Affordability first: Budget 2026 and the Energy Independence Bill

Over the past two weeks, the government has made two significant sets of energy policy announcements: the Budget on 28 October, followed by the Energy Independence Bill on 4 November. Both have changed how this government proposes to prioritise, fund and take forward key energy programmes.  

Household affordability was the overriding theme of the Budget’s energy measures. The government announced around £3.7bn of Exchequer funding for household support and has committed to no new policy costs on bills until a Cost Control Framework is in place at the 2027 Spending Review, unless adding these costs would bring bills down or is essential for security of supply. 

In parallel, decarbonisation funding was squeezed: the Department for Energy Security and Net Zero’s (DESNZ) capital budget will be reduced by around £5.6bn, with the cuts coming from household retrofit, carbon capture, utilisation and storage (CCUS), and hydrogen programmes. 

Two measures are particularly important for market participants: a proposal to offer wholesale Contracts for Difference (CfDs) to eligible existing low-carbon generators through an auction; and a package intended to accelerate grid connections, including a Data Centre Covenant for strategic data centres, which could support electricity demand growth and lower bills for other consumers. 

The Bill then puts several commitments into legislation. These include supporting plans to remove domestic gas standing charges; making permanent the transfer of 75% of domestic Renewables Obligation (RO) costs to the Exchequer; strengthening Ofgem’s powers; and allowing ministers to require developers to offer communities up to a 20% stake in new renewable projects. 

Household support is the priority 

The 0% VAT rate on domestic electricity is extended to July 2027, and a £2.6bn Household Energy Payment will give £100 to households in council tax bands A to D in England from January 2027. Together these cost around £3.7bn, with the temporary increase in the Bank Corporation Tax Surcharge from 3% to 6% raising around £1.5bn towards this. A new Energy Debt Circuit Breaker is also introduced to tackle energy debt, comprising reforms to stop arrears building up and a one-off debt relief scheme for eligible households. The government expects this, combined with payment method reforms, to save a typical household almost £30 by 2030. 

The government has asked Ofgem to abolish domestic gas standing charges, aiming for the end of 2027, with the costs recovered through unit rates instead. This helps low users at the expense of high users and, as gas demand falls with electrification (albeit more slowly than previously assumed), will push up unit costs for households that stay on gas. The Budget also includes a Corporation Tax deferral for gas distribution networks and promises a consultation on Market Arrangements for Gas, but provides little further detail. This leaves an important policy and regulatory question for networks and investors: how will network costs be recovered as gas demand declines? Over time, protecting households that remain dependent on gas may require some costs to move outside the bills framework. 

Stronger controls on adding policy costs to bills 

Until now DESNZ, and DECC and BEIS before it, has funded programmes such as the Renewables Obligation, feed-in tariffs and CfDs through a supplier obligation which passed costs through to bills. This in effect gave DESNZ its own tax and spending powers. The key change now is that the government has set a higher bar for adding new policy costs to bills. The Budget announced a Cost Control Framework, that will be introduced as part of the 2027 Spending Review, which will set budgets for each component of energy costs, including policy costs. 

This continues the recent policy direction to move costs off bills and onto the Exchequer, with closer scrutiny of anything new. The last Budget scrapped the Energy Company Obligation (ECO) levy and moved 75% of Renewables Obligation costs to the Exchequer, a then temporary measure which the Energy Independence Bill now legislates for. From April 2027 the British Industrial Competitiveness Scheme, announced in April 2026, will exempt over 10,000 manufacturers from the indirect costs of the RO, feed-in tariffs and the Capacity Market, again funded by the Exchequer. This Budget has also scrapped the planned Gas Shipper Obligation, so hydrogen contracts will be funded by the Exchequer instead. 

However, the Budget is ambiguous about what the exact controls will be. Its headline statement is no new policy costs until the framework is in place, while also stating that costs which bring bills down or are essential for security of supply will be allowed. The government says contracts will be awarded to new generation that lowers bills, can be accommodated by the grid and, according to its headline description, benefits the system. However, the detailed text does not include the “benefits the system” criterion and the government has not yet set out the framework’s coverage, accounting treatment, how it will be enforced, or when the detail will be published. 

This is not the first attempt by a government to do this. Previous measures such as the Levy Control Framework (2011) and the Control for Low Carbon Levies (2017) were described in similar terms and had limited effect in practice, and levy-funded schemes were already subject to Treasury and parliamentary oversight. The new framework could prove broader than the previous attempts, as it is intended to cover every component of energy costs rather than just low-carbon levies, but until the detail is published, its practical impact, beyond reinforcing the political focus on lowering bills, will be uncertain. 

Until the framework is in place, new bill-funded support will need to be justified on bill savings or security of supply; after that, the Spending Review will set the budget for what costs each scheme can recover through bills. Projects that could be affected by this change in approach include long-duration storage, if Ofgem’s assessment of cap and floor projects shows a net cost to bills, and power CCUS (through Dispatchable Power Agreements) and new nuclear, whose contracts are funded through bills and which will need to make the case that projects are necessary for security of supply or will reduce bills. The Capacity Market should, in principle, be unaffected, as it already exists explicitly for security of supply. 

The immediate test will be the eighth CfD allocation round (AR8), which the Budget says “will lower bills”. The question is what definition is used for “lower bills” and what this means in practice. Solar appears well-placed given its cost advantage, and likelihood of being located in unconstrained zones, while uncertainty has increased for higher-cost offshore wind, particularly remote Scottish and floating projects. For offshore wind, the government may respond by setting relatively cautious initial budgets, with scope to increase auction clearing levels if additional capacity demonstrates value for money. However, in AR8 the Secretary of State sees only anonymised bids (price and capacity), not project locations, so the ability to clear only projects that do not significantly increase system cost will be limited. 

Existing low-carbon generators: a wholesale CfD or stay merchant? 

The Budget confirms the government’s intention to offer wholesale CfDs to eligible existing low-carbon generators, which supply around 30% of GB power, and a consultation on the design was published alongside it, closing on 9 December. DESNZ expects to run the allocation round towards the end of 2027, with contracts awarded in 2028. 

The key design details include: a single, one-off auction run separately from the standard CfD rounds, a pay-as-clear format with sealed bids; and contracts lasting five or ten years. Much is still to be confirmed, including contract length options, indexation, the minimum capacity threshold and flexibility on start dates. The consultation also asks whether legacy nuclear should be eligible and seeks views on including RO revenue within the wholesale CfD. Volumes that will be covered by the auctions are unclear, but the consultation’s upper estimate is that 33.2GW could take part, falling to 26.9GW with a 10MW threshold. The consultation acknowledges that this overstates operating capacity, and not every eligible generator will bid in or clear the auction. 

Other measures could affect merchant revenues. The Electricity Generator Levy, now 55% on revenues above a benchmark of £83/MWh, will last as long as the longest wholesale CfD, so a generator that remains merchant will continue to give up 55% of any upside above £83/MWh for as long as any asset holds a wholesale CfD. Ending Carbon Price Support from April 2028 has a similar effect and these measures together reduce the value of staying out of the wholesale CfD scheme, which may push auction bids lower. With the Climate Change Levy on electricity frozen from the same date, the implied tax burden on electricity should fall relative to gas, in line with the government’s ambition to increase electrification and therefore electricity demand. 

Our view is that overall savings to consumers are likely to be modest. The ultimate impact will depend on the clearing strike price and outturn gas prices. If bidders price in sustained high gas prices and these then fall back to pre-crisis levels, consumers may end up topping up generators that would otherwise have earned less under the RO. However, if gas prices remain high, or if bidders price on the expectation that gas prices will fall rapidly, the outcome could be favourable for consumers. 

DESNZ capital budgets cut to fund defence and other priorities 

The Budget imposed cuts on DESNZ’s capital budget by around £5.6bn over 2026-27 to 2029-30 compared with the plans set at Budget 2025, reducing from £41.7bn to £36.1bn.  

Around £2.3bn of these cuts comes from announced but unspent grant funding: £1bn from the Warm Homes Plan, £500m from hydrogen transport, £200m from CCUS and £200m from Great British Energy (GBE) and GBE-Nuclear (which keep £8.3bn), with the remaining £0.4bn or so not specified. The larger share, around £3.2bn over the period, falls on DESNZ’s budget for loans and equity investments; in 2029-30 alone, this budget will now reach £2.6bn rather than the planned £4.5bn. Programmes already in delivery are largely protected, so the cuts fall mainly on household retrofit and on projects still in development. 

The money appears to have been reallocated to fund other government priorities, including the Defence Investment Plan, a £2 bus fare cap, and the £4.7bn Your First Home scheme. The headline fall in DESNZ capital from £11.5bn in 2025-26 to £8.1bn in 2026-27 is mostly Sizewell C moving off the departmental budget, which itself is not cut. 

The main message is that DESNZ capital funding for decarbonisation is now further contested, competing with other government capital priorities. This tension is likely to continue at the next Spending Review, with DESNZ potentially emerging as a smaller spending and delivery department than envisaged at the previous Budget. 

Household electrification 

Most of the £3.2bn cut to loans and equity has come from the Warm Homes Plan, which had £5bn of loans within its £13.2bn budget at the 2025 Spending Review (GBE’s £4bn of investment capacity is part of the £8.3bn that has been maintained). Around £1bn of grant funding has also been cut. The Boiler Upgrade Scheme is protected at £400m in 2027-28, rising broadly with inflation, as is most funding for low-income households and social housing. 

The Warm Homes Plan was intended to support domestic heat pumps, solar and batteries as well as insulation, and was the main package of support for household electrification, one of the Budget’s main themes. It is now significantly smaller, and the new Warm Homes Loan Scheme has a reduced budget too. The Energy Independence Bill puts the Warm Homes Agency on a statutory footing and gives councils stronger powers to enforce minimum energy efficiency standards in private rented homes, with penalties of up to £30,000, though the provisions do not specify new funding. 

This is one of the clearest signals of the shift in priorities from long-term savings to relief which can be delivered today. The government previously justified the Warm Homes Plan as investment now to support decarbonisation and cut household bills in the longer term, yet this funding has been cut at the same time as £2.6bn is being spent on £100 Household Energy Payments. 

CCUS and hydrogen 

Funding is maintained for mature CCUS and hydrogen projects in the Teesside and HyNet (Merseyside and North Wales) clusters, along with grant funding for the Viking cluster. £200m of previously announced CCUS capital grant has been cut. Projects still in development, including the Viking and Acorn clusters, could be supported through government loans or equity, subject to approval and a return for taxpayers. 

As DESNZ’s loans and equity budget has also been cut, routes to funding for these projects will be narrower and more competitive. The £2bn Energy Wealth Fund within the National Wealth Fund could fill some of the gap, although it has a strict requirement to earn a return above gilts. Gas CCUS power projects still need Dispatchable Power Agreements, which are funded through bills and so face the same test on bills and security of supply as new CfDs outlined above. 

For hydrogen the changes are more significant. The planned Gas Shipper Obligation, a levy on gas bills, has been scrapped. Contracts agreed under the first Hydrogen Allocation Round (HAR1), including Cromarty and West Wales at Milford Haven, which were planned to be funded by this levy, will be honoured and funded by the Exchequer instead. The Exchequer will also fund any future hydrogen contracts, for example the 350MW blue hydrogen production plant under negotiation in the HyNet cluster (HPP1), if the government commits and is convinced of value for money. 

Scrapping the Gas Shipper Obligation in effect closes the consumer subsidy route to funding for hydrogen production, which these projects rely on to be commercially viable. HAR2 projects will move to Invite to Offer shortly, but the decision on whether and how to fund them has been deferred to the 2027 Spending Review. Without a levy, any future production contracts will compete directly with other priorities for Exchequer funding, which worsens their outlook. 

The £500m of capital intended for a first regional hydrogen network this Parliament has been reallocated to close the defence funding gap. Programme delays meant it was unlikely to be spent in this Parliament anyway, but it has not been replaced, and any funding decision for future networks has been deferred to the Spending Review. In the meantime, recognising the risk of projects coming to a standstill, the government will invite proposals for £300m of loan or equity investment to support the continued development of “strategically important” hydrogen projects. Given these are large development projects, this looks designed to tide them over until Spending Review decisions. 

The Energy Independence Bill, by contrast, creates a new funding route for hydrogen-to-power. It enables revenue support contracts for hydrogen-fired generators funded by a levy on electricity suppliers, that is, through electricity bills. DESNZ has indicated that, because hydrogen-to-power depends on hydrogen infrastructure, support will be phased and the hydrogen infrastructure required by a hydrogen-to-power project will be considered as part of the overall project. 

We think that this is a significant change, as it treats hydrogen-to-power as a separate category from hydrogen production, with projects potentially funded by electricity bills. It implies that the government sees hydrogen-to-power projects as one value chain (production, storage and the power asset) and is prepared to support them under a single mechanism, rather than through separate business models. In doing so, it places hydrogen-to-power in the same category as CCUS power and long-duration storage (pumped hydro and batteries) and so subject to the same tests under the Cost Control Framework. 

Aside from power, the outlook is more uncertain for hydrogen production for industry, both blue and green, and for larger hydrogen transport networks. The smaller, phased approach the government describes is likely to focus on whole-value-chain power projects, combining hydrogen production, pipelines and storage to supply new peaking plants. 

More demand to spread the costs 

The Budget sets out that the government sees new electricity demand as the main route to lower bills, because this allows the fixed system costs to be spread over more users. One lever to stimulate demand is a new Data Centre Covenant, under which strategic data centres seeking enhanced government support must pay for the energy costs they create and support grid resilience, flexibility and clean power. In return, a new Ministerial Control Centre will speed up their connections, including by reserving future grid capacity and reallocating capacity released from the connections queue, identifying additional capacity available before 2030, and transferring pre-2030 connection contracts. Where that is not enough, exceptionally strategic projects may be allowed temporary on-site generation until they can connect. 

This package could make a material difference if implemented quickly and well. Faster connections, combined with on-site generation (in practice likely to be gas) and the requirement to cover their own energy costs, would, in effect, allow strategic data centres to secure additional power provision alongside an accelerated grid connection, supporting faster growth in the sector. Our modelling shows that additional data-centre demand lowers bills for other consumers, up to a point, even without the Covenant’s extra requirement. Much depends on how “strategic” is defined, as conditions that are too onerous could slow demand growth. 

Separately, competition will be introduced into onshore electricity transmission, and the roles of the National Energy System Operator (NESO), Ofgem and DESNZ will be reviewed. The Energy Independence Bill also enables the removal of final consumption levies on electricity that is re-exported to the grid and cheaper electricity at times of excess generation, which should help storage and flexible demand. 

Nuclear and the North Sea 

The Budget restates support for Sizewell C and the Rolls-Royce SMR project at Gwynedd Power Station, next to the Wylfa site on Anglesey, and commits to implementing the Fingleton nuclear regulatory review in full by the end of 2027. Building on its recommendation to indemnify nuclear developers, the government will explore indemnities for other critical projects and will legislate to let Parliament designate and authorise the most critical infrastructure projects, reducing the risk that legal challenges hold them up. The revised Green Book formalises a cut in the discount rate from 3.5% to 3.0%, which favours capital-intensive projects with long-term benefits. 

However, the Budget provides no new funding and does not create a business model for building the Rolls-Royce SMR project. The 2025 Spending Review allocated over £2.5bn to “enable” the SMR programme, but there is still no clarity on how construction will be financed or what revenue model will apply in construction or operation. Nor does the Budget say anything about next steps or support for projects selected through the Advanced Nuclear Framework pipeline. The Fingleton reforms should make new nuclear quicker and less expensive to deliver, but they do not answer the question of how it will be financed. 

In the North Sea, the Budget restates the long-standing position that oil and gas will remain part of the energy mix for decades. The Jackdaw gas field has been approved, and the Oil and Gas Revenue Levy will be legislated to replace the Energy Profits Levy when it ends on 31 March 2030, or earlier if the Energy Security Investment Mechanism is triggered. The Energy Independence Bill still implements the Labour manifesto commitment for no new oil and gas licensing, while allowing additional production from existing fields and adjacent areas, for example through tie-backs, under Transitional Energy Certificates. This does not affect the pending decision on Rosebank. The Office for Budget Responsibility’s (OBR) forecast of oil and gas receipts, published alongside the Budget, is based on North Sea Transition Authority production projections that include new fields such as Rosebank, so refusing consent would leave a gap in the forecast to be covered by further borrowing or tax rises. 

Affordability is now the test

Taken together, these measures point to a clear shift in energy policy priorities. While the government is not moving away from decarbonisation, it is slowing the pace, by making affordability and energy security the deciders for which programmes progress, which projects are funded and how. And the bar for securing public funding, particularly from consumer funded levies, has been placed higher.   

For investors and developers considering how to prioritise their development portfolio, you will need to evaluate whether projects can demonstrate that they lower bills, support security of supply or deliver sufficient wider system value.