Plugged in: DESNZ and degrees of separation in decoupling gas

Plugged in: DESNZ and degrees of separation in decoupling gas

On 21 April 2026, the Department for Energy Security and Net Zero (DESNZ) set out further policy proposals on electricity market reform, alongside a speech by Ed Miliband on the Government’s clean power agenda, announcing “decisive action to break influence of gas on electricity prices” promising that “families across the country will be better protected from energy crises, as government moves to break [the] link between gas and electricity prices”. Whilst according to DESNZ, gas no longer sets the electricity price around 90% of the time as it did in the early 2020s, it still sets the electricity price frequently and, depending on the system conditions and period analysed, it’s thought to do so around 60% of the time today.

In this blog, I explore ways in which gas can be decoupled from electricity prices, what DESNZ has set out, and whether this truly goes as far as to decouple gas.

If you’re not familiar with how wholesale electricity prices are set in the UK, then my blog “Plugged in: energy prices and gas decoupling” will help in reading this blog.

Ways in which gas can be decoupled

Let’s get the merit order from my previous blog out the box:

Given that even on the sunniest and windiest days with the lowest electricity demand, we currently rely on some level of electricity generation from gas, the key to decoupling gas is to stop it having a bearing on price. There are principally three ways to achieve this:

First, by reducing demand. If we can reduce the amount of electricity we consume, we can potentially move away from needing to call on gas to provide the final units of generation. In the merit order above, this would shift the demand curve to the left. If we can do that to such a point that instead of intersecting gas at the margin, demand instead intersects (in this example) biomass at a cheaper cost than gas, then the pay-as-clear cost of electricity will fall to the next cheapest supply.

Secondly, by increasing supply. If we can increase the amount of generation sourced from cheaper technologies such that we do not need to call on gas, then again, we can move the margin from gas to the next cheapest technology. In the merit order above this is elongating the volume of supply in the cheaper technologies to a point that supply intersects demand (again in this example) at biomass.

Thirdly, by taking gas out of the market. Given the impact of gas and the relative difference in price between it and other technologies, another option is to simply take gas out of the picture from price formation. Instead, we could have an electricity market that focusses on clean energy or those technologies with low marginal costs. Gas can then become a strategic reserve deployed to top up supply if it does not meet demand, with separate pricing or balancing mechanisms that do not set the marginal wholesale price.

Fossil fuel price shocks

We’re currently experiencing our fifth fossil fuel price shock – first, the Arab Oil Embargo in 1973-74; second, the Iranian Revolution in 1979-80; third, the Commodity Boom in 2005-08; fourth, Post-Covid Tightening and the Russia-Ukraine War; and now, the war in Iran.

The graph below shows the prices of Natural Gas up to 202. At the time of writing the price of gas (UK NBP Natural Gas Futures for May 2026) is at $117.50

(Retrieved from https://archive.ourworldindata.org/20260304-094028/grapher/natural-gas-prices.html [online resource] (archived on March 4, 2026).)

What DESNZ have announced

In response to the second fossil fuel shock in less than five years, DESNZ is doubling down on clean power to provide energy security, drive down bills and stop our reliance on fossil fuels whose supply is becoming increasingly insecure and volatile. The principal measures published in their announcement include Wholesale Contracts for Difference, an increase in the Electricity Generator Levy, alongside other measures to increase supply and reduce demand.

Wholesale Contracts for Difference

Contracts for Difference (CfD) are already a familiar part of the electricity market. Generators bid into auctions known as allocation rounds offering a certain supply for a certain price over the life of the CfD (now 20 years). Allocation rounds result in a strike price which is the fixed price for that technology. Where a generator receives a wholesale price for electricity sold in the market above the strike price, that difference is paid back to the Low Carbon Contracts Company (who administer the CfD scheme on behalf of the Government). Where a generator receives a wholesale market price below the strike price, payments are made to the generator to top them up to the fixed strike price. This is therefore a two-sided CfD.

This provides long-term price certainty to investors but also insulates consumers at the generator level, as it removes the effect of the marginal price of gas from that generator’s price of supply.

CfDs have existed since 2014 but older projects instead relied on Renewables Obligation (RO). The RO provided financial support to renewable electricity projects for a period of 20 years. Launched in 2002 and closed to new accreditations in 2017, the scheme offered renewables projects additional revenue over and above the wholesale price achieved when selling electricity into the market. Projects were issued Renewable Obligations Certificates (ROCs) which could be sold to suppliers to demonstrate compliance with renewables obligations administered by Ofgem.

Given RO projects are not subject to a CfD and sell electricity at wholesale market price without reference to a fixed strike price, these projects are directly exposed to the marginal price of gas. To break this link, the Government is proposing voluntary Wholesale Contracts for Difference (WCfDs). Under WCfDs, RO projects would continue to sell electricity in the wholesale market but where the price achieved is higher than the strike price, excess revenues would be returned, and where the price achieved is lower than the strike price, revenues would be topped up. These projects are expected to continue receiving ROCs, subject to final scheme design.

It remains to be seen how the strike price would be set and whether any administrative strike price would be sufficiently attractive for RO projects to elect to move to a WCfD.

Electricity Generator Levy (EGL)

The EGL is a windfall tax on exceptional revenue generated from the production of wholesale electricity. It was introduced following record wholesale gas price highs resulting from the COVID-19 pandemic and Russia’s invasion of Ukraine. The levy took effect from 1 January 2023 and runs until 31 March 2028 and was originally set at 45%. As part of DESNZ’s announcement, this will increase to 55%. It is targeted primarily at large electricity generator groups.

The EGL applies to wholesale electricity sold at an average price in excess of £75/MWh (CPI indexed) over an accounting period, where generating output exceeds 50GWh in a year, and only to exceptional receipts exceeding £10 million in that period. It can apply on a group basis.

The EGL is not levied against electricity generated under a CfD and therefore typically impacts large-scale clean energy projects whose earnings are tied to wholesale electricity projects, such as RO projects.

As a tax, it serves as a redistribution of revenues which the Government has stated it intends to use to support households and businesses facing ongoing cost-of-living pressures.

Other measures

Other measures announced include grants to help with the cost of heating oil and LPG, faster upgrades for social housing including solar installations and improvements to energy efficiency, increased support for rooftop solar on schools and colleges, opening up public land for electricity generation, streamlining planning, land access and grid connections, making EVs, heat pumps and solar cheaper and more accessible, providing funding for heat pump manufacturing, and enabling smarter planning and faster delivery of electricity infrastructure through reformed national pricing arrangements.

Whilst WCfDs seek to fix prices and EGL seeks to redistribute windfall profits, these other measures are more directly aimed at increasing supply and reducing demand across the wider electricity system.

Carbon Price Support

Beyond the measures announced to decouple gas, a Government on 16 April 2026 confirmed that Carbon Price Support (CPS) will be removed from April 2028. CPS is a tax applied as a top-up to the carbon price set through the UK Emissions Trading Scheme (UK ETS), increasing the carbon price applied to fossil fuels used in electricity generation.

Gas-fired generators price in both UK ETS and CPS when bidding its generation into the market. Removing CPS will therefore reduce (but not remove) the carbon component of gas-fired bids, reducing the margin price of gas relative to lower-cost technologies. This is likely to reduce average wholesale electricity prices and, in turn, reduce the exceptional revenues received over and above the marginal costs by cheaper technologies.

Do these measures truly decouple gas?

WCfDs and the increased EGL represents a carrot-and-stick approach principally aimed at RO projects. WCfDs offer fixed-price revenue certainty to projects that elect to move away from wholesale market exposure, while the increased EGL raises taxation on projects that continue to receive exceptional revenues driven by high marginal gas prices. Together, these measures incentivise a shift towards fixed-price contracting.

However, WCfDs and the EGL do not themselves increase supply or reduce demand. Instead, they primarily reallocate revenues arising from high wholesale prices. WCfDs do this through settlement against a fixed strike price, and the EGL through taxation of exceptional receipts.

The removal of Carbon Price Support will reduce the marginal price of gas, but it does not decouple gas from price formation so much as soften its impact on the market.

Taken together, these measures do not fundamentally change how electricity prices are set. Rather than decoupling gas from price formation, they largely reallocate revenues between market participants.

So, what market changes would decouple gas?

To truly decouple gas, its role in setting the marginal price of electricity needs to diminish structurally.

That can be achieved through systemic changes by reducing demand or increasing supply, or through market interventions that remove gas from price formation altogether.

Decoupling gas is increasingly within reach through systemic change.

On the supply side, just this month, NESO have reported that the transmission network ran during one 30-minute settlement period with a record 98.8% generation from zero-carbon sources, with gas generation falling to a historic low of 1.2% on the same day. Whilst a sustained period of 100% zero‑carbon generation has not yet been achieved, increasing renewable deployment has materially reduced wholesale electricity prices in recent years due to its growing influence on the merit order.

As more clean energy connects to the grid, a larger proportion of demand can be met without gas, reducing the frequency with which gas sets the marginal price.

On the demand side, overall energy consumption in the UK has been on a downward trend. Since peaking in the mid-2000s, electricity consumption has fallen significantly, with per-capita electricity use declining further. This has been driven by efficiency improvements in buildings, appliances and industrial processes, and by replacing fossil fuel conversion losses with direct electrification from clean sources.

Improving the energy efficiency of the economy dampens the impact of electrification associated with heat, transport, data centres, hydrogen electrolysis and battery manufacturing, supporting gas decoupling alongside increased supply.

(Retrieved from https://ourworldindata.org/grapher/energy-consumption-by-source-and-country?stackMode=absolute&country=~GBR on 29 April 2026)

Market intervention could also be used to decouple gas directly, or to incentivise behaviour which accelerates these supply‑ and demand‑side changes.

While the measures announced focus largely on revenue reallocation rather than price formation, they sit alongside a wider set of policies intended to increase clean energy supply and moderate demand.

Ed Miliband’s speech on 21 April, which framed the “era of clean energy security”, reaffirmed the Government’s intention to “double down, not back down” on its clean power mission.

The speech highlighted three principal routes to insulating the UK from fossil fuel volatility and gas‑linked electricity prices:

Speeding up clean power, including nuclear investment, planning reform, grid queue reform, accelerated CfD auctions, opening public land for clean energy and accelerating grid infrastructure deployment.

Driving electrification, encouraging households, businesses and industry to move away from fossil fuels in heat, transport and industrial processes, increasing electricity demand but reducing overall energy consumption and fossil fuel reliance.

Controlling price, through measures such as WCfDs and the increased EGL, which have a more limited role in decoupling gas directly but help fund and de‑risk the transition.

In conclusion…

Do I think Wholesale Contracts for Difference and an increase in the Electricity Generator Levy will decouple gas from setting the marginal price of electricity? No.

Do I think accelerating clean energy deployment and driving energy efficiency through electrification can break the link? Yes.

If these policies are implemented at sufficient scale and speed, and the commitment to “double down” is sustained, then the influence of gas over electricity pricing can continue to diminish — not through revenue reallocation, but by structural change.

Resources used to write this blog include:

https://www.gov.uk/government/news/decisive-action-to-break-influence-of-gas-on-electricity-prices

https://www.energy-uk.org.uk/publications/energy-uk-explains-the-renewables-obligation-and-the-wholesale-contract-for-difference/

https://www.gov.uk/government/publications/electricity-generator-levy-introduction/electricity-generator-levy

https://questions-statements.parliament.uk/written-statements/detail/2026-04-16/hcws1519#:~:text=Statement%20made%20on%2016%20April,Treasury

https://www.neso.energy/britains-electricity-system-breaks-zero-carbon-record-gas-reaches-historic-low-and-solar-hits-historic-high

https://assets.publishing.service.gov.uk/media/69cd141eeafd66b876458b8e/Energy_Trends_March_2026.pdf

https://institute.global/insights/climate-and-energy/cheaper-power-2030-net-zero-2050-resetting-UK-electricity-strategy

https://www.gov.uk/government/speeches/the-era-of-clean-energy-security

https://www.oxfordenergy.org/wpcms/wp-content/uploads/2026/03/Insight-178-Fossil-fuel-shocks.pdf

https://www.ice.com/products/910/UK-NBP-Natural-Gas-Futures/data?marketId=6164519