Under the guise of fighting climate change, the British government has resurrected a core instrument of 20th-century war economies: the state-guaranteed contract. Britain’s flagship Contracts for Difference (CfDs)—designed to foster a transition to green energy—are structurally very similar to the Wirtschaftlichkeitsgarantieverträge (profitability guarantee contracts) that Nazi Germany used to subsidize its rearmament and achieve autarky. This is not a new, innovative policy, but the revival of a failed, centrally-planned approach that replaces market signals with political directives, ultimately eroding economic freedom.
At the heart of the UK’s green industrial policy lies its “main mechanism for supporting low carbon electricity generation”: the Contract for Difference (CfD) scheme. This framework is not a minor subsidy but the central pillar upon which the government plans to force a transition to renewable energy. To understand the profound implications of this policy, one must first understand its mechanics, which are presented by the government as part of a sophisticated, market-friendly strategy.
The process begins with a state-run auction, where renewable energy developers compete for a limited pot of contracts. This is not, of course, competition to serve the consumer best, but a competition to win the government’s favor. The successful bidder does not win a market share, but a private law contract with the Low Carbon Contracts Company (LCCC)—a government-owned entity established specifically to administer these agreements.
The core of the CfD is a 15-year agreement that guarantees the developer a fixed, indexed price for the electricity it produces, known as the “strike price.” This strike price is not a market price; it is a politically-determined figure designed to reflect the high upfront costs of a specific technology and to ensure a healthy rate of return for the investor.
This guaranteed price is then compared to a “reference price,” which is a measure of the average wholesale market price for electricity in Great Britain. The state’s intervention kicks in to cover the difference. If the market price falls below the strike price, the government pays the generator the difference. This, officials claim, incentivizes investment by protecting developers from volatile wholesale prices. Conversely, if the market price soars above the strike price, the developer must pay the difference back to the state, a mechanism designed to protect consumers from paying increased support costs. In practice, strike prices are usually set with the aim of “de-risking” investment, so for many years they are expected to sit above anticipated market levels, making net payments from the state to the producer more likely than the reverse.
On the surface, this appears to be a balanced risk-sharing agreement. But in reality, it is a profound intervention that replaces market discipline with political guarantees. It is a system designed to make investments viable that the free market has deemed uneconomical, socializing the risk of private enterprise, and centralizing economic decision-making in the hands of the state. This is the official, modern face of industrial policy in Britain.
This state-led approach to industrial transformation, presented by London as a novel solution to a 21st-century crisis, is anything but new. The core mechanics of the British CfDs—where the state guarantees a fixed price and socializes the investment risk of a chosen industry—are, of all things, a direct echo of the Wirtschaftlichkeitsgarantieverträge (profitability guarantee contracts) employed by the German state during the first half of the 20th century. The stated objectives were different then, focused on autarky and rearmament in the lead-up to and during the World Wars. Yet, the instruments used are strikingly, even disturbingly, similar.
A telling parallel can be found in the 1933 Feder-Bosch Agreement between the Nazi regime and the chemical conglomerate I.G. Farben. To make the production of synthetic fuel viable, the German government guaranteed it would purchase all output that could not be sold on the open market and, crucially, ensured a price that covered all costs, depreciation, taxes, plus a guaranteed five percent return on invested capital. This is the very same logic as the modern CfD’s “strike price”—a politically-determined cost-plus price designed to eliminate market risk and guarantee profitability. This agreement became the blueprint for the state-controlled Braunkohle-Benzin AG (BRABAG), which produced synthetic fuels for the duration of the Third Reich and could only exist thanks to state guarantees. Later, a number of Wirtschaftlichkeitsgarantieverträge followed, typically with companies involved in the hydrogenation projects.
The parallels do not end with the price guarantee. Just as today’s CfDs require developers to pay back excess profits when market prices exceed the strike price, the Nazi-era contracts included similar provisions. Companies were often obligated to return a portion of revenues that exceeded the guaranteed price. Furthermore, these contracts were typically voluntary, with companies often approaching the state to secure these highly profitable, risk‑free arrangements, although there were important exceptions where firms came under strong political pressure or were effectively coerced into accepting such terms. The state, in turn, used these contracts to pursue a central planning goal: the transformation of the industrial base to serve a political agenda. Then, that agenda was war; today, it is “climate neutrality.” The British CfD is not an innovation; it is a resurrection of a failed, centrally-planned approach that replaces the consumer with the state as the ultimate arbiter of economic value.
The British government, far from seeing the dangers of this path, is now preparing to expand the use of CfDs beyond electricity generation. New schemes are being developed for Greenhouse Gas Removal and other technologies, proving that the state’s appetite for centrally planning the economy is insatiable. This ambition, however, runs headfirst into the same problem that doomed the Nazi-era contracts: the crippling weight of information and monitoring costs.
To administer these guarantees, the state must constantly monitor and audit the books of private companies in order to determine and verify their underlying costs, a bureaucratic nightmare that is not only inefficient but fundamentally at odds with a free society. History warns us that such systems do not create sustainable prosperity; they create bureaucratic bloat, stifle innovation, and eventually collapse under their own weight. The lesson for Britain is clear: by resurrecting the tools of the command economy, it is not building a green future, but laying the groundwork for the next great economic failure.
