market-based bidding, but does not address the underlying problem that payment is conditional on generation, amplifying incentives to locate in windy/sunny sites. This article identifies the various distortions and proposes an auctioned contract to address location and dispatch distortions: a financial Contract for Difference (CfD) with hourly contracted volume proportional to local renewable output/MW, with a life specified in MWh/MW, with long-term transmission contracts based on predicted output-weighted actual or simulated nodal prices. This yardstick CfD delivers efficient dispatch. It assures but limits the total subsidy. It does not over-pay for windy/sunny sites. The revenue assurance allows high debt:equity, dramatically lowering the subsidy cost.

Implementing Contract-for-Difference Arrangements for Hedging Electricity Price Risks of Renewable Generators on a Blockchain Marketplace

The dynamic nature of competitive electricity markets means that participants often resort to some form of derivative financial instrument. One such instrument is a contract-for-difference (CFD), usually available to renewable generators in certain electricity markets to enable them to hedge their price risk. Embracing CFD presents new risks such as counterparty credit, margining, third-party, legal, and process risks. Derivative instruments existing on blockchains have recently demonstrated potential as suitable hedging tools for minimizing the risks of renewable generators. This article applies this concept for the first time to hedge the price risk of renewable generators by implementing a novel decentralized finance instrument, an Ethereum blockchain marketplace governed by a smart contract to mediate between stakeholders mutually enrolled in bilateral CFD arrangements. The employed structure mitigates the underlying risks of traditional arrangements, underpinned by a suite of autonomous mechanisms.

Methodology to prepare for UK’s offshore wind Contract for Difference auctions

In the UK, the Contract for Difference (CfD) subsidies for renewable energy generation are awarded through a competitive auction process. This paper simulates the most recent CfD auction for offshore wind, using a novel methodology to assist developers in preparing their bid strategy and for policymakers to test auction efficiency. The simulation’s results show developer’s leading strategy is to shade their bid to increase auction pay-off. A developer’s incentive to shade their bid depends on the project’s capacity and minimum bid price; the offshore wind farm Hornsea 3 has the greatest incentive to shade its bid as its optimum bid price is further from its cost price, and results in the highest expected value of additional auction pay-off. The median strike price estimated by the model is £39.23/MWh, and the most likely winners, as predicted from the simulations, are Hornsea 3, Inch Cape, East Anglia 3 and Norfolk Boreas. Published auction results show that the estimated strike price from the simulation is 5% higher than the £37.35/MWh awarded strike price; however, the model successfully predicted the winners. Further analysis of results demonstrates that developers adopted a risk-averse bidding strategy, bidding at a pre-determined floor (coexist) price, guaranteeing subsidy. As a result, £38 million of the subsidy budget was unused.

Simulating offshore wind contract for difference auctions to prepare bid strategies

This paper presents a novel agent-based, stochastic model, which uses game-theoretic principles to simulate Contract for Difference (CfD) auctions. The framework has use cases and implications for policymakers and renewable generators alike, and can be used by developers to prepare bidding strategy and for policymakers to empirically test auction design. The model is demonstrated through replication of the offshore wind CfD Allocation Round 3 (AR3) pot, and utilises high-level cost modelling distribution data to estimate bid prices for the competing projects. The model produces a distribution of most likely results which better categorises uncertainty, and through comparison of AR3 and simulation results, demonstrates how outcomes can be predicted with reasonable confidence by developers. Analysis show that the transmission network and grid connection charges are a significant barrier for projects in some geographical regions to be awarded a CfD contract, potentially hindering renewable deployment in those areas. Moreover, this paper demonstrates how players can use probability theory to select an optimum bidding strategy which maximises expected profit while factoring the uncertainty inherent in CfD auctions. Results show that a 1200 MW wind farm development can increase potential profits by £135 million over the CfD contract length in exchange for a 25 p.p. chance reduction in being awarded a subsidy.

An investigation into the normal tax implications of fractional share rights in South Africa

A recent development in the financial service industry is the introduction of the fractional share right that allows a retail investor to invest in a fraction of a listed equity share. Fractional share right is not defined in the Income Tax Act No. 58 of 1962 (‘the Act’), nor has it been subject to scrutiny in South African courts. Uncertainty exists regarding the normal tax implications of fractional share rights in South Africa. This article investigated the possible normal tax implications of a fractional share right for a retail investor. The research followed a qualitative approach through the analysis of primary and secondary sources. The article established that a fractional share right is essentially a contract for difference, with a fraction of a listed equity share serving as the reference instrument. It was ascertained, based on a combination of the integration and bifurcation approaches, that a contract for difference in respect of a fractional share right constitutes a financial instrument for purposes of the Act. Due to the absence of specific provisions in the Act dealing with the normal taxation of financial instruments for retail investors, it was ascertained that the amounts stemming from the contract for difference in respect of a fractional share right may be taxed according to the general provisions of the Act – sections 1(1) and 11(a) of the Act.