Towards a Blockchain Contract-for-Difference Financial Instrument for
Hedging Renewable Electricity Transactions
Abstract
Contract-for-Difference financial instruments are available to renewable
electricity generators in day-ahead electricity markets to allow them to
hedge against revenue risk. Traditional CfDs while designed to hedge
revenue risk, introduce other new risks such as counterparty credit,
margining and third-party risks. We therefore propose a novel financial
instrument - an Ethereum blockchain-based dual escrow smart contract, to
serve as the mediator in a CfD agreement between a renewable electricity
generator and supplier. This financial instrument addresses hedging
related risks that result from traditional CfD agreements in day-ahead
electricity markets. In this paper, we design the logic of the financial
instrument, translate this logic to smart contract codes and demonstrate
its expected performance. Overall, the proposed financial instrument has
the benefits of reducing hedging related risks inherent in traditional
CfDs. Likewise, it enables secure, efficient, cost-effective,
consistent, reliable, transparent and frictionless transactions between
contracting parties in a CfD agreement.