UK Budget 2026: ‘wholesale CfDs’ envisaged under clean power drive

The government has opened a consultation (69-page / 601KB PDF) on the potential design of a new ‘wholesale contracts for difference’ (WCfD) regime, to offer existing low carbon generators the option of accepting a fixed price for their electricity. The proposed new regime, first floated by the government in April, would offer an optional alternative to prices being set on the wholesale electricity market.

The plans are open to consultation until 9 December 2026 and form part of the government’s ‘clean power’ agenda, more details of which emerged in UK chancellor John Healey’s Budget announcement (166-page / 4.5MB PDF) on Wednesday.

In addition to opening its consultation on the case for, and design of, a new WCfD, the government confirmed support for hydrogen projects, committed to tie support for low carbon electricity to cheaper prices for consumers, using its purchasing power through the existing CfD regime to do so, and announced the abolition of gas standing charges from consumer gas bills.

Gareth Phillips, an expert in energy projects at Pinsent Masons, said: “Clean power generation should offer the cheapest cost of energy, but savings are lost through the linkage with the gas market. In principle. the WCfD, which is akin to a power purchase agreement with government, offers a way to realise a better deal for the consumer.”

At the moment, the price of wholesale electricity is determined via a system that is referenced against wholesale gas prices. As gas prices have risen in response to major geopolitical developments, such as the war in Ukraine and Middle East conflict, so too have electricity prices – even if the generation of that electricity comes from low carbon sources completely distinct from the gas market.

The government said a move to a fixed-price arrangement “would protect consumers from future crises where gas prices spike while providing generators with greater revenue certainty”.

“A significant proportion of existing low carbon generation continues to earn revenues linked to gas-driven wholesale electricity prices, meaning consumers remain exposed to volatility in international gas markets,” the government said in its consultation paper. “Accelerating renewable deployment alone will not fully remove this exposure in the near term.”

“The WCfD would offer a fixed-price arrangement to replace the revenues generators would normally receive on the wholesale electricity market. For consumers, this would mean greater protection from future price shocks and more stable and predictable bills over the contract duration, with savings returned to consumers when the wholesale price exceeds the strike price, as under the standard CfD scheme. For generators, the WCfD would reduce exposure to wholesale price volatility, providing long-term revenue certainty and predictable returns over a fixed contract period,” it said.

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. 

Like under the existing CfD regime, low carbon electricity generators would have the opportunity to bid for a share of the capacity being allocated under the WCfD regime. Under its plans, bids could be made by generators behind a range of low carbon generation assets, including solar and wind – onshore, offshore, floating offshore, and remote island – as well as run-of-river hydro, tidal stream, wave, and geothermal projects. The government is also considering whether to enable legacy nuclear assets to participate in the scheme.