The Energy Transition | UK government announces action to break influence of gas on electricity prices

This week we look at government plans to break the link between gas and electricity prices, NESO's summer outlook for Britain's electricity system, Ofgem concerns over thresholds to determine disclosure obligations for inside information, and DESNZ and Ofgem's open letter on connections reform delivery.

UK government announces action targeting decoupling of gas and electricity prices 

The government has announced plans to break the link between gas and electricity prices amid uncertainty driven by the conflict in the Middle East. GB electricity bills are currently tied to international fossil fuel markets, meaning they can rise when international gas prices increase due to geopolitical tension or overseas supply disruption. The result is unpredictable energy costs for businesses and households.

The government has set out measures to cut the proportion of time that the wholesale price of electricity is determined by the price of gas. Its target is to reduce the share to around 50% by 2030, from around 60% today. Two principal measures have been announced.

Wholesale Contracts for Difference  

The first is the introduction of Wholesale Contracts for Difference (WCfD): voluntary long-term fixed-price contracts offered to existing low-carbon generators that do not already hold a Contract for Difference (CfD). The government estimates that around 30% of Britain's generation is renewable but is outside the CfD framework and is therefore exposed to wholesale gas prices.

This measure is particularly designed for generators supported through the Renewables Obligation, which would continue to receive support under this mechanism. Under the WCfD, their wholesale revenue, which is currently exposed to gas price volatility, would be replaced by a fixed price. WCfDs will be voluntary contracts and subject to a consultation process later this year, with plans for an allocation process in 2027.

Electricity Generators Levy  

The second measure involves changes to the Electricity Generators Levy (EGL), which the government will, with effect from 1 July 2026, increase to 55% of revenue received when the wholesale prices exceed £75 per megawatt – up from 45% previously. The aim is to ensure that a higher share of revenues generated from gas price spikes flows to the government to support businesses and households with the cost of living and to provide further incentive for legacy generators to switch to the WCfD model.

The government announcement also discusses longer-term measures to reduce bills and support "clean, homegrown power". These include additional funding to Great British Energy and the Social Housing Scheme to fund delivery of new solar installations, continued commitment to planning reform and legislation to introduce permitted development rights for electric vehicle charging providers. The government also confirmed that the Reformed National Pricing Delivery Plan is to be published shortly.

NESO sets out summer electricity outlook  

The National Energy System Operator (NESO) has published its annual summer electricity outlook, covering the period from April to October this year. The report sets out NESO's projections on the adequacy of electricity security at peak demand times and whether the system will remain flexible during periods of minimum demand, taking into account the broader energy market context. It concludes that there will be sufficient supply to meet demands throughout the summer.

Security of supply 

NESO expects peak demand this summer to be broadly in line with last year and indicates that supply should be sufficient to cover peak demand and reserve requirements throughout the period.  It also expects to be able to support exports to interconnected markets if required.

On imports, market signals suggest Britain is likely to be a net importer of electricity this summer, with NESO anticipating a broadly typical pattern of interconnector imports in scenarios for both high and low gas prices.

Managing low demand 

The report finds an increased likelihood that national demand on the transmission system will fall below the current record low of 12.8 gigawatts (GW), set in May 2025.  This reflects the expansion of embedded renewable generation, which increases demand volatility on the transmission network and widens the range of weather patterns that can produce unusually low demand.

Operating the system under low-demand conditions creates challenges. NESO says it is confident it has appropriate tools to manage them, including the balancing mechanism and, in rare cases, issuing negative reserve active power margin (NRAPM) notices, which alert generating stations that they may be required to turn down. NRAPM notices can be issued nationally or for specific areas of constraint.

As part of the continuing development of its operational "toolkit", NESO has amended the design of the Demand Flexibility Service (DFS) in a suite of changes recently approved by Ofgem to incentivise consumers to adjust their energy use to periods of excess supply, broadening the range of balancing actions available during low-demand periods. 

Electricity markets 

Strong forecast nuclear generation availability in Europe is expected to drive imports into GB at times of peak demand. That strength, combined with the expansion of renewable generation across Europe more broadly, raises the potential for oversupply during peak solar hours, which could result in negative prices and additional scheduled imports into Great Britain.

Ofgem warns on use of fixed thresholds in REMIT disclosures  

Ofgem has written a letter to all wholesale energy market participants setting out its concerns about the use of fixed thresholds, in particular of a 100 megawatt (MW) threshold in Great Britain, when assessing whether outage and availability information must be disclosed as inside information under article 4 of the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).

Article 4 of REMIT requires market participants to disclose inside information in an effective and timely manner. Article 2 states that information is considered inside information where it is non‑public and sufficiently specific information that relates directly or indirectly to one or more wholesale energy products and would, if made public, be likely to have a significant impact on the price of those products.

REMIT requires market participants to assess this on a case‑by‑case basis, taking into account the nature of the information and prevailing market conditions. Ofgem’s position is that any fixed MW threshold is an inherently unreliable substitute for the assessment of whether information would be likely to have a significant impact on the prices of wholesale energy products.

Concerns identified 

Ofgem believes that market participants are applying a blanket 100MW threshold without adequately assessing whether the information in question is likely to affect wholesale energy prices significantly.  It also notes that generation units of up to 99MW have no mechanism for publishing outage information.

Three principal concerns emerge from the letter:

• First, a 100MW threshold may be too high at times, such as in periods of tight margin or constrained supply.
• Second, the cumulative effect of multiple smaller outages, when not published, can have a material impact on prices and transparency. This risk is growing as the generation mix evolves. Ofgem warns that market participants may underestimate the extent to which knowledge of multiple smaller outages can amount to inside information, potentially providing a competitive advantage and undermining market integrity.
• Third, some operators mistakenly assume REMIT applies only to balancing mechanism units (BMUs).  Ofgem highlights that smaller or embedded generators may still be market participants and that roles can be unclear in aggregated portfolios, particularly between asset owner and virtual lead parties. 

Ofgem states that it expects all market participants to review their internal procedures in light of these concerns. Where thresholds are used, Ofgem underlines that they must be treated as advisory rather than definitive. Ofgem will monitor this area closely and take action where it considers necessary.

Energy sector updates on the progress of connections reform delivery  

The government and energy regulators have published a series of updates on the delivery of Great Britain's connections reform, with the Department of Energy Security and Net Zero (DESNZ) and Ofgem issuing a joint open letter that sets out the progress, as well as the persistent delays, in the programme. Separately, the Energy Networks Association and NESO published a new data dashboard tracking reform milestones in real time. 

Clearing the queue 

The letter reports that as part of the "TM04+" connections reform process, 221 GW of deprioritised capacity has been removed from the re-ordered queue. It acknowledges, however, that data errors in existing connection agreements and the requirement for NESO to rework network studies and planning have led to long delays in the progress of issuing offers for projects.

Ofgem and DESNZ are clear that further delays against the timeline are not acceptable. They say they are continuing to work with NESO and network operators and commit to transparent public reporting to reduce uncertainty.

Managing a surplus of battery projects 

NESO's recent consultation on updates to connections reform methodologies proposes – through the disapplication of protection clauses 3a and 3b – that only battery projects with a secured revenue support scheme would be eligible for the next connections window. The aim is to address the current oversupply of "Gate 1" battery projects that could potentially qualify for a Gate 2 offer in further windows.

The government urges storage developers to assess the viability of their projects, noting that, given the merchant business model in this sector, many battery projects are likely to leave the queue. Industry bodies have proposed financial incentives to encourage non-viable projects to withdraw, and the associated code modification proposal (CMP 470) has been granted urgent status. The government warns that non-viable projects remaining in the queue for too long risk wider knock-on impacts across the network, as network redesign is then performed against inaccurate assumptions.

The letter reaffirms the government's commitment to electricity storage. It notes that, despite the capacity removed in the recent re-ordering, current projections indicate 14.8 GW of surplus capacity in viable battery projects above the government's Clean Power 2030 target of 23-27 GW.

It cites successful deployment of protection criteria as evidence of progress, such as a battery project having secured capacity market agreements and planning consent.

The core message for developers is to take a pragmatic and proactive approach to reviewing project viability to ensure connections reform remains robustly aligned to strategic needs, supports investor confidence and protects consumer interests.

ENA connections dashboard 

Separately, the Energy Networks Association (ENA) and NESO have published a dashboard to display regularly updated data on and increase the transparency of the progress of GB connections reform.

The latest data show that 100% of the transmission-connected and large embedded generation projects under protection clauses 1 and 2a have now received their Gate 2 offers, comprising a total of 287 offers.

The dashboard also shows that distribution network operators (DNOs) have yet to issue any offers. Developers awaiting offers from DNOs should expect them between early March and end of May for protected distribution offers and early July to mid-November for Gate 2, phase 1 distribution offers).

This article was written with the assistance of Osborne Clarke trainee solicitors Alice Smith, Elise Hill, and Maggie Hudson, and solicitor apprentice Jackson Clay.