How India’s first Contract-for-Difference pilot could reshape power markets

The financial instrument could unlock flexible clean power, deepen wholesale markets, and reduce peak power costs.

India's peak power demand touched a record 256 GW on 25 April 2026, with projections of 270 GW this summer. But the challenge is the widening gap between this growing peak and average demand. Capacity built to meet short periods of extreme demand sits underutilised for most of the year, raising system costs and, ultimately, consumer tariffs.

In the last two decades, India has quadrupled its installed power generation capacity to fuel a rapidly growing economy. This expansion was enabled largely through long-term power purchase agreements (PPAs), which provided assured payments and reduced investments for coal-based plants. In renewables, competitive auctions with 25-year PPAs led to sharp tariff declines and rapid capacity additions. However, while this model was effective for scaling supply, it is less suited to today’s dynamic demand patterns. Long-term PPAs lock in capacity for decades regardless of when electricity is actually needed. They are designed to meet expected baseload demand, not respond flexibly to short-term peaks or increasing uncertainty in consumption patterns.

This is where the Ministry of New and Renewable Energy’s (MNRE) recent push towards Contracts-for-Difference (CfDs) becomes significant. Unlike traditional PPAs, CfDs can complement existing baseload arrangements by channelling flexible, demand-responsive clean power into wholesale markets. This allows India to competitively procure electricity when it is most needed while providing an alternative procurement route alongside long-term contracts.

What is a Contract-for-Difference?

A Contract-for-Difference (CfD) is a financial instrument designed to manage the risk of revenue uncertainty for generators selling electricity exclusively on market platforms (called merchant plants), where electricity prices fluctuate based on real-time demand and supply.

In advanced power markets, CfDs provide revenue stability by guaranteeing a fixed benchmark, known as the strike price (SP), which is typically determined through competitive bidding and reflects the generator’s cost to supply. The contract then settles the difference between this strike price and the prevailing market or reference price.

In a two-way CfD (Figure 1):

- If the reference price < SP, the generator receives a payment to cover the shortfall.
- If the reference price > SP, the generator pays back the excess revenue.

This structure protects generators from low-price periods while preventing windfall gains during high-price periods. In countries such as the United Kingdom and Germany, where CfDs are prevalent, these payments are usually managed through government-backed financial settlement pools managed by counterparties.

Why do CfDs matter for renewable energy and storage in India?

India’s wholesale electricity markets remain thin. Despite nearly 17 years of formal operation, power exchanges—platforms where electricity is bought and sold for short-term horizons—account for only about seven per cent of total electricity generation, functioning largely as a last-resort option for buyers. The primary cause is the dominance of legacy long-term PPAs, which lock most distribution companies into fixed procurement arrangements. This creates a self-reinforcing cycle: low trading volumes lead to volatile prices, which discourage buyers such as discoms from participation. Weak demand, in turn, deters suppliers from entering the market, further constraining market depth (Figure 2). 

Renewable energy and storage are well-placed to break this cycle for two key reasons:

• They can be built within 1–2 years, far quicker than conventional generation. Over 40 GW of renewable energy capacity is currently awaiting buyers, while a large pipeline of applications has been submitted for non-solar hour transmission connectivity under the General Network Access (GNA) regulations.
• They can help India build a lower-cost electricity system. A study by the Council on Energy, Environment and Water (CEEW) shows that, even after accounting for additional transmission and flexibility requirements,  a high renewable energy pathway can reliably serve India’s rising demand and save ~ INR 42,000 crore in 2030.

But merchant renewable energy plants face risks operating in illiquid markets. These risks are difficult to quantify and, in many cases, still poorly understood. Without instruments to discover and manage these risks, investment in market-based capacity remains constrained and wholesale market liquidity remains weak. This is the structural gap that India’s CfD is designed to fill: by stabilising revenues sufficiently to attract investment while preserving enough market exposure to drive competitive behaviour.

What makes India’s first CfD pilot significant?

In March 2026, the MNRE approved a pilot CfD scheme for 500 MW of renewable energy capacity, making India one of the first developing economies to formally adopt a CfD instrument for clean power. The Solar Energy Corporation of India (SECI), the nodal implementation agency, has since issued a tender that gives concrete shape to the framework.

The pilot is built around a two-way, financially settled CfD contract model. SECI, as a counterparty, manages a dedicated stabilisation fund, seeded at INR 76 crore to pay developers when market prices fall below the strike price and receiving returns when prices exceed it (Figure 3).  The design serves three broad objectives: (i) speeding up the deployment and offtake of renewable energy and battery storage; (ii) facilitating clean energy availability during critical evening peak-demand (non-solar) hours; and (iii) stabilising market prices to attract a wider set of buyers and sellers.

Note: GDAM is the Green Day-Ahead Market, where renewable power is traded a day in advance; DAM is the Day-Ahead Market, where electricity is bought and sold for delivery the next day on Power exchanges; RTM is the Real-Time Market, which enables trading close to the time of delivery to manage last-minute imbalances; REC stands for Renewable Energy Certificates, tradable instruments representing units of clean power; and REIA refers to Renewable Energy Implementing Agency, such as SECI, that anchor procurement on behalf of buyers/discoms.

The Government of India has already signalled the need for such market-linked instruments. The Ministry of Power's Report of the Group on Development of Electricity Market in India (2023) and the Draft National Electricity Policy 2026 both call for instruments that increase efficiency in power procurement.

What are the key design features of the CfD pilot?

• From capacity procurement to time-of-day energy procurement
  Developers can configure projects using any combination of solar, wind, and storage, including pumped storage hydro plants, to deliver dispatchable power as per system requirements. To receive CfD support, developers must place sell bids during any three hours between 6 PM and midnight, when electricity demand is high, and exchange prices are at their peak. They can also source up to 25 per cent of energy from green day-ahead market and other bilateral agreements when their own generation falls short. This marks a shift in procurement philosophy: the system is no longer just paying for capacity, but also for reliable supply when it is most needed.
• Assessing investor appetite for shorter-term contracts
  By partially stabilising revenues while retaining meaningful market exposure, the pilot will allow policymakers to understand how investors price risk and structure financing for clean energy projects operating on short-term contracts. These signals on financing conditions, pricing expectations and commercial viability will be critical for future projects.
• From risk transfer to risk sharing 
  The 30:70 profit-loss sharing arrangement is the pilot’s most distinctive feature. Developers retain 30 per cent exposure to both upside and downside risks. When market prices fall below the strike price, the CfD pool compensates 70 per cent of the shortfall, and when prices exceed it, developers return 70 per cent of the gains to the pool. This structure partially stabilises revenue without fully insulating developers from market signals, preserving the incentive while limiting fiscal liabilities for the pool.
  
  At the same time, the adequacy of the CfD pool is acutely sensitive to the level of strike prices discovered. Our analysis also reveals that the pool’s viability break-evens at a strike price of approximately INR 5.5–5.6/kWh under current profit-loss sharing ratios (Figure 4).

• Infusing supply-side liquidity in power exchanges. 
  Our ongoing analysis of the CfD pilot tender suggests that a supply of 500 MW (1.5 GWh daily) could increase Day-Ahead Market (DAM) liquidity by roughly 1–1.5 per cent and/or Green Day-Ahead Market (GDAM) liquidity by about 2.5–7 per cent, depending on monthly injection patterns. Beyond immediate price effects, the pilot could also gradually expose developers, who have been traditionally reliant on long-term PPAs, to market operations, helping build trading expertise and deepening participation over time.

How can India's CfD framework evolve to drive market efficiency?

The pilot establishes a strong foundation for catalysing innovation. Four design challenges will determine whether CfDs can fulfil their potential to deepen wholesale markets, de-risk market-linked clean energy investment, and support cost-effective peak power procurement. 

• Strengthening the pricing benchmark. The CfD settles payments based on prices discovered on the power exchanges. But these platforms handle only about seven per cent of India’s total electricity trade. When so little power is traded on exchanges, prices can swing sharply from day to day. The pilot's 30:70 risk-sharing ratio partially mitigates this by giving generators a meaningful stake in maximising market revenues. But as CfD volumes grow, more stable pricing benchmarks, such as dedicated settlement indices, will be needed to reduce the impact of day-to-day price swings on settlement outcomes.
• Managing long-term price risk. While CfDs settle against day-ahead/real-time prices, strike prices reflect a 10–12 year revenue expectation. This mismatch creates residual risk for both developers and the settlement pool. In mature markets, generators can manage this uncertainty through electricity derivatives, which are contracts that let generators lock electricity prices months or years ahead of actual delivery. As India’s derivatives market develops, its interaction with CfDs will be critical in improving bankability and investor confidence.
• Attracting buyers to manage cannibalisation. The pilot focuses on de-risking supply-side generators and brings new supply to exchanges. But as CfD-backed capacity grows, concentrated supply in similar time blocks could depress prices in precisely those hours. This is known as cannibalisation, where new supply erodes the market prices it depends on for revenue. This increases pool payouts and weakens the market signals that CfDs are meant to preserve. Without mechanisms that also draw distribution utilities and corporate consumers to procure through exchanges, the supply-demand imbalance will persist.
• Ensuring self-sustaining market-linked instruments. Scaling market mechanisms beyond the CfD pilot will require broader structural reforms. These include reviewing exchange price ceilings, unlocking new market-based revenue streams through ancillary services and carbon pricing, and introducing capacity markets. Without such interventions, the need for budgetary support will continue.

The SECI tender marks a decisive move from viewing CfDs as a policy idea to deploying them as a market instrument. It reflects a careful balancing act: de-risking investments to attract capital while preserving enough market signals to drive competitive behaviour and build exchange liquidity. The value of the pilot lies in the market intelligence it generates: on investor appetite, on price formation dynamics, and on the structural reforms needed to design further such sophisticated market instruments.

For policymakers, the next steps are as important as the pilot itself. The Central Electricity Regulatory Commission’s support for pricing benchmark development, the Government of India’s effort to design subsequent CfD rounds informed by pilot learnings, and the broader pace of electricity market reform will determine whether such instruments can build a vibrant and efficient power market.

Rashi Singh is a Programme Associate, Disha Agarwal is a Senior Programme Lead, and Vishal Tripathi is a Consultant at the Council on Energy, Environment and Water (CEEW).

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