Assessing Potential Distortions Under Production-Based CfDs on the German Electricity Market

EU legislation mandates the introduction of two-way Contracts for Difference (CfDs) for renewable energy (RE) investment support starting in 2027. Different schemes have been proposed, ranging from more conventional production-based CfDs that may distort market signals and incentivize undesirable producer behavior to more complex production-independent CfDs that aim to avoid distortions. This paper empirically analyzes the implications of production-based CfDs on the German day-ahead and intraday markets from 2020 to 2024. We quantify the frequency and magnitude of inefficient dispatch incentives linked to different CfD designs. The results indicate that most distortions occur in clawback years and on the day-ahead market, suggesting potential corrections through dynamic clawback design. While distortions in intraday markets are less prevalent, they are more difficult to fix by adjustments in the design of production-based CfDs. Our research highlights the need for further investigation to inform decisions regarding the adoption of particular CfD designs.