This Policy Brief defines Contracts for Difference (CfDs), describes the challenges of their development, and proposes guiding principles for their design, which build on European experiences of renewable energy deployment since the early 2000s.
- Investment in new technologies to enable to the use of hydrogen are necessary for decarbonisation but remain risky because of uncertainties about producer revenues. To encourage rapid deployment, a public support framework must be implemented, including incentives for demand development in priority sectors (industry and air and maritime transport) and production, and based on a shared definition of the hydrogen that is eligible for support.
- Supporting hydrogen production by electrolysis in France via CfDs could generate up to €5 billion while costing the French state up to €3 billion by 2030, according to central scenarios; this amount is lower than before the rise in energy prices. These costs could increase significantly if the price of CO2 plateaus or declines, if natural gas prices return to low levels, or if electrolysis is more widely deployed.
- On the production side, Contracts for Difference (CfDs) are an important tool for European public stakeholders. They can help lower hydrogen production costs by stimulating technological learning through de-risking and financing initial projects, while helping to select important technologies for decarbonisation and favouring direct commercialisation (without support) in the long term.
- CfDs should be limited to hydrogen production technologies compatible with a pathway to climate neutrality, with electrolysis as a priority. To ensure that all important technologies for decarbonisation are developed, these contracts could prioritize key projects for the deployment of certain transport and hydrogen storage infrastructure linked to key uses or certain technologies that are not yet mature.