Britain plans to weaken the link between electricity costs and volatile gas prices, which has been blamed for holding back the economy, saying on Tuesday it would push older wind and solar generators onto fixed contracts to reduce energy bills.
Britain has among the highest electricity prices in the world due to the structure of its energy market, under which gas sets the price for all generation most of the time, weighing heavily on households and making British industry uncompetitive.
That structure sent prices soaring after Russia’s invasion of Ukraine and again with the Iran war, prompting Britain to suffer the biggest growth downgrades for 2026 from the OECD and International Monetary Fund due in large part to the economy’s exposure to high energy costs.
Finance minister Rachel Reeves last week touted this new energy market reform as a boost for economic growth. But analysts and business groups were largely underwhelmed by the plan, which could see gas continuing to set the electricity price around 50% of the time by 2030 from 60% now.
“The limited scope and impact of the measures highlighted today reflect the limited ability and willingness of the UK government to make far-reaching changes,” analysts at Bernstein said.
VOLATILE GAS PUTS PRESSURE ON BRITISH ECONOMY
Britain’s wholesale electricity price is set every 30 minutes by the cost of the last energy source used in order to ensure demand is met. So even if wind, solar and nuclear provide 99% of the power required and gas-fired plants are needed to make up the last 1%, then gas sets the price for every buyer and seller.
British companies and consumer groups have been calling for successive governments to reform the market structure.
Domestic energy prices are forecast to rise more than 10% from July as the regulator makes its quarterly price cap adjustment, with wholesale gas costs currently 30% higher than before the Middle East conflict began.
Under its changes, the government will next year offer voluntary long-term contracts to existing low-carbon generators not already being paid a fixed price for their output to reduce the link between gas prices and electricity costs.
It said the measure would cover around a third of Britain’s power supply.
The government will also increase the Electricity Generator Levy – used to claw back excess profits made by wind and solar generators when electricity prices jump – to 55% from 45%.
Ed Miliband, the energy minister, told a conference organised by the Good Growth Foundation that it would be up to generators whether to switch contracts, but that the change in tax rates would “significantly change the economic incentives for them to do so”.
He said the link between gas and electricity prices had already been weakened since the early 2020s and the trend was continuing, but evolution was not enough.
Energy firms and business groups said the announced changes were a step in the right direction but warned that significant policy and tax changes outside of traditional fiscal events like government budgets were damaging for investor confidence.
They also called for the government to reduce environmental policy costs in electricity bills.
“At a time of extreme volatility, clarity and confidence are paramount,” said Rain Newton-Smith, head of the CBI business group. “A stable, affordable energy system is a prerequisite for a thriving economy.”
The government said it would also look to go faster on building renewable infrastructure on public land, which could potentially allow up to 10 gigawatts of new capacity, and would overhaul planning and land-use rules to speed up grid connections and infrastructure upgrades.
(Additional reporting by Sam Tabahriti）
