2026 Energy Market Drivers 

Wholesale Energy Market: Key Drivers and Insights for 2026

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In 2026, the United Kingdom’s wholesale electricity prices will still be heavily influenced by natural gas, even as more wind and solar generation comes online. When wind output is lower and temperatures are colder, gas-fired power stations tend to run more, which can push prices up and increase volatility. The International Energy Agency has highlighted this sensitivity, while also noting that market expectations for 2026 have pointed towards lower average prices than 2025, assuming weather conditions are not unusually severe and gas market fundamentals remain supportive. A key reason for potential downward pressure is the International Energy Agency’s expectation that global supplies of liquefied natural gas will increase in 2026 (around seven percent, or roughly 40 billion cubic metres), which could ease European gas prices if new supply is delivered as planned and demand does not rebound faster than expected.

 

However, several structural issues will continue to add risk and complexity. The United Kingdom’s gas storage position remains a vulnerability, with the Rough storage facility playing an outsized role; regulators have extended its operating consent until 30 April 2026, and the market has continued to watch its operational and commercial position closely. This matters less for “average” pricing and more for periods of stress, when cold spells coincide with low wind and limited deliverability. Alongside this, electricity market reform is progressing: the government’s Review of Electricity Market Arrangements is moving forward on the basis of keeping a single national wholesale price, reducing one source of major uncertainty, although the detail of implementation will still affect price swings and risk management. Settlement reforms are also advancing, with a move toward settling electricity consumption on a half-hourly basis across the market, supporting more accurate pricing and stronger incentives for flexibility over time.

 

Policy signals on carbon are becoming clearer as well: the United Kingdom Emissions Trading Scheme has confirmed an increase in the Auction Reserve Price to £28 in 2026, which can influence the operating costs of fossil fuel generation. Finally, renewable investment will remain dependent on delivery through the government’s Contracts for Difference programme, with recent and upcoming allocation rounds supporting new projects, while the practical constraints in the near term are less about ambition and more about grid capacity, supply chains, planning permissions, and the pace of new connection delivery.

 

Bullish factors for wholesale energy prices in 2026

 

Cold weather combined with low wind generation

 

When temperatures fall, electricity demand usually rises. If wind generation is also low at the same time, the system relies more on gas-fired power stations to meet demand. Because gas often becomes the “price-setting” fuel in these periods, wholesale electricity prices can rise quickly and remain volatile.

 

Limited gas storage and the risk of short, sharp price spikes

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The United Kingdom has relatively limited gas storage compared with many European countries, so we are more reliant on gas supplies and storage levels across Europe as a whole. In practice, wholesale gas markets do not price risk based on the United Kingdom in isolation; they respond to the overall level of gas in storage across Europe, because Europe-wide storage influences how tight supply could become during cold spells and how much flexibility the system has to respond. If European storage levels are lower than expected, or if withdrawal rates are constrained during peak demand, gas prices can rise quickly and that can feed through into higher electricity prices in the United Kingdom.

 

Geopolitical events affecting global gas supply

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Wholesale prices in the United Kingdom are influenced by global gas markets, including imported liquefied natural gas. Any disruption to supply routes, production facilities, or shipping can increase gas prices in Europe, which can then feed through into United Kingdom electricity prices. Ongoing changes in how Europe sources gas also add uncertainty around supply patterns and pricing.

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Higher carbon-related costs increasing the cost of gas-fired generation

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The United Kingdom Emissions Trading Scheme sets a carbon price that power stations must pay when producing electricity from fossil fuels. The planned increase in the scheme’s Auction Reserve Price to £28 in 2026 can help support the carbon price, which increases the running costs of gas-fired power stations and can push wholesale electricity prices higher when gas generation is needed.

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Grid bottlenecks and rising costs of keeping the system balanced

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Even when there is enough electricity being generated overall, it cannot always be transported efficiently from where it is produced to where it is needed. Bottlenecks on the electricity network mean the system operator sometimes has to take additional actions in real time to keep supply and demand balanced, such as instructing certain power stations to increase or reduce output. These interventions add cost to the system and can contribute to greater short-term price volatility. At the same time, major investment is required to upgrade and reinforce the grid so it can accommodate more renewable generation, new connections, and rising demand. Those upgrades are funded through network charges that are ultimately reflected in customer bills. Forecasts for Transmission Network Use of System charges (the costs associated with using and maintaining the national electricity transmission network) have approximately doubled over the last six months. This adds further upward pressure on future “non-energy” costs and is likely to be an increasingly important factor in electricity contract pricing going forward.

 

Demand growth from electrification and large new users, such as data centres

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Electricity demand is starting to rise again, partly due to electrification and growth in large users such as data centres. When new demand connects faster than new generation, storage, and grid upgrades can be delivered, local and national supply margins can tighten, supporting higher prices, especially at peak times.

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Availability risk for nuclear and other reliable generation

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Since coal-fired generation has ended in Great Britain, the system relies more on gas, imports, storage, and demand flexibility during tight periods. If nuclear stations experience outages or delays, the system can become more dependent on gas and imports, which can push prices up during high-demand periods.

 

Non-energy charges that can push up delivered electricity costs in 2026 (for UK business customers):

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• Transmission network charges (Transmission Network Use of System and Transmission Demand Residual)

These are charges for using the national electricity transmission network. They are used to recover large amounts of allowed network revenue and are often applied as daily charges based on how a site is classified. If the allowed revenue, the charging bands, or the way costs are allocated changes, the total charge to sites can increase and feed into contract prices.

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• Sizewell C nuclear levy (Regulated Asset Base levy)

This is a levy added to electricity bills to fund the Sizewell C nuclear project during construction. The levy is currently set at £3.663 per megawatt-hour for Quarter 1 of 2026, plus an additional operational cost levy. This directly increases the “stack” of costs that sit on top of the wholesale electricity price.

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• Balancing and network congestion costs

When the electricity system needs extra actions to keep supply and demand matched (for example, because electricity cannot be moved easily around the country), the associated costs can rise sharply. If these balancing and congestion costs increase, the charges suppliers pass through to customers can also increase.

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• Contracts for Difference supplier charge

This is a levy paid by electricity suppliers to fund government-backed renewable contracts, which is then reflected in customer prices. The levy rate can rise or fall depending on the wider market. The Quarter 1 of 2026 interim levy rate is £10.576 per megawatt-hour.

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• Other policy costs (Renewables Obligation, Feed-in Tariffs, and the Capacity Market)

These are government policy costs that suppliers recover through unit rates. Changes to how these schemes are funded, such as buy-out prices or auction outcomes, can increase the non-energy portion of electricity prices built into future contracts.

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Bearish factors for wholesale energy prices in 2026

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More liquefied natural gas supply coming to market globally

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If global liquefied natural gas supply increases as forecast, especially from the US, this can reduce gas prices in Europe. Lower gas prices usually reduce wholesale electricity prices in the United Kingdom during the many hours when gas-fired generation is still required to meet demand.

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More renewable generation supported by government-backed contracts

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The government continues to support new renewable projects through Contracts for Difference, which provide long-term revenue certainty and help unlock investment. As more wind and solar projects are built and connected, they add low-cost electricity to the system, which can reduce average wholesale prices over time (even if short-term volatility increases).

 

Greater ability to import electricity through interconnectors

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Electricity links to neighbouring countries provide additional supply options during tight periods. For example, the Viking Link between the United Kingdom and Denmark is expected to reach full capacity in 2026 after the completion of related upgrades. More import capability can ease price spikes when the United Kingdom is short of supply, although this depends on conditions in Europe at the same time.

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More frequent periods of very low or even negative prices

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As renewable generation grows, there will be more hours when supply is high but demand is relatively low, especially in mild, windy, or sunny conditions. In these periods, daily wholesale prices can fall sharply and can even become negative, meaning generators may effectively pay to stay running. This can pull down average prices even if occasional peaks remain high.

 

Clearer direction on electricity market reform and settlement changes

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The government’s Review of Electricity Market Arrangements is progressing, and the move toward settling electricity consumption in half-hourly periods across the market is also advancing. Together, these reforms can reduce some uncertainty and improve the incentives for flexibility over time, which supports a more efficient market and can reduce risk-related pricing over the medium term.

 

Grid investment and connection reforms, if delivery improves

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Plans to speed up grid investment and reform the process for connecting new projects could reduce congestion and lower the costs of managing the system. If these plans translate into real delivery on the ground, they can reduce volatility and the additional costs that arise from network bottlenecks, although 2026/2027 is likely to be transition years rather than an immediate fix, so this could affect both elements of the market from Bullish to bearish in the future.

 

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