Energy Secretary Ed Miliband is set to announce a significant reform to how electricity prices are set in Britain, pushing renewable energy firms onto fixed-price contracts and increasing taxes on those that refuse, in a direct response to the Iran war’s brutal demonstration of how closely linked British household energy bills remain to the price of global gas.
The plans, confirmed by multiple people familiar with the matter and first reported by the Guardian, represent one of the most significant interventions in Britain’s electricity market design in years – and an acknowledgement that the government’s existing approach to energy pricing has left households exposed to exactly the kind of global fossil fuel shock that has sent bills surging since the conflict began.
The problem: why gas sets the price for everything
To understand what Miliband is proposing, it helps to understand the problem he is trying to solve.
Britain’s electricity market operates on what is known as a “pay-as-clear” system. This means that all electricity generators – whether they are gas-fired power stations, wind farms or solar panels – receive the same wholesale price, and that price is typically set by the most expensive generator needed to meet demand. Because gas-fired power stations are frequently the “last resort” generator called upon, and because gas is expensive, they tend to set the price for the entire market.
This means that when gas prices rise – as they have done dramatically since the closure of the Strait of Hormuz – the wholesale price of electricity rises too, even for electricity generated from wind or solar, which have no fuel costs whatsoever. Households end up paying gas-crisis prices for electricity that was generated from a field of solar panels in Lincolnshire.
The Iran conflict has created the second energy price shock driven by global fossil fuel disruption to hit Britain in four years, after Russia’s invasion of Ukraine in 2022. The blockade of the Strait of Hormuz has pushed gas prices sharply higher and electricity bills with them. Ofgem’s July price cap review is expected to push the average annual household bill up by nearly £300 to £1,929.
What Miliband is proposing
The core of Miliband’s plan involves incentivising renewable power stations that currently receive subsidies under the legacy “renewables obligation” scheme to sign up to so-called contracts for difference – a mechanism under which the government guarantees them a fixed electricity price regardless of what is happening in the wholesale market.
Contracts for difference already underpin most new renewable energy projects in Britain. Under such a contract, if the wholesale price rises above the guaranteed fixed price, the power station pays back the difference. If the wholesale price falls below the fixed price, the government tops up the difference, funded through a levy on consumer bills.
The key point is that once a generator is on a contract for difference, their output is effectively insulated from wholesale price volatility. That insulation can then be passed on to consumers – meaning their bills are no longer driven up every time a foreign conflict disrupts gas markets.
Crucially, Miliband’s plan does not require changing the wholesale market design itself – a more radical option that had been proposed and then rejected under a major government review. Instead, it works through the tax and subsidy system to push generators toward contracts voluntarily.
The windfall tax element
Alongside the contracts push, ministers are set to increase the electricity generator levy – the windfall tax on power generators not signed up to contracts for difference – partly as a stick to encourage them to make the switch.
The levy was introduced in 2023 as prices rose following Russia’s invasion of Ukraine and other supply disruptions. It currently charges generators a 45% levy on wholesale electricity sold above £75 per megawatt hour. Increasing it raises the cost of staying outside the contracts for difference system, making the fixed-price route relatively more attractive for generators.
The government is also expected to announce plans for Reformed National Pricing – reforms aimed at making the electricity market more efficient by ensuring power stations are located and dispatched in ways that best meet demand given electricity grid constraints.
The political context
The timing of the announcement is politically significant. Labour pledged in its 2024 general election manifesto to cut household energy bills by £300 by 2030. Two years into government, bills are rising by a similar amount because of events in the Middle East. That gap between promise and reality has created mounting political pressure on Miliband, whose energy policies – particularly his push for low-carbon power – have faced sustained attack from Conservative and Reform opponents.
Rachel Reeves signalled the direction of travel last week, saying in Washington at the IMF spring meetings that the government would try to cut the link between gas and electricity prices. Miliband’s announcement delivers the mechanism by which that ambition will be pursued.
The broader argument the government is making is that the Iran war has vindicated the case for accelerating the transition away from gas dependency. If Britain had completed the transition to predominantly renewable electricity that Miliband has been advocating, the Strait of Hormuz closure would have had far less impact on household bills. The second energy price shock in four years – both driven by geopolitical disruption to fossil fuel markets – makes that argument considerably easier to make than it was before the war began.
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