Rachel Reeves to raise windfall tax on low-carbon electricity generators | Energy industry

Breaking the Gas Grip: The Future of UK Electricity Pricing

For years, the UK energy market has operated under a system where the most expensive source of power—typically gas—sets the overall price for electricity. This mechanism means that even when cheap wind or solar power is abundant, household bills remain tethered to the volatile global gas market.

We are now seeing a strategic pivot toward “decoupling” these prices. The goal is a fundamental shift where electricity costs are determined more frequently by cheaper renewable sources rather than the surge in gas prices.

The Shift Toward Renewable-Led Pricing

The move to weaken the link between gas and electricity is not just a policy preference but a financial necessity to protect consumers. By shifting the market structure, the government aims to ensure that the benefits of the energy transition—specifically the low cost of renewables—are passed directly to the consumer.

Analysts from the UK Energy Research Centre have suggested that reforming these wholesale markets could potentially save between £4bn and £10bn a year, provided market prices remain high.

Windfall Taxes and the Cost of Transition

To shield consumers in the short term, the government is looking to increase the electricity generator levy. This windfall tax targets the excess profits of older nuclear, biomass, and renewable energy projects built before 2017.

Currently, these generators face a 45% tax rate on electricity sold at market prices above £75 a megawatt hour (MWh). With market prices recently surging from £74/MWh to over £100/MWh due to conflicts in the Middle East, these levies become a primary tool for the Treasury to fund consumer bill protections.

The Evolution of Energy Contracts

A key trend emerging is the transition of older, low-carbon projects away from the renewables obligation scheme and toward newer set-price contracts. These contracts provide electricity at a guaranteed price, removing the volatility of the wholesale market for both the producer and the consumer.

Radical Reforms: The Strategic Reserve Model

Beyond taxation, some experts are proposing a “radical step”: removing gas plants from the active wholesale market entirely. Instead, these plants would be held in a strategic reserve, fired up only when absolutely necessary.

According to strategist Adam Bell, this approach would prevent gas plants from distorting the overall cost of electricity. Such a move could potentially reduce energy bills by as much as £80 a year, representing a significant transfer of value from producers to consumers.

Market Volatility and Corporate Impact

The industry has already reacted sharply to the prospect of these reforms. Recent signals regarding the decoupling of gas and electricity prices led to notable share price drops for major energy players:

• SSE: Shares fell more than 6%.
• Centrica: Closed down 5%.
• Drax: Fell 3%.

This volatility underscores the “consternation” within the industry regarding a fundamental reform of energy markets during a period of increased global risk.