Understanding Energy Contracts: CFD vs. FiP vs. PPA vs. DPPA …

By Vertex

As the energy transition accelerates, renewable energy projects rely on various contractual mechanisms to secure revenue, manage risk, and attract investment. Among the most common structures are Contracts for Difference (CfD), Feed-in Premiums (FiP), Power Purchase Agreements (PPA), and Direct Power Purchase Agreements (DPPA). Each model offers distinct advantages depending on market conditions, policy frameworks, and project needs.

At Vertex Energy, we help stakeholders build commercial teams to navigate these agreements to optimize financial and operational outcomes. Below, we break down the key differences between these models and explore their implications for renewable energy development.

1. Contract for Difference (CfD)

How It Works

A CfD is a long-term contract between a renewable energy generator and a government or financial counterparty that stabilizes revenue by fixing the price of electricity.

• The generator sells power at the market price.
• If the market price is below an agreed strike price, the counterparty pays the difference.
• If the market price is above the strike price, the generator refunds the excess.

Key Benefits

Price stability: Reduces exposure to volatile electricity markets.

Investor confidence: Lowers financing costs by guaranteeing minimum revenue.

Policy-driven: Often used in auctions (e.g., UK offshore wind).

Challenges

Limited upside: Generators may miss out on high market prices.

Government dependency: Requires stable policy support.

2. Feed-in Premium (FiP)

How It Works

A FiP provides renewable generators with a premium on top of the market price, rather than a fixed price.

• The generator receives the wholesale price + a premium.
• The premium can be fixed or sliding (e.g., decreasing as market prices rise).

Key Benefits

Market exposure: Allows participation in price signals.

Lower subsidy burden: Premiums adjust with market conditions.

Challenges

Revenue uncertainty: Still subject to market price fluctuations.

Complex design: Requires careful calibration to balance risk.

3. Power Purchase Agreement (PPA)

How It Works

A PPA is a private contract between a generator and an offtaker (utility, corporate, or trader) to sell electricity at a predetermined price.

• Fixed-price PPA – Locked rate over the contract term.
• Indexed PPA – Linked to wholesale market prices.
• Hybrid PPA – Combines fixed and variable components.

Key Benefits

Flexibility: Can be tailored to buyer/seller needs.

Corporate adoption: Enables companies to meet sustainability goals.

Challenges

Credit risk: Dependent on offtaker’s financial health.

Long negotiations: Complex terms require legal expertise.

4. Direct Power Purchase Agreement (DPPA)

How It Works

A DPPA is a specialized PPA where a corporate buyer contracts directly with a generator, bypassing utilities.

• Physical DPPA – Power is physically delivered (requires grid access).
• Virtual DPPA (VPPA) – Financial settlement based on generation and consumption.

Key Benefits

Decentralized procurement: Corporates source renewables directly.

Price hedging: Secures long-term energy costs.

Challenges

Regulatory barriers: Not all markets allow direct procurement.

Basis risk: Mismatch between generation and consumption locations.

Other Contractual Mechanisms

5. Green Tariffs

• Utilities offer renewable energy plans to consumers at a premium.
• Common in deregulated markets (e.g., Texas, EU).

6. Merchant Exposure

• Generators sell power fully at market prices without contracts.
• High risk but potential for high returns in volatile markets.

7. Capacity Contracts

• Payments for available capacity rather than energy generation.
• Used in markets with capacity mechanisms (e.g., PJM, UK).

At Vertex Energy, we assist developers, investors, and corporates in building their teams to structure the optimal contract to maximize returns while mitigating risks. Whether through CfDs, PPAs, or innovative DPPAs, the right agreement depends on market dynamics, policy support, and risk appetite.

Contact us to explore how we can support your energy transition strategy.