Energy Transition & Tax | Denmark: Political agreement to remove critical tax barrier on new green investments relying on long term CfDs or PPAs
Current tax treatment of price hedging contracts
In an electricity market characterised by volatile prices and substantial capital investments, fixed-price offtake agreements (PPAs) and Contract for Difference agreements (CfDs) provide essential price certainty. PPAs and CfDs are often a pre-requisite for making bankable projects. However, recent Danish Tax Council rulings have confirmed that such contracts can be treated as financial contracts subject to taxation under the “mark-to-market” principle. This means companies may be taxed on unrealised gains – changes in contract value – rather than actual payments received.
For capital-intensive on- and offshore infrastructure projects with multi-decade revenue streams, this creates unpredictable liquidity demands that cannot be managed through normal project financing. In relation to public tenders, this would force the developers to price this risk of ongoing taxation into their bids thereby increasing the strike price in the state aid support instruments.
Key elements of the political agreement
The agreement shifts long-term price hedging contracts to realisation-based taxation. Specifically, gains on contracts with a duration of 3 years or more will be taxed only upon actual payments when the contract sets a predictable price for predictable quantities and forms part of the business’s primary operations. This does not necessarily reduce total tax paid – but it simply aligns tax obligations with actual cash flows.
The new tax treatment is intended to apply to contracts entered into from 1 January 2026 onwards, meaning that it will cover inter alia the CfD contracts to be entered into under Denmark’s current offshore wind tender programme, including Hesselø. By removing tax-driven liquidity uncertainty, the reform should enable developers to offer more competitive strike prices.
The parties are committed to present a draft bill in spring of 2026. All parties have committed to vote for the legislation once presented to the Parliament.
Implications for market participants
Infrastructure investors and developers of new projects contemplating entering into PPAs or CfDs or other forms of long-term price hedging contracts should assess how these changes affect their investment models and cash flow projections, and take part in the consultation on the legislative bill coming up in order to design the optimal structure of the proposal.
As a side note, the Danish Energy Agency has requested a binding ruling from the Danish Tax Agency on the VAT treatment of payments under the Capability-Based Two-Way CfD schemes. A ruling is expected this spring and will be communicated to relevant parties – but also published.
BAHR’s pan-Scandinavian team provides seamless advice to large scale infrastructure projects across the energy transition. Do not hesitate to reach out to your tax or energy transition contact with BAHR for further information.