Davey said: "This mechanism will give investors precisely the confidence they seek."
An explanatory note to the Bill says that under the mechanism generators will receive the price they achieve in the electricity market plus a top up from the market price to an agreed level, known as the "strike price".
Where the market price is above the agreed level, the generator would be required to pay back "and thus ensure value for money and greater price stability for consumers", the explanatory note says.
Indicative "strike prices" will be published in mid-2013, according to the explanatory note. It says that the government intends to issue the first contracts for difference in 2014.
The Bill also also proposes that contracts are awarded at an earlier stage in the project development process. Developers will not have to risk taking a project right through to the final investment decision with no guarantee that they would be awarded a contract.
Renewable Energy Association chief executive Gaynor Hartnell said: "Electricity customers will only pay what is necessary to move the UK towards a more sustainable and secure energy future.
"That’s because, with these new contracts, if the price of electricity increases, the amount of subsidy required can fall. Generators should get a stable price, provided they achieve the fair market price for their electricity."
The Energy Bill is available here.