On 21 April, the Government announced it will introduce new measures to decrease the pressure that gas exerts on the electricity price in Great Britain (GB).
With the current market framework in GB gas generators are often the marginal price setters, determining the price that all other generators receive for their power on the wholesale market. When gas prices spike, as has been seen recently due to the conflict in the Middle East, electricity prices rise.
This in turn raises costs on consumer bills. The Government has highlighted that increasing levels of renewable generation on the system has reduced the frequency of gas setting the price of wholesale power from 90% in the 2020s, to 60% today. Despite these reductions, it is forecast that gas will still be setting the price around 50% of the time in 2030.
As a result, the two main proposals revealed in this announcement represent a move to decouple gas from power, without needing large-scale changes to the wider wholesale market arrangements.
Voluntary long-term fixed contracts
Voluntary long-term fixed contracts, to be known as Wholesale Contracts for Difference (WCfD), will be offered to existing low carbon generation not currently in receipt of a standard CfD, including Renewables Obligation (RO) accredited generation and potentially the existing nuclear fleet. Signing a contract would mean that the generator and consumer would not be exposed to the wholesale power price, with generators receiving a top-up payment to a pre-agreed Strike Price if wholesale power prices are below the Strike Price and paying back any excess revenue if the power price rises above the Strike Price.
Under the proposal, generators currently subsidised under the RO would continue to receive RO subsidy as they do presently but would give up their forward wholesale revenues in exchange for a fixed price WCfD.
One key challenge for the Government will be to determine what level of Strike Price would represent good value for consumers, while being high enough for generators to choose to move onto the scheme.
Further details such as technology eligibility will be considered through a consultation due to be published later this year, with the intention of running an allocation process in 2027.
Electricity Generator Levy
The Electricity Generator Levy (EGL) was introduced in 2023 as a temporary tax on windfall revenues for large renewable generators and was planned to end by March 2028. Under the EGL, eligible generators pay a 45% tax on the portion of their revenue earned above the benchmark price of £82.61/MWh.
From 1 July 2026, the tax rate will be increased to 55% and the levy will be extended beyond its scheduled end date of March 2028, with the new end date currently unspecified.
The Government intends for these changes to incentivise generators to sign up for the WCfD, while additionally providing Government with greater revenue to provide support to consumers during times of high prices.
Further announced measures
Alongside this announcement, the Government announced reforms and a delivery plan for Reformed National Pricing (RNP), with the full details outlined in a separate Alert published by Cornwall Insight. This is available to our Regulatory Intelligence customers here.
The plan details the proposed levers that could influence siting and investment decisions made by generators, constraint management and balancing settlement reforms, and how policies will be refined and delivered.
Future outlook
The proposed changes do not reflect a change to the fundamental structure of the wholesale electricity market, with gas-fired generation still expected to be the marginal price setter 50% of the time, based upon Government analysis. Instead, the changes aim to decouple renewable generator revenues from gas-set electricity prices, with the increased EGL an incentive for electricity generators to sign up for the new fixed-price contracts, providing revenue stability, and shielding consumers from future price shocks.
We await the publication of further details and the consultation on the Wholesale Contract for Difference, both in terms of scheme operation, how contracts will be allocated, the reconciliation mechanism, and what Government deems "clear value for money".
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