Oh, what a tangled web we weave ...

The full quote from Sir Walter Scott’s poem Marmion is “Oh, what a tangled web we weave, / when first we practice to deceive”. It applies directly to the mess that the UK government has got itself into concerning electricity prices. On April 21^st DESNZ, reinforced by the Prime Minister and the Chancellor, announced two significant policy changes. The first change was an increase in the Electricity Generator Levy (EGL) from 45% to 55%. The second change was the (proposed) introduction of voluntary Wholesale CfD (WCfD) contracts for renewable generators that currently receive Renewable Obligation Certificates under the Renewable Obligation (RO) scheme. One key motivation for the second change is to undo the damage done by the first change.

As one might expect, mainstream journalists at BBC and other outlets reported the changes by cutting and pasting text from the DESNZ press release and briefings. The changes were duly reported as an important shakeup in the way in which electricity is priced. Such claims demonstrate that neither the journalists nor the DESNZ have any understanding of the way electricity markets work. What is worse, the net effect of the changes in the short and longer term will be to increase, not decrease the average prices paid by commercial and household users.

First, what is the EGL? It is, in effect, a heavy windfall tax – at a rate of 80% after allowing for corporation tax - on marginal revenues from electricity sales earned by certain generators when their average revenue per MWh over a year exceeds a threshold of £82.61 per MWh for 2026-27. Revenues from CfD contracts and ROC certificates are excluded from this calculation. In practice, it is a tax on (a) EDF nuclear plants, (b) some units of the Drax biomass plant, (c) SSE’s storage hydro plants, and (d) renewable generators registered under the RO scheme. It was introduced in 2023 by the previous government which claimed that such generators were earning unwarranted profits because high gas prices from 2021 to 2023 had pushed up wholesale electricity prices.

The original logic was always codswallop. While gas prices did rise from 2021 (well before the Ukraine war) to a peak in 2022, the key factor pushing wholesale electricity prices up was a maintenance crisis in the French nuclear sector exacerbated by the closure of German nuclear plants. The UK is heavily reliant on imports of electricity, primarily from France. When French nuclear production was severely constrained, demand from other countries in Europe led to a switch in trade flows, so that UK electricity imports became exports at much higher prices. It was convenient to blame gas prices for what was, in fact, the inevitable consequence of heavy reliance on imports that were no longer available because of constrained European production.

The EGL scheme is complicated and full of exemptions or loopholes that offer huge opportunities for creative tax lawyers and accountants. In principle, the scheme applies at the level of groups of companies – parent companies plus their 75% owned subsidiaries plus subsidiaries of subsidiaries. It must deal with joint ventures – i.e. special purpose vehicles that are not a subsidiary of the parent company or one of its subsidiaries. Since this is the dominant form of company structure for renewable generation, the rules concerning joint ventures are critical but very sloppily drafted.

There are also various provisions to deal with a common arrangement under which a generator sells its output under a power purchase agreement (PPA) with an associated trading operation, which may not be classed as a member of the group of companies. The whole scheme is a mess because it was devised as an add-on to corporation tax in an industry in which corporation tax was already complicated and unsatisfactory.

The table below abstracts from these complications by showing the average market prices per MWh of output for different type of generation covered by the EGL. In practice, generators will have little difficulty in reducing their taxable revenues by at least 10% and probably 20% below these averages. The taxable threshold was £75 per MWh in 2023 rising to about £80 per MWh in 2025-26 and is £82.61 for 2026-27.

The amount of EGL liability was close to zero in in 2024. It was a bit higher in 2025 with the liability concentrated among biomass and hydro plants – i.e. primarily Drax and SSE. If the averages for 2026 to date apply for the year, EDF’s nuclear output may generate some liability for EGL. The average market prices for solar, offshore wind and onshore wind have been consistently below or close to the threshold prices.

When examined in detail the EGL is a classic example of a poorly designed tax. It is expensive to administer (both for tax authorities and taxpayers), it collects very little tax revenue, and it is likely to have major disincentive effects on the behaviour of generators. Even in 2023, the year of the highest average prices, the maximum possible tax revenue was about £750 million, paid largely by Drax and EDF. At the higher tax rate of 55% the maximum tax revenue for 2026 will be about £270 million, again paid almost entirely by Drax and EDF.

The EGL is little different from a protection racket. Revenues are collected from two captive companies who own immoveable assets that can be conveniently shaken down by a government that is desperately short of tax revenue. While many may have little sympathy for these companies, they should beware of the lessons that future investors will draw both from the original introduction of the tax and the recent increase in the tax rate.

Like most protection rackets, the total revenue collected by the EGL is small change when compared with the potential yield from a more efficient and better implemented set of policies. The suggestion, made by the Chancellor and DESNZ in announcing the recent change, that the revenues could be used to fund support for those affected by high energy prices is ridiculous. It is an illustration of the desperation of the current government – as well as the ignorance of mainstream journalists - that such a claim should be made and treated seriously by newspapers and broadcasters.

The primary lesson for any investor is the familiar one from the Bible of “put not your trust in princes”. The shakedown is limited by the fact that if EDF were to close its nuclear plants, the UK electricity would collapse more or less immediately. While more than 4 GW of nuclear generation can be replaced in the short term by gas generation, the cost and reliability of alternative supplies would pose extreme problems for the system operator.

Perhaps the best way of seeing the relationship between the UK government and EDF is one of mutually assured destruction. Of course, the government can nationalise the existing nuclear plants but without the involvement of EDF neither Hinkley Point C and Sizewell C will ever be completed, while the damage to the confidence of alternative investors would be fatal. Further, and most important, if the French government were to block all electricity exports to the UK including indirect exports over the interconnectors from Belgium and the Netherlands, the UK’s electricity system would fail very quickly. Equally, the shock to EDF’s revenues and balance sheet might be fatal for the company.

The situation of EDF nuclear plants – and, to a minor extent, SSE’s hydro plants – is different from Drax’s biomass units. Currently, one Drax unit is covered by a CfD contract, while three units receive a relatively generous award of ROCs. From April 2027 to 2031, the four units will receive CfD payments with a strike price of close to £160 per MWh at 2025 prices for about one-third of their potential output and can sell the remainder of their output at market prices. Market sales will be subject to the EGL. Drax has a record of not producing from its CfD unit when the market price exceeds the strike price, because it prefers to use its limited supplies of wood chips in the way that yields the highest earnings.

Naturally, Drax will take account of the increased level of the EGL in deciding when and how much to generate on market terms. Since the EGL greatly reduces the profitability of future market generation when compared to the existing structure of market price plus ROC value, it seems quite likely that Drax will significantly reduce its output above the level of the CfD cap. However, because Drax owns pumped hydro and gas plants as well as a trading operation, the EGL rules on group revenues are likely to encourage a variety of adjustments in both generation and trades to minimise the impact of the EGL. This illustrates the unintended consequences of a foolish tax introduced for PR rather sound economic reasons.

Setting aside Drax, EDF and SSE’s hydro plants, the government has offered to shelter current RO generators from the EGL by offering them what are called Wholesale CfD (WCfD) contracts. The provisions of such contracts are entirely unclear. The initial suspicion is that this is just a way of bringing older renewable plants under the CfD scheme in the hope that a future government will be less able to cancel the subsidies that they receive. This would be little more than an attempt to foreclose options for future governments. It is unlikely to succeed. The behaviour is so blatant that it might encourage any future government opposed to large subsidies for renewable generation simply to terminate all CfD contracts on the grounds that they are just payments to special interest groups.

Putting political games aside, few RO generators will agree to replace their ROC eligibility by a WCfD contract, unless this offers a significant increase in the expected level of subsidy received to compensate them for the uncertainty and costs involved. One route for offering such an increase would be to extend the period for which subsidies are provided. In most cases, this is not attractive. High discount rates and the decline in output as plants age mean that the present value of extending subsidies from the standard 20 years under the RO to 25 or 30 years will be low.

To persuade RO generators to switch to WCfD contracts it will be necessary to offer a strike price that is substantially greater than the expected sum of the market value and the value of the ROCs earned. Since the EGL has had a minimal impact on solar, wind and other RO generators, the increase in the EGL tax rate is largely irrelevant to such decisions.

Thus, the most likely consequence of the contract substitution proposed by DESNZ will be a significant increase in the cost of renewable subsidies that has to be funded by electricity consumers. That is not what the press release and associated public statements say, but the outcome is almost inevitable.

Seen in the harshest light, DESNZ’s proposals amount to a scheme to pay its friends in the renewables industry to accept a small or large bunce (funded by electricity users) to switch to contracts designed to make it more difficult to reduce such subsidies in future. What’s not to like from the perspective of firms being offered such a deal? However, the views of electricity users, if they ever catch on to what is going one, may be somewhat different. Who knows? DESNZ may have one of Baldrick’s cunning plans that it has yet to reveal.

Oh, what a tangled web this government weaves!

[Note 23-04-2026: Corrected EGL threshold for 2026-27. ]