Do We Really Need CfDs in India

As India accelerates its energy transition and pushes for greater integration of renewable energy (RE), policymakers and market participants are increasingly looking at global mechanisms to manage the volatility and financial risks associated with variable generation. One such mechanism that often comes into discussion is the Contract for Difference (CfD)—a tool used extensively in markets like the UK and EU to provide price stability and incentivize investments in clean energy.

But this raises a pertinent question: Do we really need CfDs in the Indian power market? Or are our existing mechanisms already serving that purpose?

Understanding CfDs

A CfD is essentially a financial contract between a power generator and a government or designated counterparty. It guarantees a fixed 'strike price' for electricity. If the market price falls below the strike price, the generator is paid the difference. If the market price rises above it, the generator pays back the excess. This creates a revenue floor that de-risks investment while still exposing the generator to market signals.

Indian Equivalent: Fixed-Tariff PPAs

In India, the functional equivalent of a CfD is the long-term Power Purchase Agreement (PPA) with a fixed tariff, especially for RE projects facilitated by entities like SECI and DISCOMs. These agreements lock in a fixed rate (e.g., ₹2.50/kWh) for a period of 20–25 years, thereby offering the same revenue certainty that CfDs are designed to provide.

Why CfDs Could Be Helpful:

- Market Integration: CfDs encourage RE developers to be mindful of real-time market prices, promoting efficiency.

- Transparent Risk Sharing: They clearly delineate who bears the risk-helpful market in a transitioning market.

- Scalability: As markets mature, CfDs can better coexist with short-term and spot markets, making them ideal for high RE penetration scenarios.

Why Existing PPAs May Be Sufficient for Now:

- Revenue Certainty Already Exists: The main benefit of CfDs—price certainty—is already delivered by fixed-tariff PPAs.

- Institutional Simplicity: PPAs are well-understood, legally entrenched, and operationally simpler than financial CfDs.

- Buyer Comfort: DISCOMs prefer the simplicity and predictability of long-term PPAs over complex market-linked settlements.

- Regulatory Readiness: CfDs require robust power market infrastructure and a mature balancing mechanism, which India is still evolving through initiatives like MBED and real-time markets.

So, Do We Really Need CfDs in India?

Rather than rushing to implement CfDs, India can continue to refine and expand its current models while developing market mechanisms that allow for gradual exposure to price signals—such as Market-Based Economic Dispatch (MBED), Green Day-Ahead Market (GDAM), and Ancillary Services & Capacity Markets. As these evolve, hybrid models that blend fixed tariffs with market-linked components could emerge, paving the way for CfD-like instruments in the future.

While CfDs are a powerful tool for energy transition, India’s current reliance on fixed-tariff PPAs already achieves many of the same goals. CfDs may become more relevant as our markets mature and RE penetration increases. For now, strengthening the existing framework and aligning it with evolving market reforms could be a more pragmatic and effective approach.
So to answer the question: No, we may not need full-fledged CfDs just yet—but we’re on the path toward needing them in the future.