Dutch Government Introduces Contracts for Difference for Renewables

The Dutch government is introducing new laws regarding the support of renewable energy projects. The Act on the Application of Two-Way Contracts for Difference (Wet toepassing tweerichtingscontracten ter verrekening van verschillen) proposes a new support system that will replace the SDE++ subsidy scheme with two-way Contracts for Difference (CfDs). As the Dutch renewables market has faced a bit of a downturn recently, with a failed offshore wind auction and solar projects performing below expectations, CfDs may help the Dutch renewables market to thrive again. Background and purpose At the European level, CfDs were introduced in 2024, following the revision of Regulation (EU) 2019/943 (the Electricity Regulation) by Regulation (EU) 2024/1747, which forms part of the Electricity Market Design (EMD) package. The EMD package was developed after the energy crisis in 2022, which led to high prices for European consumers. The EU electricity market is strongly connected to the price of fossil fuels. The price of electricity is based on the cost of the fossil fuels used in electricity generation (known as the “merit order principle”). The EMD package focuses on long-term solutions that will make electricity prices less dependent on the price of fossil fuels.1 Article 19 (d) of the new Electricity Regulation stipulates that if a Member State wants to grant state aid by means of direct price support schemes for investments in new installations for the production of renewable electricity and electricity from nuclear energy, it must be done through two-way CfDs. Article 19 (d) aims to harmonize the support schemes for renewable and nuclear energy throughout the European Union. What are CfDs? Two-way CfDs are private law agreements in which it is set out that the buyer pays the agreed-upon strike price to the seller for an agreed-upon volume of renewable energy. In the context of the Dutch Act on the Application of Two-Way Contracts for Difference, the buyer is the State, and the seller is an operator of an electricity generation facility. The financial flows of the two-way CfD are determined by the difference between the reference price and the strike price. Two-way CfDs work, as logically derived from its name, in a two-way dynamic: If the market price for electricity falls below the strike price, the State will compensate the operator for the difference. If the market price for electricity exceeds the strike price, the power producer has to repay the surplus to the State. For whom? Two-way CfDs are intended for large-scale power generation facilities. The obligation to use two-way CfDs when providing direct price support applies to contracts concluded from July 17, 2027, for investments in new production of electricity from wind energy, solar energy, geothermal energy, run-of-river hydropower, and nuclear energy. The new contracts do not affect existing SDE++-subsidies. Implications for businesses CfDs will have a number of positive implications for electricity producers. CfDs provide long-term price stability due to the strike price. This makes cash flows more predictable and improves the financial viability of renewable energy projects. Also, the reduction of market risk could cause lower risk premiums. This may lead to cheaper debt financing and improved returns. Finally, CfDs protect consumers from excessive producer profits during energy crises, as we witnessed in 2022, after the Russian invasion of Ukraine. There are also still some uncertainties. The underlying regulations of the Act on the Application of Two-Way Contracts for Difference and the CfDs themselves have not yet been published. The exact contractual parameters are therefore not yet known. Also, the tender criteria have not yet been determined. Conclusion CfDs represent a key tool in the Dutch transition towards a stable support system for renewable energy. The transition from SDE++ subsidies towards a system of stable, predictable revenues should attract long-term investments that support climate goals. If you have any questions on this topic please reach out to Jan Jakob Peelen or Noah Schütten.