Abstract for: Can the Contract for Differences system stimulate the development of renewable energy? Evidence from the SD auction model

The global low-carbon energy transition relies heavily on the expansion of renewable electricity. Many countries—such as United Kingdom, Germany, and Australia—have adopted the Contracts for Difference (CfD) mechanism to promote renewable deployment. China began implementing a CfD scheme in 2025, combining bilateral settlement and marginal clearing with province-level targets and cross-provincial allocation. As the policy remains exploratory, its impacts and potential challenges remain uncertain, motivating quantitative analysis using system dynamics. This study employs a system dynamics (SD) model to analyze the implementation of the Contracts for Difference (CfD) mechanism. First, the model improves the representation of the auction process—widely considered the core institutional design—by incorporating detailed auction dynamics and their linkage with renewable energy development. Second, it integrates an investment return framework to capture how auction outcomes influence project profitability and renewable generators’ market trading decisions. This is an ongoing study, and more mature results will be presented at the conference in July. Preliminary findings suggest that auction prices fluctuate within the government-set price bounds in the early stages but gradually converge toward the levelized cost of electricity of renewable projects. In addition, the Contracts for Difference mechanism appears to effectively stimulate renewable energy deployment, potentially exceeding national targets. Practically, this research provides quantitative insights for policymakers, power market participants, and end users. It can support policymakers in refining the design of the Contracts for Difference mechanism, help market participants optimize trading strategies, and assist end users in anticipating electricity price changes and adjusting consumption behavior. Academically, the study extends the application of System Dynamics to policy design and electricity market analysis.