Breaking the Link Between Gas and Electricity Prices: What the Government Is Doing and Why It Matters

Every time a war breaks out in a gas producing region, your electricity bill goes up even if the power lighting your home came from a wind turbine off the coast of Scotland. That is the odd, frustrating reality of how Britain's electricity market works. On 21 April 2026, the government announced a set of measures aimed directly at fixing it.

The announcement, backed by Prime Minister Keir Starmer, Chancellor Rachel Reeves, and Energy Secretary Ed Miliband, includes an immediate hike to the windfall tax on electricity generators, new voluntary fixed price contracts for renewable energy producers, and a raft of wider clean energy investments. Together, they are billed as the first serious structural attempt to break what the government calls "the link" between international gas prices and household electricity costs.

Why Does Gas Control Your Electricity Price?

To understand the government's announcement, you first need to understand a quirk of the electricity market called "marginal pricing." The wholesale price of electricity is not set by averaging the costs of every power source, it is set by the most expensive source that needs to be switched on at any given moment to meet demand. In Britain, that source is almost always a gas fired power station.

How Marginal Pricing Works

Think of it this way:

• Wind is cheap to run: Once a wind turbine is built, generating electricity from it costs very little, so wind farm operators will happily sell at almost any price.
• Gas is expensive to run: Gas power stations burn fuel that must be purchased on global commodity markets, so they need a higher price to cover their costs.
• The "marginal" generator sets the price: When Britain needs more power than wind, solar, nuclear, and hydro can provide, gas plants are switched on. The price they need to break even becomes the wholesale market clearing price for all electricity sold at that moment, including the cheap wind power.
• Wind generators profit from the gap: Because wind costs almost nothing to generate but sells at the gas inflated price, wind farm operators earn significant windfall revenues whenever gas prices are high.
• Consumers pay the gas price: Your energy supplier buys power at the wholesale price, which reflects gas costs, regardless of whether your electricity actually came from a gas plant or a turbine.

Why This Is a Growing Problem

Instability in fossil fuel markets hits British households even as renewables expand:

The Two Core Measures. What They Are and How They Work

The government's immediate response centres on two tools. One is an emergency tax measure; the other is a longer term structural reform. Neither alone solves the problem, but together they are designed to reduce the financial windfall that generators receive when gas spikes and begin moving the market onto more stable pricing.

Measure 1: Raising the Electricity Generator Levy

The Electricity Generator Levy (EGL) is a windfall profits tax on electricity generators that was introduced in 2023 in response to the energy crisis triggered by Russia's invasion of Ukraine. Here is how the changes work:

Measure 2: Voluntary Wholesale Contracts for Difference

This is the more structurally significant of the two measures, though it will take longer to implement. A standard Contract for Difference (CfD) is already the main tool the government uses to fund new renewable energy projects, it guarantees generators a fixed "strike price" for the electricity they produce, smoothing out market volatility in both directions.

• The new "Wholesale CfD": The government will offer existing renewable generators, those already built but not on a CfD, the option to enter a voluntary fixed price contract for their wholesale revenues.
• Who it covers: Generators accredited under the older Renewables Obligation (RO) scheme, which covers a large tranche of Britain's existing wind and solar capacity, roughly a third of the country's power supply.
• What generators give up: They surrender their current exposure to the (potentially high) wholesale market price and instead receive a stable, agreed fixed price.
• What consumers gain: Those generators' output is decoupled from gas price swings, reducing the share of electricity traded at gas inflated rates.
• Timeline: Voluntary contracts will be introduced later in 2026, with a formal allocation process planned for 2027. A consultation will be held before they are finalised.

The Wider Package: What Else Was Announced

Beyond the two headline measures, Energy Secretary Ed Miliband set out a broader suite of policies at the Good Growth Foundation on 21 April 2026. These range from immediate financial support for those hit hardest by rising energy costs to long term infrastructure investments designed to accelerate Britain's clean energy transition.

Support Measures for Households

Who benefits immediately and what they receive:

Infrastructure and Planning Reforms

Several announcements focused on removing barriers to building more clean energy infrastructure, something the government argues is the only long term solution to insulating Britain from fossil fuel price shocks:

• Public land for renewables: The government will drive forward plans to use brownfield land, industrial sites, and railway land for solar panels and wind turbines, potentially unlocking up to 10 GW of capacity from government owned land alone, enough to power around 5 million homes.
• Planning overhaul: Described as the biggest overhaul of planning, land access, and grid connection processes since the clean energy mission began, designed to cut delays for grid upgrades and new renewable projects.
• Reformed National Pricing: A new Reformed National Pricing Delivery Plan shows how smarter infrastructure planning could unlock up to £20 billion in system wide benefits between 2030 and 2050.
• Schools and colleges solar: Great British Energy will extend its rooftop solar scheme to a further 100 schools and colleges, backed by up to £40 million of government investment.
• Transitional Energy Certificates: Further details published ahead of legislation to give investors greater certainty about already explored areas near existing licensed oil and gas fields, supporting a managed transition.

Making Electric Technology More Accessible

A significant thread running through the announcement is the government's push to ensure that the financial benefits of cleaner, cheaper electricity can be accessed by everyone, not just homeowners with driveways and large rooftops. Several measures specifically address renters, flat dwellers, and those on lower incomes.

EVs, Heat Pumps, and Solar for All

The barriers and how the government plans to remove them:

What About the Renewables Obligation Generators?

It is worth understanding the distinction between different categories of renewable generator, because it explains why the Wholesale CfD is being offered in the first place:

• New CfD generators: Projects built under the current Contracts for Difference scheme already have fixed strike prices and are not exposed to wholesale gas price swings their revenues are largely insulated from volatility.
• Renewables Obligation generators: Older projects supported under the Renewables Obligation (RO) do not have a fixed wholesale price they sell their electricity on the open market and therefore earn the gas inflated rate when gas prices are high. This covers roughly 30% of Britain's power supply.
• The gap: There is currently no mechanism to protect consumers from the windfall revenues that RO generators earn during gas price spikes, other than the EGL windfall tax. The Wholesale CfD would close this gap structurally.
• Voluntary, not mandatory: The government has been careful to make the Wholesale CfD voluntary. Generators will only enter contracts where both sides benefit government will only offer terms representing clear value for consumers.
• RO income preserved: Under the proposed design, RO generators would continue to receive their existing RO support only their wholesale revenues would shift onto a fixed price basis.

The Bigger Picture: Britain's Energy Security Challenge

The government has been at pains to frame these measures not just as a response to the current Middle East crisis, but as part of a longer term structural shift in how Britain generates and prices electricity. Understanding that context helps explain both the scale of ambition and the limits of what any single announcement can achieve.

How Britain Got Here

The energy price crisis is not new, and neither is the problem it reveals:

What Industry and Stakeholders Are Saying

The announcement received broadly positive responses from industry bodies, energy companies, and environmental groups, though some stakeholders stressed that implementation details will be critical:

• E.ON UK (CEO Chris Norbury): Welcomed the decoupling of gas from electricity pricing and the planning reforms, arguing that clean power delivered locally such as school rooftop solar cuts bills where people live and work.
• EDF Energy (CEO Simone Rossi): Backed the government's focus on expanding electricity demand but warned against a "two tier system" where only homeowners with driveways and large roofs can access savings from cleaner electricity.
• CBI (Chief Executive Rain Newton Smith): Called for correct implementation, noting that voluntary contracts for difference "could" reduce the impact of gas on retail electricity prices with the implication that the design of the contracts will matter significantly.
• RenewableUK (CEO Tara Singh): Argued the right response to gas price spikes is to accelerate homegrown renewables and rapid electrification pointing to the Wholesale CfD and planning reforms as steps in the right direction.
• WWF (Director of Policy Solutions Angela Francis): Connected energy security to environmental protection, arguing that reducing fossil fuel dependence simultaneously protects bill payers and the natural world.

Conclusion: A Good Start But the Deeper Reform Still Lies Ahead

The government's 21 April 2026 announcement represents the most direct attempt yet to address the structural reason why British electricity bills spike every time there is a geopolitical crisis in a gas producing region.

The immediate EGL rate rise from 45% to 55% will channel more windfall profits into public coffers quickly providing resources to support households during the current cost of living squeeze. The Wholesale CfD, by contrast, is a longer term structural reform that will take years to fully implement but, if successful, could permanently reduce the share of Britain's electricity exposed to gas market volatility.

The critical question is whether generators will take up the voluntary contracts in sufficient numbers to make a material difference. The government has signalled it will only offer contracts representing value for consumers but that same caution means it may not be able to offer terms attractive enough to persuade all eligible generators to sign up. The 2027 allocation process will be a crucial test of whether this mechanism can deliver on its promise.

Why This Is a Good Start But Not Enough

These measures are welcome and meaningful, but they treat the symptoms rather than the underlying architecture of the problem. The marginal pricing system itself is a relic of a fossil fuel era that no longer reflects how Britain generates electricity. Designed at a time when gas and coal dominated the grid, it made sense for the cost of the most expensive plant needed to set the clearing price. But on a modern grid where wind, solar, and nuclear produce the majority of electricity at near zero marginal cost, the system produces outcomes that are economically incoherent, consumers pay gas prices for electricity that was generated by the wind.

A more fundamental solution would be to move towards a split market model, in which electricity from low cost, near zero carbon sources is priced and traded separately from dispatchable fossil fuel generation. Under such a system, the falling cost of renewables would be directly passed through to households and businesses rather than being masked by the gas price ceiling. Several European countries and academic economists have been examining variants of this approach, and there is a growing consensus that the current uniform marginal price model is simply too blunt an instrument for a grid that is fundamentally changing.

The potential savings from a properly designed split market could be substantial. Because wind and solar now generate electricity at a fraction of the cost of gas, decoupling their pricing from fossil fuels could allow household and business electricity bills to fall sharply, not just in moments of crisis but structurally, year on year, as renewables continue to scale.

Moving Policy Costs Off Bills

There is a second, equally significant reform that rarely features in these announcements, the question of where the costs of energy policy are collected. Currently, a significant portion of the levies that fund clean energy investment, social support schemes, and grid upgrades are embedded directly in electricity bills. This is regressive it hits lower income households disproportionately hard, since they spend a larger share of their income on energy and it perversely makes electricity more expensive at precisely the moment the country is trying to electrify homes, transport, and industry.

Transferring those policy costs from energy bills to general taxation funded through income tax, national insurance, or other progressive instruments, would immediately reduce the standing charges and unit rates households and businesses pay for electricity. That would leave more money in people's pockets to spend in the wider economy, supporting growth and easing the cost of living pressure that has defined British politics for the past four years. It is a reform that economists across the political spectrum have advocated for, and one that a government serious about both energy security and economic growth should place firmly on its agenda.

The announcement is a genuine and significant step forward. The Wholesale CfD, the EGL rise, and the planning reforms all move in the right direction. But fully insulating Britain from fossil fuel price shocks and delivering the lower bills that a clean energy transition should, in principle, produce, will require this government, or a future one, to be willing to take on the deeper structural questions that today's package leaves unanswered.