I have a somewhat less rosy view, based on the experience of senior staff at the CEGB and successor companies both pre- and post-privatisation. There were huge operational gains made after the CEGB was broken up. It was a heavily influenced by political considerations and had all of the disadvantages of massive monolithic organisations. Yes there was strong role for technical people, but many of those were pleased to be freed from the pervasive institutional conformism.
The shock of change was good for the sector. What has emerged - incompetent political control - was not what was expected but has been made easier by the disappearance of any competent technical management. The real problem, I think, is at National Grid which has become a political yes-man. There are understandable reasons why this has happened due to the incentives that govern National Grid's behaviour.
It still has a lot of friends at court: the planning department at NESO is still run by Claire Dykta, whose default idea is to solve renewables problems with More Grid.
Can we go back to the days of the CEGB, a profitable enterprise owned by the state, staffed by engineers and chaired by a theoretical physicist who championed nuclear?
Coming from 35yrs in the water sector I have found all the years of market manipulation staggering. I strongly suspect the generators and retailers will cop for more criticism from bill payers when the chickens come home to roost. But as ever, with every single failure of the 'market' we always, with no exceptions, find the Government hiding in the shadows (of accountability). Of course they will be loading their guns and willingly firing them at the Companies whilst trying to convince the public that they are in fact the saviour. The more I see the clearer it becomes.
As both a regulator and an analyst in the water sector as well as energy and other infrastructure, I am surprised at the combination of naivete, incompetence, and sharp practice that is characteristic of many operators and retailers. They feel unable to be honest about the rules under which they operate but invariably some take full advantage of the opportunities offered. There is very little reward for straightforward competence and, indeed, most policymakers have absolutely no idea of what that looks like.
Both operators and retailers really need to understand that they are, in practice, the designated fall-guys for incompetent bureaucratic and political decision-making. Until they are willing to say that publicly and push back in the interests of consumers, they will consistently be treated as part of a stupid and even corrupt structure. But on the other side, the public suspicion of monopoly private operators is very strong and sometimes warranted. Meaningless guff about caring for customers merely exacerbates the cynicism.
Such is the level of anger directed toward utilities that I doubt they would get any hearing if they pushed back at Govt and Regulators. That anger has been whipped up by politicians eager to curry favour with small voters groups. The answer for me is less regulation and more customer research. I know first hand how Regulators rejected company research and I appreciate it is fraught with risk but frankly what we have today is almost as bad as it could be (only nationalisation will guarantee worse outcomes). Environmental legislation drives the cost of water supply and sewage treatment. The environment is important but the public have consistently deprioritised it against their other demands. But Govts have forced it on them. Some honesty about costs and trade-offs is required. BTW - another truly wonderful article Gordon.
A story from early in my period as chairman of the Scottish water regulator. I gave a talk at a conference based on a detailed analysis of changes in productivity and service costs of infrastructure utilities showing the large improvements since privatisation. It was greeted with almost astonishment by the audience and a lot of private criticism from our civil service counterparts. The lesson, which I tried to put aside, was that no one, including the operators, had any real interest in honesty and accuracy.
I think that you are only partially correct about environmental issues. There is a highly organised and vocal lobby on major issues, most of whom believe that other people (not themselves) should pay for improvements. The press relies on these people when reporting environmental incidents but are never willing to report on what is required to minimise such incidents. I agree entirely about the need for honesty about costs and trade-offs but crucially that kind of reporting is hugely resisted by politicians, bureaucrats and companies. In my view, regulators should act partly as educators for the general public but no-one really wants that because it implies that insiders lose control of the discussion.
I found some data on EGL paid by Drax and EdF Holdings from their accounts. Drax actually report their forward hedge sale revenue, price and volume broken down by subsidy regime as at report date, so we already know they will have no liability for 2026. They paid nothing for 2025, £161m for 2024 and £205m for 2023. EdF paid £416m for 2024 and £348m for 2023. No accounts for 2025 until ~July.
HMRC have just published an update of their data on tax receipts that shows the EGL provided
2023/24 £1,473m
2024/25 £749m
2025/26 £35m
Receipts relate to the previous accounting year for each firm, as the liability can only be calculated based on annual revenues. Time averaged day ahead prices were below the £80 cap for 2025-26, so there may be no tax to collect for that company accounts year. Current forward baseload prices average around £92/MWh for 2026/27, so there will be tax for baseload generators if that holds, but probably not so much for wind or solar, where realised prices are discounted to the straight time average (particularly solar). For later years the forward baseload prices drop substantially below the tax threshold, especially once you allow for the fact that the forward prices are money of the day, while the threshold will be indexed upwards.
That is also a huge issue for the other half of the Miliband proposals: to create a CFD basis in place of market revenue for ROC subsidised generators. The average wholesale revenues of wind and solar are being cannibalised by periods of excess production resulting in much lower market prices: these expectations should have been built into operations signing up to the terms. Solar revenues will erode particularly rapidly, as we get regular midday surpluses over summer months - the time of peak production from solar). Any fixed price CFD would favour solar unduly.
We already know from the AR3-5 CFDs with low strike prices that if there is the option not to commence the CFD generators will opt for market prices as long as they are permitted to do so (the Long Stop date, often several years after start of operations). So the plan to make the CFD optional will suffer the same fate if it is set at a low level, reflecting underlying gas cost (which is lower still because of the UKA carbon taxes). Set it too high, and consumers will be locked into high prices for the duration with a CPI escalator on top.
Given the reporting lag the numbers that you cite are similar to my calculations. The tax paid in 2023/24 was just a retrospective capital levy. For 2025/26 prices were low but I would also expect that generators had learned how to play the rules to reduce any tax liabilities.
I am not clear how the new CfDs are supposed to work. In particular, whether they will substitute for market sales while leaving ROC revenues in place. It would look extremely bad if an offshore wind farm with 2 ROCs per MWh were offered a CfD price of over £200 per MWh. A significant element for new build CfDs is that they represent security for lenders by removing price risk, though leaving output risk, meaning that the cash flows to service high levels of debt are more predictable. However, for ROC generators all of them will have paid off a large part of their debt and can use ROC revenues to service what is left. Thus, the risk-reward decision is quite different for the operators. On the other hand, it would be entirely in line with DESNZ's behaviour for it to offer CfD contracts that are particularly favourable for solar generators given the regular midday surplus during the summer (as in Germany).
As I understand it, the new CFD will set a (?single) price to which ROCs are added largely unchanged. In other ways it will probably operate like the rest of CFDs - i.e. based on Day Ahead hourly prices, with payouts financed up front via interim levies (and repayments only in arrears).
It has to be optional, because some ROC generators will already have other contracts in place that don’t price off the Day Ahead basis. We await the promised consultation to see the detail of what they actually propose. It will either be too cheap for volunteers to take it up, or too costly, landing consumers with bigger bills. Those with contracts that price off Day Ahead can simply dump their volumes into the DAM auctions or OTC DAM trade much as they do at present at least for weather surprise outputs. The auctions will offer pay as clear prices which may turn out to be lower than current ones because an increased volume will go through with a low reserve price - so the CFD subsidy will compensate. We see this already on the Continent, where more volume goes via auction.
In my mind the real question is what happens to hedging? Currently it is heavily based on quotes based off being able to hedge gas (which retailers need to do anyway, not just CCGT plants). Renewables can’t offer proper hedges because their output is far too uncertain. Yet where the new system provides more volumes at effectively fixed prices it is forcing retailers to pay at times when DAM prices would be depressed by high renewables outputs, while leaving them scrambling for cover via interconnectors, OCGT etc. for periods where renewables underperform. Gas has provided the cheapest hedges almost always, certainly in the volume required by the OFGEM cap or forward fixes - and they work even when the market is short of renewables. Take them out of the equation, and hedging cost (and hence retail prices) will rise. That happened during the Energy Crisis because there was no volume from nuclear due to risk of regulatory shutdown for maintenance (or actual shutdown for Grand Carénage), no volume from CFD biomass because BMRP was almost £400, and much reduced volume from everyone in general because of extremely high collateral requirements for mark-to-market positions and very high levels of initial margin to secure against market volatility intra day, with extreme performance risk for generators if forced to cover for plant breakdown at £££££. Hedging more than a short time ahead became almost impossible, which forced OFGEM to reset the cap quarterly.
There are proposals to amend the detail of ROCs because as they run off/expire there is considerable potential volatility in recycle values. Floated ideas include simply boosting the cashout price by 10% and paying that as a fixed level per ROC, CPI indexed. There would be no secondary market and recycle game, with the money collected by levies, much as with CFDs - though there are big cashflow timing issues as ROC payment can be deferred until well after year end, whereas CFDs are funded in advance.
Yes - get that. And of course the ROC element of what generators get is not linked to the wholesale price - so that was poor thinking on my part. Part of what you are identifying in the design of the tax (which came from the last government of course) is that it is calculated based on the average revenues/MWH of the given generator compared to a fixed benchmark - which means that if you have lower marginal costs and get used more often when prices are low, you end up paying less. Intuitively that isnt right if the objective of the tax is to capture an element of surplus which would not reasonably have been expected by investors. The surplus per hour for a solar generator with a ROC compared to their expectations in more 'normal' trading conditions will be different from the surplus that a nuclear generator gets, but not that different. So perhaps the tax needs to be calculated based on the difference between some kind of market average and the £75 base (as adjusted for inflation), and then apply to all in-scope generators.
I think that this is attempting to tweak what is conceptually a very poor tax. Further, the whole point of the EGL is that it is intended to operate as an extension to corporation tax, so that its structure must rely on data that is easily available from company or group accounts. Defining and taxing "excess profits" has always been a pointless exercise in chasing a chimera.
If you made it a tax that only applies when the price is high then it may leave consumers paying very high prices indeed. It becomes interesting to withdraw some generation from the market, forcing the use of high cost marginal generators like OCGT, and forcing up prices much higher. Exempt generation gets big profits, The high price will at least pay the taxes on the renewables.
The electricity market is big and few suppliers have any significant impact on the market. That is why Drax and EDF are important because they can each account for 10-20% of supply in many periods - SSE is the same in Scotland when transmission capacity is constrained. For technical operating reasons EDF doesn't really want to adjust its nuclear output by much from period to period. Drax's position is more complicated but I am sure that they would want to avoid claims of market manipulation - remember all of the measures faced by National Power and Powergen in the 1990s when they tried to be too clever. There is no doubt in my mind that SSE has played games in Scotland in the past over transmission capacity, esp from Peterhead, but they have become more careful since being warned by Ofgem.
The CFD is priced against a Baseload Market Reference Price, which is set for 6 months at a time, based on forward trade for the summer/winter as appropriate in the preceding 6 months, so it is out of phase with Day Ahead based Intermittent Market Reference Prices. However, because it is constant effectively it is either a fixed subsidy or tax, and Drax can respond to market conditions for both ROC and CFD subsidies. They take full advantage of their contracts and are very commercial in their approach, but I think above reproach on that score.
I expect they will take advantage of the ability to offset purchased power as a cost in calculating their EGL liability. They can buy in renewable generation against forward sales they have made and cut their own generation which would be unprofitable at the Day Ahead price - saving the fuel for a higher margin day.
A couple of points. First, I did not mean to suggest that Drax do anything improper. I think that they rely on staff and advisers who are much smarter than DESNZ or HMRC, because they have much more to gain from playing the rules intelligently. Second, I have not looked at all of the details but my reading of the new subsidy arrangement for Drax does not limit how much they can produce. It does limit the amount of output for which it earns the high CfD strike price. Clearly they have a strong incentive not to generate when expected wind and solar output is high relative to demand. However, their actual behaviour will depend on warm-up and cool-down costs, especially from a cold start. I suspect that they will want to invest in reducing start-up & ramp costs or running some units at 10% of output to allow the plant to operate from, say 16.00 to 22.00 most evenings as well as during autumn/winter periods of low wind.
Yes, the subsidy is limited to 27% of annual capacity, and there is also a floor of at least 22% (allegedly saving on procuring gas in the CM), and profit clawbacks at 30 and 60% rates for “excess profit” (detail not disclosed). I’m sure they’re much smarter than DESNZ.
I don't quite follow your example, but I can see that this kind of approach does lead to potential for different kinds of tactical behaviour, and that it is based on a theoretical distinction between generation which benefits from a rise in the price of gas and those who don't, when in practice things are more nuanced. So perhaps it is a dead end. But one last try! Say there is a tax which is paid on every MWH of generation other than from gas or covered by a CFD which is equal to the excess rate (now 55%) multiplied by the difference between the average wholesale price per MWH across a quarter and £85 (say). It can never be negative. So if the average wholesale price was £135, then ROC generators, EDF, Hydro would all pay an extra £27.50 tax / MWH generated regardless of what they sold their output for. The reasoning would be that these have largely fixed marginal costs and benefit from increased marginal revenues which are to some considerable extent related to the shift in the level of the whole market. There would be less incentive for Drax to turn down CFD generatoin in favour of this - though some games will still get played. The existence of the tax and the rules would need to be set out well (2 years?) in advance so that it can be anticipated within hedging strategies (though probably not fully covered) And it is more likely to help the objective of getting ROC generators to switch to a CFD at a more reasonable price.
This is like all windfall taxes. It is predicated on the assumption that "no investor" expected to receive high prices when making their investment, so the additional revenue from high prices are an unanticipated gain that can be taxed without significant consequences. Then, for symmetry, why don't you propose a negative tax/subsidy when the average price is less than, say £50 per MWh?
Any investor - and economists with experience of the sector around the world - knows that what are, in effect, price caps are almost always asymmetric and designed to cap returns in periods when prices are high. The lesson of history is that it is always possible to tax captive assets. But do it once and all future investors will assume that it will happen again when politically convenient. Thus they change their behaviour to demand higher prices/returns all the time to compensate for the expectation that they will be subject to such taxes at some time in the future.
Rent control is the same thing - transferring income from investors to tenants is convenient when investors are captive but the effects are dire in the longer term.
I agree with all of the above - but it is still a less bad option than reneging completely on contractual commitments such as CFD's, ROC's as some politicians are proposing
I think that it is very hard to write the job requirements for senior civil servants responsible for sectors like electricity. Clearly they should be technical competent and able - the civil service doesn't pay enough to keep those with such characteristics. There is also the issue of how long they should stay in post. Rotating every 2 years is ridiculous but we don't want people in post for so long that they block all change. Maybe 5 years should be a minimum and perhaps not more than 8 years.
I would think the advantages of including the ROC revenues in the benchmark rather than simply reducing the ROC are (a) that it retains the link between the level of clawback and the level of unanticipated surplus due to external factors and (b) that a tax increase might have less impact on future investment than undoing a previous government commitment
It would be a horrible shock for solar & wind generators. Remember that some of them get 2 ROCs per MWh. At a buyout price of £69.34 per ROC that would imply a tax of more than £76 per MWh. There is no way that isn't going to create a storm. Even at 1 ROC per MWh for many onshore wind farms it is a tax of £38 per MWh. Those are far more than any increase in average wholesale revenue. If you are going to do that, then you might as well legislate to change the whole system. DESNZ under the current administration is not going to do that.
Thank you Gordon. As I had understood it, the government's main intention here was to reduce future revenue expectations for renewables generators with ROC's in order to make an offer of conversion to a fixed (CFD) price which brings down their average revenue more attractive, leading to lower long term prices than we would otherwise see. But if as you say this group of generators is not going to be affected, then all you get is some unintended consequences. How would the government have had to change the regime in order to materially affect the decisions of renewables generators with ROC's? Should it include revenues from the ROC's in the definition of revenue for the EGL benchmark - or does that cause other problems?
Re your last sentence: Yes, that would clearly change incentives. However, it would also lead to a huge hoo-ha, similar to what happened when the FIT tariffs for solar were drastically lowered. And if you are going to do that it would be much simpler just to lower the RO and the buyout price.
I am not inclined to accept your initial interpretation. I see no desire on the part of DESNZ to bite the hands of renewable generators who are the only people who support current policies. In reality, it is just a rather ineffective shakedown of EDF, given that Drax has already agreed a revised subsidy regime for 2027-31.
Thankyou for explaining this saves me the trouble of having to research as i suspected it was more bravodo than a significant change. That i surmise will come from REMA MkII whenever they get around to concluding the consultation and potentially these announcement give us a steer that DESNZ will be going down splitting renewables out from gas. If not they will surely need to address how they manage the dwindling use of gas.
I am unconvinced that DESNZ has any coherent idea of what they are doing. My brief engagement with REMA was depressing in the extreme with respect to the competence of the DESNZ staff involved. The whole process was captured by lobbyists, who in turn had no coherent idea of what a system might look other than serving their particular interests. Equally it is clear that Ofgem has been captured and is completely at sea.
Just when one thought I government had reached peak stupidity on the subject, one finds its a false peak. I was unclear if imports would be subject to the tax but if they were then EDF France would I assume take that into account when directing exports as I suppose would other exporters? In the winter during high demand for conventional power the UK would in a permanent disadvantaged position in the market so would not receive power.
The people who designed the EGL are foolish but not quite that stupid. Imports of electricity are excluded from the EGL calculations as is all gas and similar generation.
I think you comments about making future changes to the subsidy regimes are looking more solid. This could be just another example of the current government signing up to things for which they had no mandate to pander to their special interest groups in the knowledge that the next election is almost certainly lost. Its the government version of the old commercial poison pill defense for hostile takeovers.
Yes, the poison pill aspect is very clear. But unlike corporate poison pills, Parliament has the right to sweep away policy poison pills and the actions of DESNZ increase the likelihood that may happen.
I have tried to work through the incentives for different generators. They are very complicated because the rules are such a mess. I am pretty sure that Drax has an incentive to run its pumped hydro and gas plants rather than its biomass units when prices are high - in part because it operates clearly as a group.
You are right that there is a general incentive to substitute imports for own production when there is a risk that own production will push average revenue per MWh over the threshold. The reason is that the tax applies to total annual production minus exclusions, not just marginal production. I suspect that DESNZ and Treasury got their analysis of the impacts wrong by failing to understand this asymmetry when the tax was initially introduced. Now, it is just posturing by DESNZ.
Brilliant article, has anyone confronted this shameless Energy minister and his disciples with this well constructed analysis of the mess the UK is in?
Thank you. My personal experience is the DESNZ (and its predecessors) treat most critics as "heretics". That is a literal statement from Kwasi Kwarteng about me when he was Secretary of State of DECC or BEIS.
Kwarteng was among the more hapless ministers in the role. Didn't have a clue how to tackle the energy crisis and cost the country a fortune in consequence. Precisely through that "heretic" attitude that refused e.g. to try to organise baseload coal to save gas.
I have no personal experience of dealing with Kwarteng. I think that as much as anything he was reflecting the views of his civil servants. I do know from other experience that they are almost desperate not to have their core beliefs challenged.
Thank you Gordon. The web is sufficiently tangled that Joe Public has very little chance of seeing what's really going on, beyond his bills, but surely with inexorably rising prices, he's going to be smelling the rat before too long. Or will he remain taken in by stories and keywords like Ukraine, Iran, the wrong sort of gas, and gas plants burning less efficiently due to carbon dioxide in the atmosphere?
Governments seem to find innovative ways of messing up energy markets, so I eagerly await your recipe for how it should be done, or a least-worst approach.
I think that there are two reasons why widespread popular understanding is difficult - quite apart from deliberate incompetence of journalists. First, for many people gas is more important than electricity as the primary influence on their total energy bills. There is a more direct link from gas prices to bill payments so the story that gas prices drive everything seems plausible. Second, the electricity sector and market is undoubtedly complicated. Everyone understands that it is critical to modern life, but for most people it falls in the category of rocket science. So over-simplified stories are hard to correct.
Unfortunately, change is going to be very painful for those who benefit from what has become a massive transfer from electricity users to special interests. Thus, it will strongly resisted on what are, empirically, entirely spurious grounds. That is what frightens politicians proposing change.
Thank you again. The influence over politicians of lobbyists with little merit really riles me and makes me recall Thatcher: “When I'm out of politics I'm going to run a business; it'll be called rent-a-spine” .
The reason is simple and is illustrated by an example. For a period the nuclear technology division of DESNZ was run by a staff member with an arts degree whose primary experience was as a supermarket manager. Quite possibly, a bright and well-intentioned person but an unchallenged example of an amateur bureaucrat. Such people are completely ill-equipped to argue with Rolls Royce over SMRs.
Yes but: the essential mantra for even someone wholly technically unqualified should be "follow the money". I thought having tenured academics without a financial stake as advisors was a means of protection against skilled lobbying. Maybe not?
Not really unless you make a very determined effort to recruit people with differing views and from different institutions. DESNZ has relied very heavily on a very small group of what might be called "insiders".
I have a somewhat less rosy view, based on the experience of senior staff at the CEGB and successor companies both pre- and post-privatisation. There were huge operational gains made after the CEGB was broken up. It was a heavily influenced by political considerations and had all of the disadvantages of massive monolithic organisations. Yes there was strong role for technical people, but many of those were pleased to be freed from the pervasive institutional conformism.
The shock of change was good for the sector. What has emerged - incompetent political control - was not what was expected but has been made easier by the disappearance of any competent technical management. The real problem, I think, is at National Grid which has become a political yes-man. There are understandable reasons why this has happened due to the incentives that govern National Grid's behaviour.
This cartoon nicely sums up the delinquent so-called professions of the industry who are leading us all off the Net Zero cliff edge: https://www.conservativewoman.co.uk/wp-content/uploads/2023/11/net-zero-nonsense.jpg.
Is Nat Grid still like i since it was forced to offload NESO?
Its interest in increasing its asset base is even clearer, especially since it bought a number of DNO's.
It still has a lot of friends at court: the planning department at NESO is still run by Claire Dykta, whose default idea is to solve renewables problems with More Grid.
True - and at Ofgem too.
Can we go back to the days of the CEGB, a profitable enterprise owned by the state, staffed by engineers and chaired by a theoretical physicist who championed nuclear?
“Oh, what a tangled web we weave ...”. By a very appropriate coincidence, this quotation is also the opening line of Allison Pearson’s Telegraph article on the Mandelson mess which is about to bring down Starmer: https://www.telegraph.co.uk/news/2026/04/21/keir-starmer-olly-robbins-deserve-each-other/.
Thank you for the reference.
Coming from 35yrs in the water sector I have found all the years of market manipulation staggering. I strongly suspect the generators and retailers will cop for more criticism from bill payers when the chickens come home to roost. But as ever, with every single failure of the 'market' we always, with no exceptions, find the Government hiding in the shadows (of accountability). Of course they will be loading their guns and willingly firing them at the Companies whilst trying to convince the public that they are in fact the saviour. The more I see the clearer it becomes.
As both a regulator and an analyst in the water sector as well as energy and other infrastructure, I am surprised at the combination of naivete, incompetence, and sharp practice that is characteristic of many operators and retailers. They feel unable to be honest about the rules under which they operate but invariably some take full advantage of the opportunities offered. There is very little reward for straightforward competence and, indeed, most policymakers have absolutely no idea of what that looks like.
Both operators and retailers really need to understand that they are, in practice, the designated fall-guys for incompetent bureaucratic and political decision-making. Until they are willing to say that publicly and push back in the interests of consumers, they will consistently be treated as part of a stupid and even corrupt structure. But on the other side, the public suspicion of monopoly private operators is very strong and sometimes warranted. Meaningless guff about caring for customers merely exacerbates the cynicism.
Such is the level of anger directed toward utilities that I doubt they would get any hearing if they pushed back at Govt and Regulators. That anger has been whipped up by politicians eager to curry favour with small voters groups. The answer for me is less regulation and more customer research. I know first hand how Regulators rejected company research and I appreciate it is fraught with risk but frankly what we have today is almost as bad as it could be (only nationalisation will guarantee worse outcomes). Environmental legislation drives the cost of water supply and sewage treatment. The environment is important but the public have consistently deprioritised it against their other demands. But Govts have forced it on them. Some honesty about costs and trade-offs is required. BTW - another truly wonderful article Gordon.
A story from early in my period as chairman of the Scottish water regulator. I gave a talk at a conference based on a detailed analysis of changes in productivity and service costs of infrastructure utilities showing the large improvements since privatisation. It was greeted with almost astonishment by the audience and a lot of private criticism from our civil service counterparts. The lesson, which I tried to put aside, was that no one, including the operators, had any real interest in honesty and accuracy.
I think that you are only partially correct about environmental issues. There is a highly organised and vocal lobby on major issues, most of whom believe that other people (not themselves) should pay for improvements. The press relies on these people when reporting environmental incidents but are never willing to report on what is required to minimise such incidents. I agree entirely about the need for honesty about costs and trade-offs but crucially that kind of reporting is hugely resisted by politicians, bureaucrats and companies. In my view, regulators should act partly as educators for the general public but no-one really wants that because it implies that insiders lose control of the discussion.
I found some data on EGL paid by Drax and EdF Holdings from their accounts. Drax actually report their forward hedge sale revenue, price and volume broken down by subsidy regime as at report date, so we already know they will have no liability for 2026. They paid nothing for 2025, £161m for 2024 and £205m for 2023. EdF paid £416m for 2024 and £348m for 2023. No accounts for 2025 until ~July.
HMRC have just published an update of their data on tax receipts that shows the EGL provided
2023/24 £1,473m
2024/25 £749m
2025/26 £35m
Receipts relate to the previous accounting year for each firm, as the liability can only be calculated based on annual revenues. Time averaged day ahead prices were below the £80 cap for 2025-26, so there may be no tax to collect for that company accounts year. Current forward baseload prices average around £92/MWh for 2026/27, so there will be tax for baseload generators if that holds, but probably not so much for wind or solar, where realised prices are discounted to the straight time average (particularly solar). For later years the forward baseload prices drop substantially below the tax threshold, especially once you allow for the fact that the forward prices are money of the day, while the threshold will be indexed upwards.
That is also a huge issue for the other half of the Miliband proposals: to create a CFD basis in place of market revenue for ROC subsidised generators. The average wholesale revenues of wind and solar are being cannibalised by periods of excess production resulting in much lower market prices: these expectations should have been built into operations signing up to the terms. Solar revenues will erode particularly rapidly, as we get regular midday surpluses over summer months - the time of peak production from solar). Any fixed price CFD would favour solar unduly.
We already know from the AR3-5 CFDs with low strike prices that if there is the option not to commence the CFD generators will opt for market prices as long as they are permitted to do so (the Long Stop date, often several years after start of operations). So the plan to make the CFD optional will suffer the same fate if it is set at a low level, reflecting underlying gas cost (which is lower still because of the UKA carbon taxes). Set it too high, and consumers will be locked into high prices for the duration with a CPI escalator on top.
Given the reporting lag the numbers that you cite are similar to my calculations. The tax paid in 2023/24 was just a retrospective capital levy. For 2025/26 prices were low but I would also expect that generators had learned how to play the rules to reduce any tax liabilities.
I am not clear how the new CfDs are supposed to work. In particular, whether they will substitute for market sales while leaving ROC revenues in place. It would look extremely bad if an offshore wind farm with 2 ROCs per MWh were offered a CfD price of over £200 per MWh. A significant element for new build CfDs is that they represent security for lenders by removing price risk, though leaving output risk, meaning that the cash flows to service high levels of debt are more predictable. However, for ROC generators all of them will have paid off a large part of their debt and can use ROC revenues to service what is left. Thus, the risk-reward decision is quite different for the operators. On the other hand, it would be entirely in line with DESNZ's behaviour for it to offer CfD contracts that are particularly favourable for solar generators given the regular midday surplus during the summer (as in Germany).
As I understand it, the new CFD will set a (?single) price to which ROCs are added largely unchanged. In other ways it will probably operate like the rest of CFDs - i.e. based on Day Ahead hourly prices, with payouts financed up front via interim levies (and repayments only in arrears).
It has to be optional, because some ROC generators will already have other contracts in place that don’t price off the Day Ahead basis. We await the promised consultation to see the detail of what they actually propose. It will either be too cheap for volunteers to take it up, or too costly, landing consumers with bigger bills. Those with contracts that price off Day Ahead can simply dump their volumes into the DAM auctions or OTC DAM trade much as they do at present at least for weather surprise outputs. The auctions will offer pay as clear prices which may turn out to be lower than current ones because an increased volume will go through with a low reserve price - so the CFD subsidy will compensate. We see this already on the Continent, where more volume goes via auction.
In my mind the real question is what happens to hedging? Currently it is heavily based on quotes based off being able to hedge gas (which retailers need to do anyway, not just CCGT plants). Renewables can’t offer proper hedges because their output is far too uncertain. Yet where the new system provides more volumes at effectively fixed prices it is forcing retailers to pay at times when DAM prices would be depressed by high renewables outputs, while leaving them scrambling for cover via interconnectors, OCGT etc. for periods where renewables underperform. Gas has provided the cheapest hedges almost always, certainly in the volume required by the OFGEM cap or forward fixes - and they work even when the market is short of renewables. Take them out of the equation, and hedging cost (and hence retail prices) will rise. That happened during the Energy Crisis because there was no volume from nuclear due to risk of regulatory shutdown for maintenance (or actual shutdown for Grand Carénage), no volume from CFD biomass because BMRP was almost £400, and much reduced volume from everyone in general because of extremely high collateral requirements for mark-to-market positions and very high levels of initial margin to secure against market volatility intra day, with extreme performance risk for generators if forced to cover for plant breakdown at £££££. Hedging more than a short time ahead became almost impossible, which forced OFGEM to reset the cap quarterly.
There are proposals to amend the detail of ROCs because as they run off/expire there is considerable potential volatility in recycle values. Floated ideas include simply boosting the cashout price by 10% and paying that as a fixed level per ROC, CPI indexed. There would be no secondary market and recycle game, with the money collected by levies, much as with CFDs - though there are big cashflow timing issues as ROC payment can be deferred until well after year end, whereas CFDs are funded in advance.
Yes - get that. And of course the ROC element of what generators get is not linked to the wholesale price - so that was poor thinking on my part. Part of what you are identifying in the design of the tax (which came from the last government of course) is that it is calculated based on the average revenues/MWH of the given generator compared to a fixed benchmark - which means that if you have lower marginal costs and get used more often when prices are low, you end up paying less. Intuitively that isnt right if the objective of the tax is to capture an element of surplus which would not reasonably have been expected by investors. The surplus per hour for a solar generator with a ROC compared to their expectations in more 'normal' trading conditions will be different from the surplus that a nuclear generator gets, but not that different. So perhaps the tax needs to be calculated based on the difference between some kind of market average and the £75 base (as adjusted for inflation), and then apply to all in-scope generators.
I think that this is attempting to tweak what is conceptually a very poor tax. Further, the whole point of the EGL is that it is intended to operate as an extension to corporation tax, so that its structure must rely on data that is easily available from company or group accounts. Defining and taxing "excess profits" has always been a pointless exercise in chasing a chimera.
If you made it a tax that only applies when the price is high then it may leave consumers paying very high prices indeed. It becomes interesting to withdraw some generation from the market, forcing the use of high cost marginal generators like OCGT, and forcing up prices much higher. Exempt generation gets big profits, The high price will at least pay the taxes on the renewables.
The electricity market is big and few suppliers have any significant impact on the market. That is why Drax and EDF are important because they can each account for 10-20% of supply in many periods - SSE is the same in Scotland when transmission capacity is constrained. For technical operating reasons EDF doesn't really want to adjust its nuclear output by much from period to period. Drax's position is more complicated but I am sure that they would want to avoid claims of market manipulation - remember all of the measures faced by National Power and Powergen in the 1990s when they tried to be too clever. There is no doubt in my mind that SSE has played games in Scotland in the past over transmission capacity, esp from Peterhead, but they have become more careful since being warned by Ofgem.
I've looked at Drax' operation quite closely, and recently wrote this summary of how they respond to the market to optimise.
https://davidturver.substack.com/p/the-dying-embers-of-net-zero-propaganda/comment/245992108
The CFD is priced against a Baseload Market Reference Price, which is set for 6 months at a time, based on forward trade for the summer/winter as appropriate in the preceding 6 months, so it is out of phase with Day Ahead based Intermittent Market Reference Prices. However, because it is constant effectively it is either a fixed subsidy or tax, and Drax can respond to market conditions for both ROC and CFD subsidies. They take full advantage of their contracts and are very commercial in their approach, but I think above reproach on that score.
I expect they will take advantage of the ability to offset purchased power as a cost in calculating their EGL liability. They can buy in renewable generation against forward sales they have made and cut their own generation which would be unprofitable at the Day Ahead price - saving the fuel for a higher margin day.
https://www.gov.uk/hmrc-internal-manuals/electricity-generator-levy-manual/egl24100
A couple of points. First, I did not mean to suggest that Drax do anything improper. I think that they rely on staff and advisers who are much smarter than DESNZ or HMRC, because they have much more to gain from playing the rules intelligently. Second, I have not looked at all of the details but my reading of the new subsidy arrangement for Drax does not limit how much they can produce. It does limit the amount of output for which it earns the high CfD strike price. Clearly they have a strong incentive not to generate when expected wind and solar output is high relative to demand. However, their actual behaviour will depend on warm-up and cool-down costs, especially from a cold start. I suspect that they will want to invest in reducing start-up & ramp costs or running some units at 10% of output to allow the plant to operate from, say 16.00 to 22.00 most evenings as well as during autumn/winter periods of low wind.
Yes, the subsidy is limited to 27% of annual capacity, and there is also a floor of at least 22% (allegedly saving on procuring gas in the CM), and profit clawbacks at 30 and 60% rates for “excess profit” (detail not disclosed). I’m sure they’re much smarter than DESNZ.
https://questions-statements.parliament.uk/written-statements/detail/2025-02-10/hcws424#
I don't quite follow your example, but I can see that this kind of approach does lead to potential for different kinds of tactical behaviour, and that it is based on a theoretical distinction between generation which benefits from a rise in the price of gas and those who don't, when in practice things are more nuanced. So perhaps it is a dead end. But one last try! Say there is a tax which is paid on every MWH of generation other than from gas or covered by a CFD which is equal to the excess rate (now 55%) multiplied by the difference between the average wholesale price per MWH across a quarter and £85 (say). It can never be negative. So if the average wholesale price was £135, then ROC generators, EDF, Hydro would all pay an extra £27.50 tax / MWH generated regardless of what they sold their output for. The reasoning would be that these have largely fixed marginal costs and benefit from increased marginal revenues which are to some considerable extent related to the shift in the level of the whole market. There would be less incentive for Drax to turn down CFD generatoin in favour of this - though some games will still get played. The existence of the tax and the rules would need to be set out well (2 years?) in advance so that it can be anticipated within hedging strategies (though probably not fully covered) And it is more likely to help the objective of getting ROC generators to switch to a CFD at a more reasonable price.
This is like all windfall taxes. It is predicated on the assumption that "no investor" expected to receive high prices when making their investment, so the additional revenue from high prices are an unanticipated gain that can be taxed without significant consequences. Then, for symmetry, why don't you propose a negative tax/subsidy when the average price is less than, say £50 per MWh?
Any investor - and economists with experience of the sector around the world - knows that what are, in effect, price caps are almost always asymmetric and designed to cap returns in periods when prices are high. The lesson of history is that it is always possible to tax captive assets. But do it once and all future investors will assume that it will happen again when politically convenient. Thus they change their behaviour to demand higher prices/returns all the time to compensate for the expectation that they will be subject to such taxes at some time in the future.
Rent control is the same thing - transferring income from investors to tenants is convenient when investors are captive but the effects are dire in the longer term.
I agree with all of the above - but it is still a less bad option than reneging completely on contractual commitments such as CFD's, ROC's as some politicians are proposing
DESNZ, as competent in managing the power sector as DEFRA are at managing the agricultural sector....
Must be nice to be paid well with an excellent pension plan when it appears you have no idea what you are doing......
I think that it is very hard to write the job requirements for senior civil servants responsible for sectors like electricity. Clearly they should be technical competent and able - the civil service doesn't pay enough to keep those with such characteristics. There is also the issue of how long they should stay in post. Rotating every 2 years is ridiculous but we don't want people in post for so long that they block all change. Maybe 5 years should be a minimum and perhaps not more than 8 years.
Thank you.
I would think the advantages of including the ROC revenues in the benchmark rather than simply reducing the ROC are (a) that it retains the link between the level of clawback and the level of unanticipated surplus due to external factors and (b) that a tax increase might have less impact on future investment than undoing a previous government commitment
It would be a horrible shock for solar & wind generators. Remember that some of them get 2 ROCs per MWh. At a buyout price of £69.34 per ROC that would imply a tax of more than £76 per MWh. There is no way that isn't going to create a storm. Even at 1 ROC per MWh for many onshore wind farms it is a tax of £38 per MWh. Those are far more than any increase in average wholesale revenue. If you are going to do that, then you might as well legislate to change the whole system. DESNZ under the current administration is not going to do that.
Thank you Gordon. As I had understood it, the government's main intention here was to reduce future revenue expectations for renewables generators with ROC's in order to make an offer of conversion to a fixed (CFD) price which brings down their average revenue more attractive, leading to lower long term prices than we would otherwise see. But if as you say this group of generators is not going to be affected, then all you get is some unintended consequences. How would the government have had to change the regime in order to materially affect the decisions of renewables generators with ROC's? Should it include revenues from the ROC's in the definition of revenue for the EGL benchmark - or does that cause other problems?
Re your last sentence: Yes, that would clearly change incentives. However, it would also lead to a huge hoo-ha, similar to what happened when the FIT tariffs for solar were drastically lowered. And if you are going to do that it would be much simpler just to lower the RO and the buyout price.
I am not inclined to accept your initial interpretation. I see no desire on the part of DESNZ to bite the hands of renewable generators who are the only people who support current policies. In reality, it is just a rather ineffective shakedown of EDF, given that Drax has already agreed a revised subsidy regime for 2027-31.
Thankyou for explaining this saves me the trouble of having to research as i suspected it was more bravodo than a significant change. That i surmise will come from REMA MkII whenever they get around to concluding the consultation and potentially these announcement give us a steer that DESNZ will be going down splitting renewables out from gas. If not they will surely need to address how they manage the dwindling use of gas.
I am unconvinced that DESNZ has any coherent idea of what they are doing. My brief engagement with REMA was depressing in the extreme with respect to the competence of the DESNZ staff involved. The whole process was captured by lobbyists, who in turn had no coherent idea of what a system might look other than serving their particular interests. Equally it is clear that Ofgem has been captured and is completely at sea.
A small correction: the EGL threshold was ~£80 for 2025-26. It is £82.61 for 2026-27.
https://www.gov.uk/hmrc-internal-manuals/electricity-generator-levy-manual/egl21000
Thank you for the correction. I got the dating of the indexation wrong. I will amend the article.
Just when one thought I government had reached peak stupidity on the subject, one finds its a false peak. I was unclear if imports would be subject to the tax but if they were then EDF France would I assume take that into account when directing exports as I suppose would other exporters? In the winter during high demand for conventional power the UK would in a permanent disadvantaged position in the market so would not receive power.
The people who designed the EGL are foolish but not quite that stupid. Imports of electricity are excluded from the EGL calculations as is all gas and similar generation.
I think you comments about making future changes to the subsidy regimes are looking more solid. This could be just another example of the current government signing up to things for which they had no mandate to pander to their special interest groups in the knowledge that the next election is almost certainly lost. Its the government version of the old commercial poison pill defense for hostile takeovers.
Yes, the poison pill aspect is very clear. But unlike corporate poison pills, Parliament has the right to sweep away policy poison pills and the actions of DESNZ increase the likelihood that may happen.
Umm isnt this going to incentivise some generators to try and substitute imports when prices are higher?
I have tried to work through the incentives for different generators. They are very complicated because the rules are such a mess. I am pretty sure that Drax has an incentive to run its pumped hydro and gas plants rather than its biomass units when prices are high - in part because it operates clearly as a group.
You are right that there is a general incentive to substitute imports for own production when there is a risk that own production will push average revenue per MWh over the threshold. The reason is that the tax applies to total annual production minus exclusions, not just marginal production. I suspect that DESNZ and Treasury got their analysis of the impacts wrong by failing to understand this asymmetry when the tax was initially introduced. Now, it is just posturing by DESNZ.
Brilliant article, has anyone confronted this shameless Energy minister and his disciples with this well constructed analysis of the mess the UK is in?
Thank you. My personal experience is the DESNZ (and its predecessors) treat most critics as "heretics". That is a literal statement from Kwasi Kwarteng about me when he was Secretary of State of DECC or BEIS.
Kwarteng was among the more hapless ministers in the role. Didn't have a clue how to tackle the energy crisis and cost the country a fortune in consequence. Precisely through that "heretic" attitude that refused e.g. to try to organise baseload coal to save gas.
I have no personal experience of dealing with Kwarteng. I think that as much as anything he was reflecting the views of his civil servants. I do know from other experience that they are almost desperate not to have their core beliefs challenged.
I fed him advice via a well respected backbencher who grasped the message thoroughly. We were ignored. Doubtless because of Sir Humphrey.
Thank you Gordon. The web is sufficiently tangled that Joe Public has very little chance of seeing what's really going on, beyond his bills, but surely with inexorably rising prices, he's going to be smelling the rat before too long. Or will he remain taken in by stories and keywords like Ukraine, Iran, the wrong sort of gas, and gas plants burning less efficiently due to carbon dioxide in the atmosphere?
Governments seem to find innovative ways of messing up energy markets, so I eagerly await your recipe for how it should be done, or a least-worst approach.
I think that there are two reasons why widespread popular understanding is difficult - quite apart from deliberate incompetence of journalists. First, for many people gas is more important than electricity as the primary influence on their total energy bills. There is a more direct link from gas prices to bill payments so the story that gas prices drive everything seems plausible. Second, the electricity sector and market is undoubtedly complicated. Everyone understands that it is critical to modern life, but for most people it falls in the category of rocket science. So over-simplified stories are hard to correct.
Unfortunately, change is going to be very painful for those who benefit from what has become a massive transfer from electricity users to special interests. Thus, it will strongly resisted on what are, empirically, entirely spurious grounds. That is what frightens politicians proposing change.
Thank you again. The influence over politicians of lobbyists with little merit really riles me and makes me recall Thatcher: “When I'm out of politics I'm going to run a business; it'll be called rent-a-spine” .
The reason is simple and is illustrated by an example. For a period the nuclear technology division of DESNZ was run by a staff member with an arts degree whose primary experience was as a supermarket manager. Quite possibly, a bright and well-intentioned person but an unchallenged example of an amateur bureaucrat. Such people are completely ill-equipped to argue with Rolls Royce over SMRs.
Yes but: the essential mantra for even someone wholly technically unqualified should be "follow the money". I thought having tenured academics without a financial stake as advisors was a means of protection against skilled lobbying. Maybe not?
Not really unless you make a very determined effort to recruit people with differing views and from different institutions. DESNZ has relied very heavily on a very small group of what might be called "insiders".