Breaking the link: Government moves to decouple gas and electricity prices

Under Great Britain's "pay-as-clear" wholesale market mechanism, the most expensive energy generator needed to meet demand sets the price for all generators. Gas-fired power stations set that price around 60% of the time. Approximately 30% of Britain's power supply comes from renewable generation whose revenue is therefore in part dependent on wholesale prices set by gas. Legacy generators operating under the Renewables Obligation ("RO"), or Feed-in-Tariff ("FIT") – subsidies designed to encourage generation of electricity from eligible renewable sources in the UK – will also receive additional income which is not, directly, tied to the wholesale pricing market.

Newer renewables projects (where larger scale and/or emerging technology) will often operate under Contracts for Difference ("CfD"), which guarantee a fixed "strike price" for generators.  When the wholesale price exceeds the strike price, the generator pays back the difference. When wholesale price falls below the strike price, the generator is topped up. This means that CfD generators are already insulated from falls in the wholesale / gas price, and likewise do not benefit from price spikes. However, these CfDs are subject to their own market dynamics. The strike price is agreed via an auction process and will vary dependent on the nature of the technology and when it was agreed – in the most recent round, for example, the price for offshore wind was £91.20/MWh (2024 prices) – which is significantly lower than the current wholesale prices. For newer technologies that strike price will be higher – for example for floating offshore wind it was £216.49/MWh in the latest round, reflecting the greater risk these developers are taking (and so representing a public investment in developing that technology).

The consequence of this is that, other than for the newer CfD projects (which make up a relatively small part of the overall energy mix), the GB electricity system remains highly  exposed to wholesale gas prices. That exposure has three dimensions: cost, politics, and security, each of which has sharpened significantly in recent months.

Whilst not the focus of this article, it is important to note that the recent spike in wholesale electricity prices (driven by the global rise in gas prices) has not been entirely welcome news for renewable projects. The immediate underlying cause of that is recent events in Iran, which have caused major supply chain risks – an acute challenge for projects at the development stage – and further challenges in financings.  See our briefing for further details.

The cost to consumers and the economy

The immediate political driver is the impact on household bills. UK household energy bills are expected to rise again from July - for a government that pledged in the 2024 general election to cut energy bills by £300 by 2030, the political consequences risk compounding existing pressure on a government already facing significant scrutiny. Britain already has some of the highest electricity costs in any developed economy.

Importantly, the impact extends well beyond household bills. The UK's exposure to volatile gas prices imposes a structural cost on the wider economy. Part of the UK Climate Change Committee's (the "CCC") supplementary analysis of the Seventh Carbon Budget modelled a single fossil fuel price spike (e.g., a Ukraine war-level crisis) of 2022 magnitude occurring in 2040, under a scenario in which no further action is taken to decarbonise the energy system. The below chart shows the impact: the average household energy bill would rise by 59%, compared to only 4% under the CCC's decarbonised Balanced Pathway (the CCC's recommended decarbonisation pathway to Net Zero). The total additional cost to households, businesses and the Exchequer of a single such shock is likely to be as large as the total net additional cost of meeting the Balanced Pathway across every year to 2050.

This illustrates the core economic argument for the government's intervention: the longer the electricity system remains tied to gas, the greater the fiscal exposure to future price shocks, and the wider the gap between the cost trajectory of a gas-dependent system and a clean power system.

Energy independence and security

Furthermore, the deeper structural concern is one of national security and economic sovereignty. As noted by the government in their announcement, Britain's reliance on international fossil fuel markets leaves it exposed to "volatile gas prices, driving the cost-of-living crisis even though much of the country's electricity supply comes from cheaper renewables and nuclear".

This exposure is likely to become a greater risk to the economy over time. The geopolitical environment, including instability in the Middle East, the ongoing consequences of the Ukraine conflict and broader great power competition, shows no sign of stabilising. At the same time, the UK is in the process of electrifying significant parts of the economy that are currently powered by fossil fuels directly (e.g., Heat Pump installation, electric vehicles). The paradox of the current system is that Britain can continue to build low-cost, homegrown renewable generation and still see its electricity prices dictated by conflicts and supply disruptions thousands of miles away.

It is this vulnerability that the government's announcement seeks to address in the long term - severing the transmission mechanism through which international fossil fuel instability reaches the domestic economy. As Ed Miliband, the Energy Secretary worded it: "The era of fossil fuel security is over, and the era of clean energy security must come of age".

In July 2025, the government concluded its Review of Electricity Market Arrangements ("REMA"), a comprehensive review of the wholesale electricity market, inherited from the previous government. The review had considered whether to retain the current national pricing system or undertake a radical overhaul, such as splitting the country into different pricing zones. Given the complexity of the market, the time this would take to implement, the risk of unintended consequences, and the sheer number of things on its desk, the Government has instead chosen to work within the existing market framework in looking to decouple electricity pricing from the gas price. Its two headline measures are the introduction of voluntary WCfDs for existing low-carbon generators (that have not entered into CfDs) and an increase to the EGL from 45% to 55%.

The Government's 21 April 2026 announcement also included a broader package of measures with the aim of further promoting renewables and reducing the impact of rising energy costs on households:

• Boiler Upgrade Scheme: Grant increased to £9,000 for properties heated by oil and LPG (England and Wales only).
  
  
• Social Housing Fund: An additional £100 million of funding (to an existing pot of £1.2 billion) to support up to 57,000 solar installations.
  
  
• Solar for schools and colleges: Up to £40million via Great British Energy for rooftop solar on a further 100 schools and colleges this year.
  
  
• Public land renewables: Plans to use brownfield, industrial and railway sites across the public estate, with a stated potential of up to 10 GW of capacity.
  
  
• Planning and grid reform: A major overhaul of planning, land access and grid connection processes to cut delays for grid upgrades and renewable connections.
  
  
• Reformed National Pricing: A delivery plan for smarter locational pricing of electricity infrastructure, with claimed benefits of up to £20 billion between 2030 and 2050.
  
  
• Transitional Energy Certificates:  Further details published in advance of legislation, aimed at providing certainty for investment in areas near existing licensed oil and gas fields.
  
  
• EVs, heat pumps and solar: Plans to make EV chargers, solar panels and heat pumps easier to install for renters, flat-dwellers and households without a driveway. The Government is also exploring ways to support low-income households with plug-in solar through the Warm Homes Plan, with up to £25 million earmarked for piloting support in partnership with local authorities and mayors.

This announcement represents the latest in a series of government interventions that have altered the economics of legacy renewables assets, which have been financed, built and operated on specific regulatory commitments:

• Original Mandate of the EGL: The EGL was introduced as a temporary windfall tax in the context of the Ukraine War energy crisis. The latest announcement of an increase in the EGL's rate marks an expansion of what was originally a temporary measure.
  
  
• RPI to CPI Indexation: The Government confirmed the switch of inflation indexation in the RO and Feed-in Tariff ("FiT") schemes from RPI to CPI from April 2026, a change characterised by many respondents to the consultations as retrospective and contrary to the principles of legal certainty on which projects and financings were structured. For more information on this topic, please see our previous briefing here.
  
  
• WCfDs: The Government is now offering legacy generators the option to exchange their wholesale revenues for a fixed CfD price. The measures have been explicitly designed to "provide generators the economic incentive to move on to fixed contracts not linked to volatile gas".

The Government is progressively reshaping the risk-reward profile of legacy renewable assets through changes to indexation and taxation. While the WCfD is described as a voluntary scheme, the direction of the Government's policy travel has created significant economic pressure for generators to enter them.

The Government is at pains to describe the WCfD as a voluntary offer. However, generators that do not sign a WCfD face a higher marginal tax rate on their most profitable revenues, while those that do will receive a fixed price that sits outside the scope of the EGL.

Furthermore, the Government has stated that WCfDs will only be offered where they represent clear value for money for consumers. What strike price will be offered, and how "clear value for money" is assessed, remains unknown. Until the Government provides further details on pricing methodology and the terms of these contracts, generators cannot make an informed decision.

Investors, generators and lenders with exposure to RO-accredited assets will need to consider the implications carefully. As noted in our previous briefing on the RPI-to-CPI indexation change, the cumulative effect of successive interventions on cash flows, valuations and financing structures should be assessed in the round. Key considerations include the following:

• Uncertain terms and duration of WCfDs: The government has described the WCfD as a "long-term" contract but has not specified its duration. Standard CfDs run for 15 years. For RO generators nearing the end of their 20-year support period, the term of the WCfD will be a critical factor: a longer contract could effectively extend the period of government-backed price support beyond the original RO expiry, while a shorter term may offer limited value. The interaction between the remaining RO term and the WCfD term should be a key focus of the forthcoming consultation. More broadly, the move from volatile wholesale revenues to a fixed CfD price fundamentally changes the cash flow profile of the asset. This may require re-modelling of a generator's financial projections and distribution capacity. Details on WCfD strike prices, eligibility criteria, contract duration and the allocation process will be critical. Interested parties should ensure early engagement with the consultation process.
  
  
• Implementation timing and revenue profile: The Government has announced the EGL increase as "immediate action" but the WCfD will not be available until after consultation. This creates a potentially significant timing gap during which generators face a higher tax burden without any ability to mitigate it by entering into a WCfD. Depending on the duration of this gap and the trajectory of wholesale prices, the financial impact on generators could be material.
  
  
• Financing consents: Existing financing documents may require lender consent to enter into a WCfD, particularly if the contract constitutes a material change to the revenue structure of the project or involves the granting of rights to the Low Carbon Contracts Company (the counterparty to the contracts awarded in CfD allocations rounds).
  
  
• Stacking with the RO: In their proposal, the Government states that "generators accredited under the Renewables Obligation (RO) would continue to receive support via the RO in the way they do currently – with only their wholesale revenues being exchanged for a fixed price CfD." Detail is still needed on the interaction between ROC income, the fixed CfD price and the EGL, which together will determine a generator's overall revenue position. Any change to this "stacking" approach during the consultation process may have significant consequences for a generator's financial position.
  
  
• Hedging and trading arrangements: Generators with existing power purchase agreements, hedging positions or trading strategies will need to consider the interaction between those arrangements and a WCfD. The replacement of wholesale revenue with a fixed price may require unwinding or restructuring of existing commercial contracts.

• Cumulative impact with RPI-to-CPI change: For RO generators already absorbing the shift from RPI to CPI indexation on their ROC income, the WCfD offer introduces a further change to their revenue structure. The combined effect of both changes, including the risk of structural mismatches where cost bases remain RPI-linked while revenues shift to CPI and/or fixed CfD prices, should be assessed holistically. This is particularly acute for assets held within infrastructure funds, yieldcos or listed vehicles, where investment mandates, distribution policies and NAV calculations may be predicated on predictable, inflation-linked cash flows. Affected parties should consider whether a revaluation of assets or disclosure to investors is required in light of the shift.

The Government's announcement marks a significant further step in reshaping the economics of legacy renewable generation in Great Britain. While the WCfD is framed as a voluntary, pro-consumer measure, the simultaneous increase in the EGL creates a clear fiscal incentive (or, depending on perspective, fiscal pressure) for generators to accept. That said, the Government has continued to duck the more fundamental wholesale market reform it once contemplated. The underlying market architecture remains intact: the wholesale electricity price continues to be set, the majority of the time, by the cost of gas. This leaves ongoing question marks over the policy, and how successful it can be. With wholesale prices elevated by the current gas price spike, and a clear likelihood of further volatility in at least the medium term given ongoing instability in the Middle East, the strike price offered under the WCfD will need to be genuinely attractive to secure meaningful uptake. Generators being asked to surrender their upside exposure to wholesale prices will want to be confident that the fixed price on offer adequately reflects the risk they are assuming — particularly in a market where the structural link between gas and electricity pricing persists.

Nonetheless, coming on the heels of the RPI-to-CPI indexation change, the cumulative direction of travel is unmistakable: the Government is progressively moving legacy generators away from wholesale market exposure and towards fixed-price, government-contracted revenue models. For generators, investors and lenders, the critical question is no longer whether the regulatory landscape is shifting, but how quickly and on what terms. Early and active engagement with the forthcoming consultation process will be essential to shaping an outcome that balances the Government's consumer protection and economic security objectives with the investment certainty on which the renewables sector, and its continued growth, depends.