{"id":18856,"date":"2026-04-21T16:23:08","date_gmt":"2026-04-21T16:23:08","guid":{"rendered":"https:\/\/www.europesays.com\/britain\/18856\/"},"modified":"2026-04-21T16:23:08","modified_gmt":"2026-04-21T16:23:08","slug":"qa-how-the-uk-government-aims-to-break-link-between-gas-and-electricity-prices","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/britain\/18856\/","title":{"rendered":"Q&A: How the UK government aims to \u2018break link between gas and electricity prices\u2019"},"content":{"rendered":"

The UK government has announced<\/a> a series of measures to \u201cdouble down on clean power\u201d in response to the energy crisis sparked by the Iran war<\/a>.<\/p>\n

The conflict has caused a spike in fossil-fuel prices\u00a0\u2013\u00a0and the high cost of gas is already<\/a> causing electricity prices to increase, particularly in countries such as the UK.<\/p>\n

In response, alongside plans to speed the expansion of renewables and electric vehicles, the UK government says<\/a> it will \u201cmove\u2026to break [the] link between gas and electricity prices\u201d.<\/p>\n

Ahead of the announcement, there had been speculation<\/a> that this could mean a radical change to the way the UK electricity market operates<\/a>, such as moving<\/a> gas plants into a strategic reserve.<\/p>\n

However, the government is taking a more measured approach with two steps that will weaken \u2013\u00a0but not completely sever\u00a0\u2013\u00a0the link between gas and electricity prices.<\/p>\n

From 1 July 2026, the government will increase the \u201celectricity generator levy<\/a>\u201d, a windfall tax on older renewable energy and nuclear plants, using part of the revenue to limit energy bills.<\/p>\n

The government will encourage older renewable projects to sign fixed-price contracts, which it says will \u201chelp protect families and businesses from higher bills when gas prices spike\u201d.<\/p>\n

There has been a cautious response to the plans, with one researcher telling Carbon Brief that it is a \u201cbig step in the right direction in policy terms\u201d, but that the impact might be \u201crelatively modest\u201d.<\/p>\n

Another says that, while the headlines around the government plans \u201csuggest a decisive shift\u201d in terms of \u201cbreaking the link\u201d between gas and power, \u201cthe reality is more incremental\u201d.<\/p>\n

Why are electricity prices linked to gas?<\/p>\n

The price of electricity is usually set by the price of gas-fired power plants in the UK, Italy and many other European markets.<\/p>\n

This is due to the \u201cmarginal pricing\u201d system used in most electricity markets globally.<\/p>\n

(For more details of what \u201cmarginal pricing\u201d means and how it works, see the recent Carbon Brief<\/a> explainer on why gas usually sets the price of electricity and what the alternatives are.)<\/p>\n

As a result, whenever there is a spike in the cost of gas, electricity prices go up too.<\/p>\n

This has been illustrated twice in recent years: during the global energy crisis after Russia invaded Ukraine<\/a> in 2022; and since the US and Israel attacked Iran<\/a> in February 2026.<\/p>\n

Notably, however, the expansion of clean energy is already weakening the link between gas and electricity, a trend that will strengthen as more renewables and nuclear plants are built.<\/p>\n

The figure below shows that recent UK wholesale electricity prices have been lower than those in Italy, as a result of the expansion of renewable sources.<\/p>\n

The contrast with prices in Spain is even larger, where thinktank Ember says<\/a> \u201cstrong solar and wind growth [has] reduced the influence of expensive coal and gas power\u201d.<\/p>\n

\"ChartWholesale electricity prices in the UK, Spain and Italy, \u20ac per megawatt hour. Source: Ember.<\/p>\n

The share of hours where gas sets the price of power on the island of Great Britain (namely, England, Scotland and Wales) has fallen from more than 90% in 2021 to around 60% today, according to the Department of Energy Security and Net Zero<\/a> (DESNZ). (Northern Ireland is part of the separate grid on the island of Ireland.)<\/p>\n

This is largely because an increasing share of generation is coming from renewables with \u201ccontracts for difference<\/a>\u201d (CfDs), which offer a fixed price for each unit of electricity.<\/p>\n

CfD projects are paid this fixed price for the electricity they generate, regardless of the wholesale price of power. As such, they dilute<\/a> the impact of gas on consumer bills.<\/p>\n

The rise of CfD projects means that the weeks since the Iran war broke out have coincided with the first-ever extended periods without<\/a> gas-fired power stations in the wholesale market.<\/p>\n

This shows how, in the longer term, the shift to clean energy backed by fixed-price CfDs will almost completely<\/a> sever the link between gas and electricity prices.<\/p>\n

The National Energy System Operator<\/a> (NESO) estimated<\/a> that the government\u2019s target for clean power by 2030 could see the share of hours with prices set by gas falling to just 15%.<\/p>\n

What is the government proposing?<\/p>\n

For now, however, about one-third<\/a> of UK electricity generation comes from renewable projects with an older type of contract under the \u201crenewables obligation<\/a>\u201d scheme (RO).<\/p>\n

It is these projects that the new government proposals are targeting.<\/p>\n

The government hopes to move some of these projects onto fixed-price contracts, which would no longer be tied to gas prices, further weakening the link between gas and electricity prices overall.<\/p>\n

When RO projects generate electricity, they earn the wholesale price, which is usually set by gas power. In addition, they are paid a fixed subsidy via \u201crenewable obligation certificates<\/a>\u201d (ROCs).<\/p>\n

This means that the cost of a significant proportion of renewable electricity is linked to gas prices. Moreover, it means that, when gas prices are high, these projects earn windfall profits.<\/p>\n

In recognition of this, the Conservative government introduced<\/a> the \u201celectricity generator levy<\/a>\u201d (EGL) in 2022. Under the EGL, certain generators pay a 45% tax on earnings above a benchmark price, which rises with inflation and currently sits at \u00a382<\/a> per megawatt hour (MWh).<\/p>\n

The tax applies to renewables obligation projects and to old nuclear plants.<\/p>\n

The current government will now increase<\/a> the rate of the windfall tax to 55% from 1 July 2026, as well as extending<\/a> the levy beyond its previously planned end date in 2028.<\/p>\n

It says it will use some of the additional revenue to \u201csupport businesses and households with the impacts of the conflict in the Middle East on the cost of living\u201d. Chancellor Rachel Reeves said<\/a>:<\/p>\n

\u201cThis ensures that a larger proportion of any exceptional revenues from high gas prices are passed back to government, providing a vital revenue stream so that money is available for government to support businesses and families with the impacts of the conflict in the Middle East.\u201d<\/p>\n

The increase in the windfall tax may also help to achieve the government\u2019s second aim, which is to persuade older renewable projects to accept new fixed-price contracts.<\/p>\n

\"Simon<\/a><\/p>\n

Reeves made this aim explicit in her comments to MPs, saying the higher levy \u201cwill encourage older, low-carbon electricity generators, which supply about a third of our power, to move from market pricing to fixed-price contracts for difference\u201d.<\/p>\n

(This is an adaptation of a proposal<\/a> for \u201cpot zero\u201d fixed-price contracts, made by the UK Energy Research Centre<\/a> (UKERC) in 2022, see below for more details.)<\/p>\n

As with traditional CfDs, the new fixed-price contracts would not be tied to the price of gas power. Instead of earning money on the wholesale electricity market, these generators would take a fixed-price \u201cwholesale CfD\u201d. In addition, they would be exempted from the windfall tax and would continue to receive their fixed subsidy via ROCs.<\/p>\n

The government says this will be voluntary. It will offer further details \u201cin due course\u201d and will then consult on the plans \u201clater this year\u201d, with a view to running an auction for such contracts next year<\/a>.<\/p>\n

It adds: \u201cGovernment will only offer contracts to electricity generators where it represents clear value for money for consumers.\u201d<\/p>\n

\"Leo<\/a><\/p>\n

(It is currently unclear if the proposals for new fixed-price contracts would also apply to older nuclear plants. Last month, the government said it intended<\/a> to \u201cenable existing nuclear generating stations to become eligible for CfD support for lifetime-extension activities\u201d.)<\/p>\n

What is not being proposed?<\/p>\n

Contrary to speculation<\/a> ahead of today\u2019s announcement, the government is not taking forward any of the more radical ideas for breaking the link between gas and electricity prices.<\/p>\n

Many of these ideas had already been considered in detail\u00a0\u2013 and rejected<\/a>\u00a0\u2013 during the government\u2019s \u201creview of electricity market arrangements<\/a>\u201d (REMA) process.<\/p>\n

This includes the idea of creating two separate markets, one \u201cgreen power pool<\/a>\u201d for renewables and another for conventional sources of electricity.<\/p>\n

It also includes the idea of operating the market under \u201cpay as bid<\/a>\u201d pricing. This has been promoted<\/a> as a way to ensure that each power plant is only paid the amount that it bid to supply electricity, rather than the higher price of the \u201cmarginal\u201d unit, which is usually gas.<\/p>\n

However, \u201cpay as bid\u201d would have been expected to change bidding behaviour<\/a> rather than cutting bills, with generators guessing what the marginal unit would have been and bidding at that level.<\/p>\n

Finally, the government has also not taken forward the idea of putting gas-fired power stations in a strategic reserve that sits outside the electricity market.<\/p>\n

Last year, this had been proposed<\/a> jointly by consultancy Stonehaven<\/a> and NGO Greenpeace<\/a>. In March, they shared updated figures with Carbon Brief showing that \u2013\u00a0according to their analysis \u2013\u00a0this could have cut bills by a total of around \u00a36bn per year, or about \u00a380 per household.<\/p>\n

However, some analysts<\/a> argued<\/a> that it would have distorted the electricity market, removing incentives to build batteries and for consumers to use power more flexibly.<\/p>\n

What will the impact be?<\/p>\n

The government\u2019s plan for voluntary fixed-price contracts has received a cautious response.<\/p>\n

UKERC had put forward a similar proposal<\/a> in 2022, under which older nuclear and renewable projects would have received a fixed-price \u201cpot zero\u201d CfD.<\/p>\n

(This name refers to the fact that CfDs are given to new onshore wind and solar under \u201cpot one\u201d, with technologies such as offshore wind bidding into a separate \u201cpot two\u201d.)<\/p>\n

In April 2026, UKERC published updated analysis suggesting that its \u201cpot zero\u201d reforms could have saved consumers as much as \u00a310bn a year\u00a0\u2013 roughly \u00a3120 per household.<\/p>\n

Callum McIver<\/a>, research fellow at the University of Strathclyde and a member of the UKERC, tells Carbon Brief that the government proposals are a \u201cbig step in the right direction in policy terms\u201d.\u00a0<\/p>\n

However, he says the \u201cbill impact potential is lower\u201d than UKERC\u2019s \u201cpot zero\u201d idea, because it would leave renewables obligation projects still earning their top-up subsidy via ROCs.<\/p>\n

As such, McIver tells Carbon Brief that, in his view, the near-term impact \u201ccould be relatively modest\u201d. Still, he says that the idea could \u201cinsulate electricity prices\u201d from gas:<\/p>\n

\u201cThe measures are very welcome and, with good take-up, they have the potential to insulate electricity prices further from the impact of continued or future gas price shocks, which should be regarded as a win in its own right.\u201d<\/p>\n

In a statement<\/a>, UKERC said the government plan \u201cstops short of the full pot-zero proposal, since it will leave the RO subsidy in place\u201d. It adds:<\/p>\n

\u201cThis makes the potential savings smaller, but it will break the link with gas prices. The devil will be in the detail, but provided the majority of generators join the scheme, most of the UK\u2019s power generation fleet will have a price that is not related to the global price of gas.\u201d<\/p>\n

Marc Hedin<\/a>, head of research for Western Europe and Africa at consultancy Aurora Energy Research<\/a>, tells Carbon Brief that, while the headlines \u201csuggest a decisive shift\u201d in terms of \u201cbreaking the link\u201d between gas and power, \u201cthe reality is more incremental\u201d. He adds:<\/p>\n

\u201cIn principle, moving a larger share of generation onto fixed prices would reduce consumers\u2019 exposure to gas\u2011driven price spikes and aligns well with the direction already taken for new build [generators receiving a CfD].\u201d<\/p>\n

However, he cautioned that \u201cpoorly calibrated [fixed] prices would transfer value to generators at consumers\u2019 expense, while overly aggressive pricing could result in low participation\u201d.<\/p>\n

In an emailed statement, Sam Hollister, head of UK market strategy for consultancy LCP, says that the principle of the government\u2019s approach is to \u201cbring stability to the wholesale market and avoid some of the disruption that a more radical break might have caused\u201d.<\/p>\n

However, he adds that the reforms will not \u201cfundamentally reduce residential energy bills today\u201d.<\/p>\n

Johnny Gowdy<\/a>, a director of thinktank Regen<\/a>, writes in a response<\/a> to the plans that while both the increased windfall tax and the fixed-price contracts \u201chave merit and could save consumers money\u201d, there were also \u201cpitfalls and risks\u201d that the government will need to consider.<\/p>\n

These include that a higher windfall tax could \u201cspook investors\u201d. He writes:<\/p>\n

\u201cA challenge for policymakers is that, while the EGL carries an investment risk downside, unless there is a very significant increase in wholesale prices, the tax revenue made by the current EGL could be quite modest.\u201d<\/p>\n

Gowdy says that the proposed fixed-price contracts for older renewables \u201cis not a new idea, but its time may have come\u201d. He writes:<\/p>\n

\u201cIt would offer a practical way to hedge consumers and generators against volatile wholesale prices. The key challenge, however, is to come up with a strike price that is fair for consumers and does not lock future consumers into higher prices, given that we expect wholesale prices to fall over the coming decade.\u201d<\/p>\n

Gowdy adds that it might be possible to use the scheme as a way to support \u201crepowering\u201d, where old windfarms replace ageing equipment with new turbines.<\/p>\n

On LinkedIn<\/a>, Adam Bell, partner at Stonehaven and former head of government energy policy, welcomes the principle of the government\u2019s approach, saying: \u201cThe right response to yet another fossil fuel crisis is to make our economy less dependent on fossil fuels.\u201d
However, he adds on Bluesky<\/a> that the proposals were \u201cunlikely to reduce consumer bills\u201d. He says this is because they offered a weak incentive for generators to accept fixed-price contracts.<\/p>\n","protected":false},"excerpt":{"rendered":"The UK government has announced a series of measures to \u201cdouble down on clean power\u201d in response to…\n","protected":false},"author":2,"featured_media":18857,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[7493,1973,8643,2598,5,6],"class_list":{"0":"post-18856","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-uk","8":"tag-electricity-prices","9":"tag-gas-prices","10":"tag-power-prices","11":"tag-renewables","12":"tag-uk","13":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116443624510187969","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/18856","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=18856"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/18856\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/18857"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=18856"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=18856"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=18856"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}