UK Government Proposes Overhaul of Electricity Pricing to Lower Consumer Bills

On 21 April 2026, Energy Secretary Ed Miliband stood before cameras and declared that "the era of fossil fuel security is over, and the era of clean energy security must come of age" [1]. Behind the rhetoric lay a concrete, if contested, set of policies: voluntary fixed-price contracts for older renewable generators, a raised windfall tax on excess electricity profits, and a broader push to insulate British households from the global gas market. The announcement was the latest and most ambitious step in a reform process — the Review of Electricity Market Arrangements (REMA) — that has been running since April 2022 [2].

The question is whether these measures will actually cut household bills, or whether they represent something closer to political repositioning dressed up as structural reform.

What British Households Pay Now

The Ofgem energy price cap for Q2 2026 stands at £1,641 per year for a typical dual-fuel household paying by direct debit — a £117 drop from the previous quarter [3]. That figure, while lower than the crisis peak, remains far above pre-2021 levels. In Q1 2021, the cap was £1,138 [3]. At the height of the energy crisis in Q1 2023, it hit £4,279 [3].

Source: Ofgem

Data as of Apr 1, 2026CSV

The electricity-specific component of that bill is roughly £947 per year, based on typical consumption of 2,700 kWh at the current unit rate of 24.67p/kWh, plus a daily standing charge of 57.21p [3].

In European context, UK household electricity prices in the first half of 2025 were 23% above the EU average, at approximately 28.6p/kWh [4]. France paid around 26.6p/kWh equivalent, while Germany — burdened by its own energy transition costs — paid roughly 38.4p/kWh [4]. Spain (23.1p/kWh) and Norway (19.5p/kWh) offered cheaper power [4].

Source: Eurostat / Ofgem

Data as of Jun 30, 2025CSV

The Problem: Why Gas Sets the Electricity Price

Britain's wholesale electricity market uses marginal pricing — the most expensive generator needed to meet demand at any given moment sets the price for all generators. Because gas-fired power plants are frequently the marginal source, gas prices effectively determine what every producer receives, including wind farms and nuclear plants whose actual operating costs are far lower [5].

In the early 2020s, gas set the wholesale electricity price roughly 90% of the time. That figure has fallen to around 60% as renewable generation has expanded, and the government projects it will reach 50% by 2030 [1]. But even at 60%, the link means that any spike in global gas markets — whether driven by geopolitical disruption in the Strait of Hormuz or seasonal demand — feeds directly into British electricity bills.

This is the core problem the government says it is solving.

What the Government Is Actually Proposing

The April 2026 package has two main components targeting wholesale price formation, on top of policy cost shifts already enacted [1][6].

Wholesale Contracts for Difference (WCfDs). The government will offer voluntary fixed-price contracts to existing low-carbon generators — primarily older wind farms, solar installations, and some nuclear capacity — that are not already on fixed-price arrangements. These generators, built under the Renewables Obligation (RO) scheme between 2002 and 2017, currently sell their output at wholesale market prices and so benefit directly when gas prices rise. Under the proposed WCfDs, they would instead receive a guaranteed fixed price, insulating consumers from gas-linked volatility. The first auction is planned for 2027, with consultations on contract design later in 2026 [6][7].

Electricity Generator Levy increase. The windfall tax on electricity generators earning above £82/MWh (adjusted for inflation) will rise from 45% to 55%, effective 1 July 2026 [6][7]. The levy was originally set to expire in 2028; that end date has now been extended. Revenue will be redirected toward household and business energy support [1].

These measures sit alongside policy cost shifts already delivered in the 2025 Autumn Budget. The government moved 75% of the Renewables Obligation off electricity bills and into general taxation (saving roughly £67 per typical household) and scrapped the Energy Company Obligation (ECO) scheme (saving roughly £60), for a combined reduction of about £134 [8][9].

Source: Ofgem / Energy UK

Data as of Apr 1, 2026CSV

Where the Bill Savings Stand

The government has been notably vague about the long-term savings from the WCfD proposal specifically. The UK Energy Research Centre (UKERC) first proposed a more ambitious version of this idea — called "Pot Zero" — in 2022, estimating savings of up to £20 billion, or roughly £300 per household, when gas prices were at crisis levels [10]. Updated UKERC analysis from 2025 put savings at £2 billion to £8 billion per year, with an additional £1.5–2.5 billion from recent gas price increases [10].

But the government's version stops short of the full Pot Zero proposal. It leaves the RO subsidy in place and makes participation voluntary, which means generators can decline if the offered price is unattractive [7]. Carbon Brief's analysis concluded that the plan is "relatively modest" and "unlikely to reduce consumer bills" on its own [7].

The £134 per household saving from the Autumn Budget measures is real and already reflected in the Q2 2026 price cap. But the Resolution Foundation noted that roughly 27% of households save less than £100, while 24% save more than £200 — the benefits are unevenly distributed depending on consumption patterns [11].

Prime Minister Keir Starmer framed the broader reform as delivering "£20 billion in benefits between 2030 and 2050" through Reformed National Pricing [1], but this figure refers to system-wide efficiency gains from the wider REMA programme, not direct bill reductions.

Who Benefits and Who Doesn't

The distributional picture is mixed. The Resolution Foundation found that nine of ten income deciles gain on average from the policy cost shifts, and that bill savings are "worth twice as much to the bottom two income deciles (0.8% of income) than to the top two (0.4%)" [11]. That makes the immediate reforms mildly progressive.

Prepayment meter customers — disproportionately low-income, elderly, disabled, or renting — now pay the same unit rate as direct debit customers after Ofgem eliminated the prepayment premium [12]. But they face structural disadvantages in the transition to flexible tariffs. Research from Nesta found that prepayment meter households are less able to shift demand to off-peak hours and less likely to benefit from smart tariff products [13].

Households with solar panels, batteries, heat pumps, or EV chargers stand to gain disproportionately from time-of-use tariffs and demand flexibility services that form part of the broader REMA vision. These tend to be wealthier, owner-occupier households. The risk, as the Energy Demand Research Centre has flagged, is that "households who can't afford, or otherwise aren't able, to install low carbon technologies could end up getting left behind" [13].

Rural households on single-rate tariffs face a separate problem: rising network charges. Electricity transmission charges are forecast to nearly double by 2031, adding approximately £70 to standing charges, with total network charges on track to be 50% higher by the end of the decade [11]. This pressure falls hardest on low-consumption households — including many rural and elderly customers — for whom standing charges represent a larger share of the total bill.

Ofgem's review of standing charges acknowledged this tension but concluded in early 2026 that it should not change the default structure, citing the risk of "significant losses" for vulnerable households if charges were restructured [14].

The Counterarguments: Investment Risk and Cost Shifting

The most substantial criticism is that the reforms could deter the investment Britain needs. The Association of Investment Companies (AIC) warned that the government's proposed changes to renewables subsidies would "erode investor confidence at a critical time for UK clean energy investment" [15]. Renewable energy investment trusts, which have deployed billions into UK wind and solar, depend on predictable revenue streams — and a higher windfall tax plus pressure to accept lower fixed prices changes the calculus.

Analysts at Jefferies estimated that a £5/MWh price shift from the reforms could reduce net income for UK generators by 2–3%, with companies like Centrica, SSE, RWE, and Ørsted all exposed [16]. This is not catastrophic, but as one analyst put it, the reforms create "two potential negative developments for utilities exposed to renewable/nuclear merchant generation assets in the UK" [16].

The British Chambers of Commerce called for reforms to "go further" while simultaneously warning that industrial electricity prices — already the highest in Europe and 2–4 times those in the US, Canada, or China — risk driving production offshore [17]. Energy costs as a share of total value added in UK industrial sectors have risen from roughly 3% to 12% over two decades [17]. If consumer bill reductions are funded partly by shifting costs onto business users, the net economic effect is unclear.

There is also a price signal concern. The wholesale market's marginal pricing system, for all its flaws, sends signals about when new generation capacity is needed and when it is profitable to store or shift electricity. Removing generators from this market via fixed contracts could reduce the revenue signals that incentivise battery storage, demand response, and flexible generation — precisely the technologies a renewables-heavy grid needs to function reliably [7].

Who Stands to Gain and Lose Commercially

The commercial landscape is split. Octopus Energy, Britain's largest electricity supplier, has been a vocal advocate for market restructuring, arguing it would save consumers money and give the economy a boost [18]. Suppliers with large retail books and no generation assets benefit from lower wholesale costs.

Generators with older renewable portfolios are more conflicted. They currently earn wholesale prices that have been elevated by gas linkage — the WCfD contracts would reduce that revenue in exchange for stability. Participation is voluntary, but the raised Electricity Generator Levy to 55% acts as a stick: generators who refuse the fixed contract face a higher tax on their windfall profits [7].

Grid operators, including the National Energy System Operator (NESO), stand to benefit from the broader REMA programme, which gives them a more strategic planning role through the Strategic Spatial Energy Plan (SSEP) [2]. Fossil fuel generators face a structural decline as the gas-price link weakens, though they remain essential for system balancing.

The government has not published a formal register of industry consultations specific to the April 2026 delinking announcement, though the REMA process has involved extensive public consultation since 2022, with two major consultation rounds and responses from hundreds of industry participants [2].

The Wider REMA Timeline

The April 2026 announcement is one piece of a larger reform architecture. In July 2025, the government published its REMA Summer Update, ruling out zonal pricing — which would have divided Britain into regional price zones — in favour of "Reformed National Pricing," retaining a single national wholesale market [2][19].

Key milestones include:

• July 2025: REMA Summer Update confirms Reformed National Pricing direction [2]
• July 2026: Electricity Generator Levy increase takes effect [1]
• Late 2026: Consultation on WCfD contract design; first iteration of the Strategic Spatial Energy Plan [2]
• 2027: First WCfD auction [7]
• 2029: Full REMA implementation target, with primary legislation to be introduced "as early as possible" [2]

The government has stated it will introduce primary legislation to facilitate the necessary changes, though specifics of the bill have not yet been published [2].

Lessons from Comparable Reforms Abroad

International experience offers mixed evidence. The Nordic electricity market uses a spot-price model with zonal pricing — precisely the approach Britain rejected in 2025. Nordic markets have delivered relatively low and stable consumer prices, but they benefit from abundant hydroelectric generation that provides natural storage and flexibility [19].

Australia's National Electricity Market has undergone repeated restructuring over two decades. A 2023 MIT working paper on UK electricity market reform noted that past British reforms "proved highly controversial" and that underlying concerns about investment remained a persistent challenge across international markets [20]. Australia's experience suggests that structural market changes can take a decade or more to deliver measurable consumer savings, and that transition costs are often underestimated.

Spain's strong solar and wind growth has reduced the influence of expensive gas and coal on its wholesale prices more organically, without the kind of top-down contracting mechanism Britain is pursuing [7]. This raises the question of whether Britain's approach adds regulatory complexity to a process that market forces may accomplish independently as renewable penetration increases.

What Remains Unclear

Several gaps remain in the public evidence. The government has not published a household-level impact assessment for the WCfD policy specifically — the £20 billion figure covers the full REMA programme over two decades [1]. The voluntary nature of the contracts means uptake is uncertain; if generators find the offered prices unattractive, participation could be low.

The interaction between the raised Electricity Generator Levy and future investment decisions has not been independently modelled. And while the policy cost shifts from the 2025 Budget delivered real savings, those savings were funded by moving costs onto the general tax base — not by eliminating them. Taxpayers and bill-payers are largely the same people.

Rising network charges, driven by the £40+ billion in grid investment needed for decarbonisation, will put upward pressure on bills regardless of wholesale price reforms [11]. The Resolution Foundation projects net bill increases of approximately £65 per household by 2029 after accounting for these pressures, even with the policy cost savings [11].

The reforms announced in April 2026 represent a genuine attempt to restructure how electricity is priced in Britain. Whether they deliver the savings the government implies — or instead create new distortions while the real cost reductions arrive through the simpler mechanism of building more renewables — will take years to determine.