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On 21 April 2026 the Prime Minister, the Chancellor and the Energy Secretary jointly announced a package of measures designed to weaken the relationship between international gas prices and Great Britain’s wholesale electricity price.
The package included amongst other things two key aspects for electricity generators: an increase in the Electricity Generator Levy (EGL) from 45% to 55% as from 1 July 2026, and a new voluntary Wholesale Contract for Difference (WCfD) for low-carbon generators that are not already contracted under a CfD.
Why delinking, and why now?
The GB wholesale market is a marginal ("pay-as-clear") market: each half-hour, the clearing price is set by the most expensive dispatched generator, which is usually an unabated gas-fired station. On Government figures, gas set the wholesale price around 90% of the time in the early 2020s, around 60% today, and is projected to set it roughly half the time by 2030. The policy question has always been how to shield consumers from gas-price volatility without unpicking investment price signals.
Alternative market structures (e.g. splitting the electricity market by technology) were considered and rejected as part of Government's Review of Electricity Market Arrangements (REMA) programme, which concluded that consumer benefit, deliverability and investor confidence would be better achieved by accelerating renewables build-out through the use of CfDs and retaining a unified wholesale market.
Instability in the Middle East and the associated increases in gas prices have sharpened that policy question and provided renewed political impetus to seek to 'break the link'.
The voluntary Wholesale Contract for Difference
Government propose a new, voluntary Wholesale CfD offered to existing low-carbon generators not already contracted under a CfD, representing around 30% of Britain’s power supply and principally stations accredited under the Renewables Obligation (RO). While details of the WCfD are expected to be shared in a public consultation later this year, it is proposed that only the wholesale revenue element is exchanged for a fixed strike price under the WCfD. Importantly, it is also proposed that the WCfD will be available alongside existing subsidies: RO revenues would be retained by generators.
As a CfD-backed generators' revenues above the strike price are returned to the consumer, increasing the generation capacity subject to CfDs is intended to reduce the extent to which GB wholesale power prices are set by the marginal price of gas generation.
Government has said WCfDs will only be offered where they deliver "clear value for money for consumers", with an allocation process to be held in 2027. It is not yet clear what this allocation process will look like, and whether the strike price will be set through auction or through bilateral negotiations with generators. The term envisaged for the WCfDs is also not yet clear.
The uplifted Electricity Generator Levy
The EGL, introduced in Finance (No.2) Act 2023 and originally legislated to expire on 31 March 2028, applies to exceptional receipts above a current benchmark of £82.61 for generators producing more than 100 GWh/year from nuclear, renewable or biomass sources, and does not apply to electricity generated under CfDs entered into with the Low Carbon Contracts Company Ltd.
The rate will rise from 45% to 55% with effect from 1 July 2026 and the term of the levy will be extended for an unspecified period beyond its scheduled conclusion in 2028.
This increase is intended to incentivise generators to move to the fixed-price WCfD, and is intended to raise additional funds for the Exchequer.
Implications for projects
The package does not change the structure of the wholesale market itself, consistent with the outcome of the government's REMA decision to maintain a wholesale market based on short-run marginal pricing.
The package will however give generators an opportunity to reassess their revenue strategy, including in the context of recent government interventions that have impacted RO revenues such as the shift from RPI to CPI indexation and a proposed move to fixed price certificates from 2027, and the changes proposed as part of the ongoing Reformed National Pricing reforms. A move to a fixed-price (and potentially indexed) private law WCfD could offer long-term revenue stability for generators, particularly in the context of a political climate where opposition parties are saying they will remove the RO regime.
Generators and their investors, lenders and advisers will need to wait for the UK government consultation later this year to understand the proposals more fully, but they will need to be ready, by 2027, to make an informed election between a contracted fixed-price or merchant future. Please do not hesitate to contact us if you would like to discuss this further.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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