Termination amounts and the enforcement gap in the Contracts for Difference scheme: Insights from offshore wind project finance in the United Kingdom

The Contracts for Difference (CfD) scheme supports low-carbon electricity generation in the United Kingdom by stabilising revenue per unit of output at a pre-agreed strike price. When wholesale prices exceed the strike price, generators make payback payments to the Low Carbon Contracts Company (LCCC), and termination provisions are intended to deter early exit by requiring compensation for expected future paybacks. This study examines a potential enforcement gap in this mechanism. Offshore wind CfDs are commonly held by highly leveraged, non-recourse special purpose vehicles, whose assets and cash flows may be pledged to secured lenders. If a project company enters financial distress or insolvency, the termination amount may be large, but the LCCC’s claim for that amount may be weakly recoverable. The study develops a stylised quantitative framework calibrated to publicly available information on large UK offshore wind projects. It distinguishes financial resilience, measured by the debt service coverage ratio, from the termination amount, measured as the present value of expected future paybacks. The analysis identifies two linking channels. The volume channel shows that lower eligible generation can weaken debt-servicing capacity and reduce the termination amount. By contrast, the price channel shows that high wholesale prices can increase the termination amount without directly improving financial resilience. The enforcement gap is most relevant when a large termination amount coincides with financial distress. Although no such generator insolvency cases have been documented under the CfD regime to date, the study highlights the need to strengthen recoverability while preserving project bankability.