New contract for difference option and tax uplift for renewable electricity generators

Ronan Lambe, Jake Landman and Chris Sawyer of Pinsent Masons were commenting after the UK government set out two new measures it said are aimed at “reducing the impact that volatile gas prices have on the price of electricity”. It said “a significant share of renewable generation – about 30% of Britain’s power supply – is still exposed to wholesale prices set by gas” and cited the Middle East conflict as an example of how the price of energy in Britain is exposed to “wars, geopolitical tensions or supply shocks abroad”.

The first measure will involve encouraging electricity generators in Britain that do not already hold a ‘contract for difference’ (CfD), to take up a new ‘wholesale’ CfD (WCfD). The option will be voluntary and the details of how it will operate will be set out and consulted on later this year, the government said.

The government said: “A WCfD would see eligible generators give up their current forward wholesale revenues in exchange for a fixed power price achieved via a CfD. Under this proposal it is envisaged that generators accredited under the Renewables Obligation (RO) would continue to receive support via the RO in the way they do currently – with only their wholesale revenues being exchanged for a fixed price CfD… Government will only offer contracts to electricity generators where it represents clear value for money for consumers.”

According to the government, electricity generators that take up the WCfD option and consumers alike would “no longer [be] exposed to volatile gas-linked electricity prices”.

CfDs in operation now provide a two-way mechanism for controlling what end-users of electricity in Britain pay to support low carbon generation, such as renewables, and what generators of the electricity receive in return for supplying it to the grid. They mitigate the risk associated with price fluctuations by ensuring remuneration for supply at a pre-agreed "strike price". If the electricity price achieved by the generator on the market falls short of the agreed strike price, the state compensates for the difference, with consumers ultimately funding such payments through their electricity bills. If the electricity price achieved is higher than the strike price, the generator pays the surplus back to the state. 

Ronan Lambe of Pinsent Masons, who specialises in renewable energy projects, said: “This is being portrayed in the media as severing the connection between gas and electricity pricing to an extent. It doesn’t actually do that – gas will continue to set the electricity price a lot of the time. It would just move money around, so when electricity prices are high because gas prices are high, generators that sign up to these wholesale CfDs will be paying back cash to government.”

The second measure the government announced is an increase to the rate at which the electricity generators levy (EGL) applies, from 45% to 55%, as well as an extension of its duration. The EGL is a temporary tax on exceptional revenues derived from electricity generation from certain sources. It began to apply on 1 January 2023 and was due to expire on 31 March 2028.

The government described the measure as taking “immediate action”, and the parliamentary written statement sets out that the increased rate will apply from 1 July 2026. However, no further indication has yet been given of how long the EGL will continue to apply for beyond 31 March 2028.

Tax expert Jake Landman highlighted the fact that the increase in the EGL rate was unlikely to impact on new projects based on the limited information released on Tuesday. This is because an exemption was introduced for the EGL receipts from electricity generation from new generating stations where “the substantive decision to proceed” with the project was taken on or after 22 November 2023.

“For those in-scope of the EGL, the specifics of the increase in rate will need careful consideration, such as around how apportionment across the rate change will work,” Landman said.

Aberdeen-based Chris Sawyer, also of Pinsent Masons, said the price of gas on international markets does not need to influence the cost of electricity in Britain.

“Gas doesn't need to be a negative influence on electricity prices, it's just that our energy policy is structured so that it does,” Sawyer said.

Sawyer highlighted another significant announcement made by the government on Tuesday relevant to businesses in the energy sector, which provided an update on its policy of establishing ‘transitional energy certificates’ (TECs).

In the context of the government’s policy to ban new licences from being issued that would enable exploration for new oil and gas, TECs will provide a legal basis for UK oil and gas operators to undertake certain new operations near existing oil and gas fields.

TECs were introduced as a concept in last year's North Sea Future Plan (NSFP). The government has now confirmed that TECs will only be issued if the North Sea Transition Authority (NSTA) is satisfied that four criteria have been met. These are that any development on the site: will not undertake any exploration; concerns acreage that is either adjacent or in close proximity to an existing field; will connect offshore oil and gas fields to existing infrastructure via pipelines and other infrastructure – so-called tiebacks, and; where it can be demonstrated that the activity will support the management of existing fields.

New legislation will be required to introduce TECs and more detail on how the criteria apply is to be set out in NSTA guidance.

Sawyer said: “Relevant NSTA guidance, explaining how each of the criteria should be considered during any application for a TEC, will be published after the conclusion of the legislative process to introduce TECs. It is therefore important that industry views are heard when the new legislation is prepared.”