·         The UK government will open Allocation Round 8 this July to accelerate renewable energy deployment, extending the pipeline of opportunities.

·         The Contract for Difference (CfD) scheme offers long-term, inflation-linked revenue opportunities.

·         In this article, we answer investors’ questions about what Contracts for Difference are and how it is an opportunity for the Company.

 

What is a Contract for Difference?

A Contract for Difference, or CfD, is a long-term agreement between a renewable energy generator and a government-backed counterparty.

The contract guarantees a fixed price, known as the strike price, for every unit of electricity generated. If market power prices fall below that level, the generator receives a top-up payment. If market prices rise above it, the generator pays the difference back.

The system is designed to provide revenue certainty for renewable energy projects while protecting consumers from price volatility.

 

Why does the UK use CfDs?

The UK introduced the Contracts for Difference scheme in 2014 as part of a broader reform of the electricity market. At the time, the government faced a dual challenge: replacing ageing power stations while attracting the private investment needed to build new low-carbon generation. CfDs were designed to provide investors with greater revenue certainty while reducing the long-term cost of supporting renewable energy.

By guaranteeing a predictable revenue stream through competitive auctions, the government aimed to lower financing costs, encourage investment and ultimately deliver new renewable capacity at a lower cost to consumers. The scheme replaced the Renewables Obligation (RO) scheme.

Today, CfDs are the UK's primary mechanism for supporting new renewable electricity generation and are widely regarded as one of the key policy tools behind the country's rapid growth in renewable energy capacity.

 

What was the Renewables Obligation (RO) scheme?

The RO was the UK's previous renewable energy support mechanism.

Introduced in 2002, it helped stimulate investment in renewable generation by awarding certificates for each unit of renewable electricity produced. Suppliers were required to purchase these certificates to demonstrate the green source of their electricity, creating an additional revenue stream for generators.

According to Ofgem, the scheme supported around 35GW of renewable energy capacity before closing to new projects in 2017.

 

How is a CfD different from the Renewables Obligation?

Both schemes were designed to encourage renewable energy investment, but they work differently.

Under the Renewables Obligation, generators earned revenue from two sources: selling electricity into the market and receiving Renewable Obligation Certificates (ROCs), a form of support mechanism linked to renewable generation.

CfDs take a different approach. Instead of providing an additional revenue stream on top of power sales, they guarantee a fixed price for electricity generated. If market prices fall below the agreed level, the generator receives a top-up payment. If market prices rise above it, the generator pays the difference back to the government.

 

Why have CfDs become more attractive recently?

The UK government recently extended CfD contract lengths from 15 years to 20 years.

The longer support period provides greater visibility over future revenues, improving project economics.

For investors, this means a longer period of contracted and inflation-linked income. This provides greater visibility over future revenues, making projects easier to finance and reducing exposure to wholesale electricity price volatility.

 

What is Allocation Round 8 (AR8)?

Allocation Round 8, or AR8, is the latest auction through which renewable energy developers can compete for Contracts for Difference.

Since the scheme launched in 2014, the government has held a series of allocation rounds to award CfD contracts to renewable energy projects. Solar projects were included in the first auction, excluded from AR2 and AR3, and returned from AR4 onwards as costs fell and the technology became increasingly competitive.

The growth in solar awards illustrates how rapidly the sector has developed:

 

Allocation round	Award year	Solar capacity awarded	Solar projects awarded
AR1	2015	72 MW	5
AR2	2017	Not eligible	–
AR3	2019	Not eligible	–
AR4	2022	2.2 GW	65
AR5	2023	1.9 GW	56
AR6	2024	3.3 GW	93
AR7	2026	4.9 GW	157
AR8	TBD	TBD	TBD

 

The steady increase in awarded capacity reflects both falling solar costs and growing government confidence in renewable energy as a central part of the UK's future electricity system.

AR8 is expected to open in July 2026. While the final auction budget has not yet been published, the round is expected to attract many solar projects seeking long-term, inflation-linked contracts.

For investors, each allocation round expands the pool of future renewable assets that may become available for acquisition once they move towards construction or operation.

 

Why does this matter for Foresight Solar?

Foresight Solar owns a portfolio of operational solar assets, many of which were developed under the Renewables Obligation regime.

As those assets mature and move closer to the end of their support periods, the Company is evaluating opportunities to invest in newer projects with longer-duration contracted revenues.

The growing pool of CfD-backed projects could provide a source of future investment opportunities in Foresight Solar's core UK market.

 

What opportunities does Foresight Solar see?

According to the Investment Manager’s calculations, more than 7GW of projects awarded CfDs in AR6 and AR7 are progressing towards construction.

Within that universe are around 200 projects ranging from 10MW to 50MW in size, broadly consistent with the scale of many assets already owned by the Company.

This creates a sizeable potential acquisition market where Foresight Solar can leverage its operational expertise and sector knowledge.

 

How could CfD-backed projects support dividends?

CfD-backed assets offer several features:

·         Long-term contracted revenues.

·         Inflation-linked income.

·         Reduced exposure to wholesale power price volatility.

·         Improved access to project finance.

·         Greater visibility over future cash flows.

Because future revenues are more predictable, investors and management teams have greater confidence when assessing future cash generation. That visibility supports dividend planning.

 

How does Foresight Solar plan to finance these opportunities?

The Company is pursuing a phased asset divestment programme designed to unlock capital from mature investments. Proceeds from selected asset sales can be recycled into new opportunities that offer attractive risk-adjusted returns.

The Investment Manager is also evaluating other ways to release capital from the existing portfolio.

 

How does that affect the long-term strategy?

Over time, Foresight Solar aims to gradually refresh its portfolio by recycling capital from mature Renewables Obligation assets into newer projects supported by long-term CfD contracts.

The objective is not simply to grow the portfolio, but to improve the quality and visibility of future revenues.

By increasing exposure to contracted, inflation-linked cash flows, the Company aims to support its investment objective of delivering a sustainable dividend alongside modest long-term growth in shareholder value.