The Energy Transition | Budget 2026 sets out the UK government’s energy agenda

This week we look at the Budget announcements for the energy sector, a new growth plan for the electricity networks sector, and Ofgem's launch of a record offshore transmission tender for Hornsea 3 

Budget 2026 sets out the UK government's energy agenda

The UK chancellor, John Healey, set out in his Budget on 28 October the government's energy transition agenda, with a range of sector-specific commitments and policy changes spanning clean power and renewables, grid connections and electricity, hydrogen, and nuclear, alongside market reforms, investment plans and measures to ease industrial energy costs.

Clean power and renewables

The Budget establishes a new approach to clean power procurement: new electricity generation will only be procured where it lowers bills, benefits the energy system and can connect to the grid. 

To progress what it describes as "next steps in breaking the grip of gas on bills", the government is consulting on the introduction of wholesale Contracts for Difference (CfD) that it first announced in April. A wholesale CfD, if implemented, would act as a financial hedge, in the same way as the current scheme, for renewable generation that would otherwise not be eligible for a CfD. This includes assets that receive other forms of subsidies, such as from the Renewables Obligation scheme.

The Budget also confirms more than £85 million of investment in the Offshore Renewable Energy Catapult at Blyth, to develop a major testing hub for next-generation wind turbines. Additional regional clean energy commitments include more than £12 million for the port of Montrose's offshore wind project and support for a floating offshore wind port at Port Talbot.

Grid connections and electricity networks

Building on the government's announcement of Great British Grid in September, the Budget confirms that the new body will work alongside existing network operators to increase competition and support grid upgrades, delivering infrastructure cheaper and faster.

The National Wealth Fund has provided an £800 million guarantee for four major grid upgrades in northern Scotland. The government will also confirm the use of powers under the Planning and Infrastructure Act to prioritise grid connections for strategically important demand projects.

Strategic data centres will receive accelerated access to electricity connections through a range of measures including a new "data centre covenant". This will set the test for the approval of new strategic data centres, as well as require those seeking enhanced government support to pay their "fair share" of energy costs, support grid resilience and clean power and, where practical, recover waste heat for nearby users. In exceptional cases, strategic data centres will be permitted to build temporary on-site generation pending a grid connection, conditional on strategic importance and energy security safeguards. 

Hydrogen funding

The Budget has also confirmed that a planned levy on gas bills intended to fund hydrogen production, the Gas Shipper Obligation, will be scrapped. The government will instead publicly fund Hydrogen Allocation Round 1 (HAR1) contracts and future hydrogen contracts, subject to value-for-money assessments, with a £27 million funding uplift from the Department for Energy Security and Net Zero for HAR1 in 2027–28. The chancellor said the scrapping of the levy was consistent with the new principle that no policy costs should be added to bills unless they reduce bills or are essential to keep the lights on.

Up to £300 million may be made available for strategically important hydrogen projects in HAR2. It is expected that HAR2 projects will progress to the "invite to offer" stage ahead of the next spending review. The Budget also prioritises mature carbon capture, utilisation and storage, and hydrogen projects in the Teesside, Merseyside and North Wales clusters, while maintaining grant funding for the Viking cluster.

Nuclear ambitions

The Budget heralded a "golden age of nuclear power in the UK", which includes government approval of Sizewell C, delivery of the UK's first small modular reactor programme, and a significant investment in nuclear fusion. 

The government has committed to implement fully the findings of economist John Fingleton's nuclear regulatory review, including through a nuclear regulation bill expected to be published early next year, with all reforms intended to be delivered by the end of 2027. The review is described as the most significant reset of the UK's nuclear regulatory system in more than 20 years, with the stated aim of making new civil nuclear deployment quicker and cheaper while preserving safety and environmental standards.

Market reform

The government's anticipated 10-year plan will set out further detail on electricity market reform, covering generator siting and investment decisions, constraint management, system pricing, and balancing and settlement arrangements. Building on the reformed national pricing programme announced earlier this year, the reforms aim to reduce system costs, improve outcomes for consumers and support electrification.

Energy investment

Great British Energy and Great British Energy-Nuclear will retain £8.3 billion across the spending review period. The government plans to issue £12 billion of sovereign green bonds, or "green gilts", in 2026–27 and update its infrastructure pipeline before the end of the year. The pipeline is expected to identify more than £750 billion of planned investment over 10 years, spanning energy and network infrastructure, in order to improve certainty for investors, industry and supply chains.

Industrial energy costs

The British Industrial Competitiveness Scheme will launch in April 2027, providing electricity discounts of 20-25% to more than 10,000 energy-intensive businesses, with a back payment for eligible energy costs incurred during 2026-27. 

The scheme is designed to bring GB industrial electricity costs closer to those of other European economies and includes an equivalent scheme for Northern Ireland. Eligible businesses will be exempt from the indirect costs of the Renewables Obligation, Feed-in Tariffs and Capacity Market schemes. Additionally, the main rate of the Climate Change Levy on electricity will be frozen from 1 April 2028.

Industry bodies map out plan for a decade of investment in the electricity network

The Energy Networks Association (ENA) and trade body BEAMA have published a growth plan for the electricity networks sector, with input from the government, Ofgem and industry stakeholders. The plan is presented as a 10-year roadmap to direct investment in transmission and distribution networks, renewables, electric vehicles, heat, housing and data centres, with the aim of capitalising on this economic growth opportunity for UK supply chains and industry.

The plan forecasts £181 billion of investment in electricity networks over the next 10 years, with up to £200 billion of investment in the energy sector. With respect to job creation, the plan forecasts 128,000 high-quality, well-paid job openings "distributed across every region" and emphasises the need to build and develop a skilled workforce strategically. It is expected that growth forecast by the plan would add a projected £58 billion in gross value for the UK economy.

To support UK manufacturers, suppliers and industry participants in building, innovating and making effective investments, the plan proposes practical measures to improve longer-term procurement and to ensure better visibility of planned network upgrades and stronger collaboration between network operators, regulators and the supply chain.

The plan commits to publishing an annual update to provide a rolling 10-year view. It also announces the establishment of a Growth Partnership, formed of senior decision-makers across the sector supported by ENA and BEAMA to oversee delivery of the plan.

Ofgem launches record offshore transmission tender for Hornsea 3 

Ofgem has launched the 14th tender round for the offshore transmission owner (OFTO) regime, with investors bidding to own and operate the transmission assets connecting the Hornsea 3 offshore wind farm to the onshore network. 

Ofgem has confirmed the 14th OFTO tender round as its largest to date, with an estimated value of around £3.5 billion. Participants will bid to own and operate transmission assets for Hornsea 3, one of the world's largest development-stage offshore wind farms, which is located over 100km offshore in the North Sea with an expected capacity of 2.9 gigawatts. It is due for completion by the end of 2027. 

If successful, bidders will receive a long-term, inflation-linked revenue stream for financing, operating and maintaining pre-built transmission assets, for up to 25 years subject to asset availability and performance. Ofgem says that competitive tendering for offshore assets is designed to reduce consumer costs and maintain high standards of performance.

This article was written with the assistance of solicitor apprentice Ellie Cockford and trainee solicitors John McVea and Luna Panella.