The European Parliament has published a study providing a comprehensive analysis of the adoption, design, and impact of Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs) across the EU. The study assesses current trends, market effects, and policy frameworks, and proposes actionable recommendations to overcome barriers to the wider uptake of these policy instruments. The document was prepared by a consortium led by Trinomics and published by the Policy Department for Transformation, Innovation and Health at the request of the Committee on Industry, Research and Energy (ITRE). Below we present a brief summary from the authors.
The European Union (EU) has set ambitious targets for renewable energy deployment and decarbonisation, aiming for at least 42.5% of final energy consumption to come from renewable energy sources (RES) by 2030 and to achieve climate neutrality by 2050. Achieving these goals requires accelerated investment in renewable and low-carbon electricity generation.
Two key instruments — Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs) — have emerged as central mechanisms to support this transition. PPAs are long-term contracts between energy producers and consumers or retailers, while CfDs are financial contracts, typically between generators and public authorities, designed to stabilise revenues and reduce market risks for investors. Both instruments play a crucial role in reducing investment risk, facilitating the deployment and market integration of RES, and stabilising electricity prices for end-users.
The study, developed by Trinomics at the request of ITRE, provides a comprehensive analysis of the implementation, design, and impact of PPAs and CfDs in the EU. It examines current trends, contractual structures, market effects, and policy frameworks, with a focus on identifying barriers to their wider use and formulating actionable recommendations. The report is based on a literature review, quantitative data analysis, and stakeholder interviews. Particular attention is paid to the interaction between EU-level legislation and national implementation, as well as to the evolving needs of market participants.
Key Findings
Effectiveness of the instruments:
Both Contracts for Difference (CfDs) and Power Purchase Agreements (PPAs) have proven highly effective in stimulating investments in renewable energy sources (RES), providing revenue certainty for investors and price predictability for consumers. CfDs are particularly useful for bridging the gap between generation costs and market revenues, while PPAs provide flexible, market-based risk management for both producers and electricity offtakers.
Market trends:
CfDs, generally awarded through competitive auctions, have shown steady growth. This instrument has been crucial for investments in solar and wind energy and has also been applied, to some extent, to other technologies. Corporate demand for sustainability has been the main driver behind the rapid expansion of PPAs for solar and wind projects, although this growth is currently concentrated in a limited number of European countries. In recent years, signs of stagnation have appeared in traditional PPAs, while hybrid PPAs (combining electricity generation and storage) are gaining popularity. As of 2024, these instruments are associated with the deployment of about 17% of the total RES capacity installed in the EU-27 since 2017.
Potential for growth:
PPAs and CfDs are expected to continue expanding towards 2050, although different policy approaches may lead to significantly different outcomes. At the current pace of deployment, about 67% of the required RES capacity would need to be supported through other mechanisms if the EU is to meet its targets. With accelerated deployment based on policies promoting CfDs and PPAs, about 71% of the required capacity could be delivered through these instruments (with the remainder supported by other mechanisms and markets), making the achievement of the targets more feasible.
Design challenges:
If not carefully designed, CfDs may introduce distortions in electricity markets, such as weakening price signals for flexibility and operational responsiveness. PPAs face barriers related to the creditworthiness of offtakers, the complexity of negotiations, and limited access for smaller market participants.
Complementarity:
CfDs and PPAs can be complementary, but poorly coordinated CfD schemes may crowd out private contracts. Well-designed frameworks can ensure synergies between both instruments and accelerate RES deployment.
Policy support:
The European legal framework positions two-way CfDs as a primary support mechanism, while also promoting measures to strengthen the PPA market, such as guarantee schemes and contract standardisation.
Market impacts:
Large-scale deployment of CfDs and PPAs may reshape electricity markets, potentially reducing market liquidity, affecting price formation, and increasing overall system costs. Appropriate design of these instruments is essential to minimise negative impacts and ensure that their deployment effectively supports the objectives of the energy market.
Recommendations
Ensure appropriate CfD design:
National authorities should implement adequate auction rules and CfD designs that provide flexibility incentives and avoid market distortions. CfDs should complement, rather than crowd out, PPAs and other market-based contracts.
Assess and adapt existing risk- and cost-sharing mechanisms where appropriate:
Currently, subsidies granted through CfDs (and electricity sector decarbonisation policies in general) are usually financed via electricity bills. Alternative approaches (such as financing through the general budget) should be considered, as they would avoid increasing end-user bills and would support electrification.
Diversify applications of CfDs on the supply side:
The use of CfD-type instruments to facilitate investments in other renewable energy sectors (e.g. hydrogen, biofuels) should be assessed and extended where appropriate.
Extend applications of CfDs to the demand side:
CfD-type instruments should also be applied to the demand side, for example through specific energy or carbon CfDs implemented via tailored pilot schemes to identify best practices before wider deployment.
Enhance PPA accessibility:
Initiatives to facilitate access to PPAs — such as state-backed guarantees, more standardised contracts, and multi-buyer or aggregation platforms — should be expanded, especially for SMEs and offtakers with lower creditworthiness.
Enable SMEs to hedge price risks:
Since PPAs are complex instruments and often not suitable for the majority of SMEs, suppliers/retailers should be encouraged to offer portfolio-based long-term supply contracts to SMEs, reducing price risks for these offtakers and supporting their decarbonisation investments.
Remove remaining barriers to RES investments and stimulate PPA demand:
Authorities should continue reducing barriers (e.g. permitting procedures and grid connection) for RES investments and facilitate the decarbonisation and electrification of energy end-use.
Ensure greater harmonisation of national CfD approaches:
A higher degree of harmonisation in auction rules and CfD design would reduce the cost of achieving national RES targets, including by enabling cross-border participation and lowering administrative costs for investors operating in several Member States.
See the full report here.
