In the wake of globally volatile gas markets that left British electricity prices reeling, the Department of Energy Security and Net Zero (DESNZ) have proposed a range of measures to break the relationship between the two.

The relationship between gas and electricity prices has long been a source of cost volatility and investment uncertainty for GB generators and consumers alike. DESNZ's proposals — including the introduction of a Wholesale Contract for Difference (WCfD) and an uplift to the Electricity Generator Levy — signal a decisive shift in how non-gas generators are remunerated, with significant implications for investment returns, revenue certainty, and long-term offtake strategies.

Why are electricity prices in Great Britain still linked to gas?

In Great Britain, a mix of generation sources are used to produce electricity, including both renewables and gas. Electricity prices are set, in part, by the source of generation - with cheaper sources of generation being used first, and the price being determined by the most expensive source that needs to be used. As a net importer of gas, Great Britain is exposed to international gas price volatility, and electricity generated by gas typically represents the most expensive source of generation. Due to the scale of renewables projects in Great Britain, gas is still frequently used to provide continuity of supply and therefore, wholesale gas prices set the wholesale electricity prices approximately 60% of the time.

Whilst renewable energy generation has undergone significant growth in Great Britain, it remains that renewable generation representing approximately 30% of Great Britain's power supply, is still exposed to wholesale prices that are often set by the gas market (as detailed above). Therefore, an increasingly volatile gas market has resulted in growing concern for the cost of electricity for consumers.

What is a Wholesale Contract for Difference (WCfD)?

In response to this concern, one such measure proposed by DESNZ is the introduction of a voluntary WCfD. Under this measure, existing eligible generators that are not already contracted under a Contract for Difference (CfD) would be able to accept a fixed price for electricity generation – thereby reducing exposure to the wholesale prices, frequently set by gas. Further to this, generators accredited under the Renewable Obligation scheme (RO) would still receive RO support, with the option to switch their wholesale revenues to a fixed price WCfD.

The WCfD measure will be consulted on, however indications from DESNZ are that the scheme could be introduced by late 2026 with an allocation process run by 2027.

Why is the Electricity Generator Levy increasing?

Another measure proposed, is the "immediate action" to uplift the Electricity Generator Levy (EGL) from 45% to 55% from 1 July 2026. Introduced on 1 January 2023, the EGL taxes "extraordinary" profits made by non-gas electricity generators in circumstances where wholesale electricity prices are increased due to high gas prices. This is because non-gas generators receive windfalls from the high electricity prices, despite not having to bear the increased gas input costs themselves. The levy applies to the difference between the wholesale price that a generator achieves against the benchmark of £75/MWh.

Whilst the EGL was initially slated to end on 31 March 2028, it has been indicated that it will continue beyond its scheduled conclusion in light of the current concerns. This additional revenue for the Government has been earmarked to support both business and domestic consumers impacted by the rise in electricity prices.

If your organisation is navigating the implications of these proposals from DESNZ, our Energy team is here to help. Please contact Gus Wood, James Stanier, George Nixon or Kate Huet.