Last week, the Secretary of State for Energy, alongside the Prime Minister and the Chancellor, announced a series of measures aimed at reducing the impact of volatile gas prices on Great Britain’s wholesale electricity market, as geopolitical tensions in the Middle East continue to drive energy price uncertainty.[1]
The announcement follows media briefings suggesting that the Government was considering decoupling electricity prices from gas.[2] While this framing has featured in headlines, it is worth noting that the Government is not, at present, removing the link between gas and electricity in the wholesale market. Instead, the Government is introducing targeted interventions to reduce the extent to which gas sets the marginal price of electricity.
What has the Government announced?
The Government plans to introduce a wholesale Contract for Difference (CfD) that will be offered to existing low carbon generators that are not currently covered by CfD arrangements. Under this proposal, eligible generators will be able to secure a fixed strike price for their wholesale revenues.
In essence, this will extend revenue stabilisation to a broader pool of low carbon generators. The rationale being that increasing the proportion of generation under CfD style arrangements will reduce the share of electricity priced at the marginal gas level. Critically, this is an indirect, rather than direct intervention: it does not alter the fundamental structure of the wholesale pricing system.
Extension of the Electricity Generator Levy
To compliment the above, the Government has announced an extension and strengthening of the Electricity Generator Levy (EGL), often referred to as a windfall tax on low carbon generators benefiting from high wholesale prices. The marginal rate will increase from 45 per cent to 55 per cent from 1st July 2026. By increasing the relative attractiveness of CfD participation, the Government aims to shift more generation into long-term price stabilisation arrangements, further insulating consumers from volatile wholesale pricing conditions.
Key considerations
The conflict in the Middle East and the impact on gas prices have again highlighted the UK’s exposure to fluctuations in global gas markets.
In the GB wholesale electricity market, the marginal price is typically set by the most expensive form of generation required to meet demand – most often unabated natural gas. Although the share of gas in setting the marginal price has declined over time (from around 90% in the early 2020s to approximately 60% today), it remains the dominant price-setting technology. This has renewed political and policy interest in the long-debated question of whether electricity pricing should be less closely tied to gas markets. The Government’s latest package does not pursue full decoupling of electricity from gas, but instead seeks to reduce the effective exposure of consumers to gas-driven pricing through expanded revenue stabilisation mechanisms.
The detail of the forthcoming consultation on the Wholesale CfD mechanism will be critical in determining the effectiveness of these reforms. In particular, several issues will shape whether the policy delivers meaningful consumer benefit:
- Where strike prices are be set, and whether sufficient competitive can be maintained to ensure value for money for consumers.
- Whether the mechanism strikes the right balance between providing revenue certainty and maintaining attractive returns to support continued investment in low-carbon generation.
- The extent to which existing renewable and low-carbon assets participate, and how quickly the share of CfD-backed generation expands.
- How the new mechanism will interact with the existing CfD regime and broader wholesale market structure.
Conclusion
Taken together, the measures announced represent a considerable evolution in the UK’s approach to electricity market design, but not a fundamental redesign of the wholesale pricing mechanism. The effectiveness of this approach will ultimately depend on the detailed design of the Wholesale CfD mechanism and its ability to balance consumer protection with continued investment in the UK’s low-carbon energy system.
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Notes
[1] Department for Energy Security and Net Zero, ‘Decisive action to break influence of gas on electricity prices’, 21 April 2026, Link
[2] The Guardian, ‘Reeves looking to break link between gas cost and electricity prices’, 16 April 2026, Link
