On April 21, the government announced two changes to how it would tax and contract with renewable generators in response to rising energy costs following the crisis in the Middle East.

The Electricity Generator Levy (EGL) is rising from 45% to 55% on 1 July 2026, applying to generators producing more than 50 GWh a year with group revenue above £10 million. From July, these generators pay 55p on every pound they earn above the levy threshold. Corporation tax then applies to whatever is left — so the government’s total take on that pound is above the headline rate.

Alongside that, the government is offering a new voluntary fixed-price contract — a Wholesale Contract for Difference (CfD) — specifically for generators currently on the Renewables Obligation. Take the contract, and the higher levy rate doesn't apply. The first auction is expected sometime in 2027.

Let's dive into what the policy is actually doing — and where the logic runs into trouble.

Why the EGL increase is harder to justify than it looks

The EGL came into effect in January 2023, introduced as a temporary measure designed to run until March 2028. Prices had spiked, profits were exceptional, and a levy on excess returns was a reasonable response to an unusual moment.

But EGL revenue has already fallen from £1.4 billion in 2023/24 to £0.7 billion in 2024/25, because wholesale prices fell below the threshold the levy was designed to target. Raising the rate at this moment suggests the policy is no longer primarily about capturing excess returns. It's about pushing generators toward the CfD.

That is a significant shift in what the levy is doing. What started as a fair tax on exceptional profits is being used as a mechanism to pressure generators into a government pricing arrangement. Those are different things, and it's worth naming them as such.

There's a deeper problem too. The assumption behind the levy is that generators are capturing the margin when prices spike. In many cases, they aren't. Generators typically sell their power months in advance at a locked-in price. When the spot market surges, it's the traders who bought that forward power cheaply and resell it at the higher day-ahead price who capture the margin — not the generator who produced it. The levy taxes the visible part of the market while the layer where the value actually sits goes untouched.

Whether the CfD solves the problem

The government's stated aim is to lower electricity bills by reducing the influence of gas prices on what renewable generators earn. The CfD could be the tool for that. But there are a few things worth understanding before that logic is accepted at face value.

The gap between the punishment and the alternative is real. The higher levy rate takes effect on 1 July 2026. The CfD auction isn't until sometime in 2027. Generators on the RO who might want to take the contract simply pay more in the interim, with no alternative available yet.

Fixed price doesn't mean fixed income. Under the current CfD structure, when market prices go negative — which happens on high-wind, low-demand days — generators are required to stop producing. The guaranteed price applies per unit generated, but there's no guarantee on volume. On the days when renewable output is highest and grid demand is lowest, generators can earn nothing at all.

Generators lose commercial flexibility. Under the RO, generators retain their subsidy and **commercial flexibility in the route to market they chose. Whether giving that up for a CfD is worth it depends entirely on two numbers that haven't been published yet: the strike price per technology and the contract length. Set the price too high and consumers get locked into above-market rates. Set it too low and generators don't take it. The net effect is a 10 percentage point tax increase with nothing to show for it on consumer bills. Is the government planning to offer generators a premium to make this attractive — and if so, does that cost end up on business energy bills?

In the short term, none of this helps businesses facing high bills now. These are structural changes to how generators are contracted and taxed. They don't touch the wholesale pricing mechanism that passes gas costs through to electricity prices for every business in the UK.

What would actually help

The UK doesn't have a generation problem. Renewables are now the biggest source of electricity on the grid. The problem is structural: the wholesale pricing mechanism keeps tying the cost of clean energy to the cost of gas, and the transaction layer between generators and businesses extracts significant value before it reaches either side.

The government is trying to solve a pricing problem with a tax and a subsidy. That combination doesn't change the architecture of how value flows — or doesn't — through the market. tem's model removes the intermediary layer entirely, so more of what a business pays reaches the generator and more of what the generator earns reflects the actual value of their electricity. The government is trying to tax around a problem that better market infrastructure solves structurally.

EGL revenue halved in a single year. The government's response was to raise the rate.

That's a signal worth paying attention to.