19 min read

Energy was front and centre of John Healey's maiden Budget as Chancellor and the first under Andy Burnham’s premiership. Delivered on 28 October amidst a difficult fiscal environment and ongoing geopolitical challenges, the Chancellor used the Budget to offer short-term relief to energy bill payers whilst promising longer term structural changes to the energy system and markets.

Although much of the detail is deferred to subsequent consultations, the 10-Year Plan and the 2027 Spending Review, the Chancellor presented the Budget as the start of a "new energy pathway" toward long-term energy security and affordability. Cost allocation, and market and institutional reforms are key themes of the Budget. Whilst the Chancellor reaffirmed the government’s commitment to net zero by 2050, the previously announced £2bn spending cut to the budget of the Department for Energy Security and Net Zero (DESNZ) (to be redirected into the Defence Investment Plan) will make achieving this target more challenging.

We set out below some of the key decisions and policy proposals outlined in the Budget.

"Breathing space today"

A range of immediate targeted measures are intended to provide households with "breathing space today" from high energy costs. These include extending the temporary VAT cut on electricity bills (introduced in October 2026) until July 2027, and an Energy Payment of £100 to 20 million households in council tax bands A to D in England (with similar support across the rest of the UK). In addition, the Chancellor has asked Ofgem to abolish standing charges on gas bills, with these fixed costs to be paid on the unit rate instead (the Treasury estimates that this could save 60% of account-holding households an average of £45 off their annual bill). A similar measure is under consideration in relation to electricity bills, with details expected next year. Support for motorists was also announced (see below).

A new Energy Debt Circuit Breaker strategy was issued alongside the Budget to tackle high levels of energy debt, estimated to stand at £5bn as at Q2 2026. The Government and Ofgem will consult on a Debt Relief Scheme for launch in 2027, a one-off, targeted intervention for customers in "genuine financial need" as well as a review of how to better identify consumers in vulnerable situations. Alongside this, a raft of related consultations were launched by Ofgem or are expected soon. These include reforms to energy payments systems (such as a consultation on home moves and, in 2027, a call for evidence on the role of Standard Credit in the energy market) and proposals to improve consumer engagement mechanisms (including a review of pre-payment meters).

For business, the Chancellor confirmed that from April 2027 the previously announced British Industrial Competitiveness Scheme (BICS) will remove 25% from electricity bills for 10,000 companies in energy intensive industries and include a back payment for 2026-27.

Longer-term energy market reforms on the horizon

Further detail on reforming the electricity market will be set out in the 10-Year Plan, with the Chancellor suggesting decisions on key elements of its Reformed National Pricing policy programme, including how siting and investment decisions are made by generators, constraint management, system pricing, and balancing and settlement arrangements. In addition, the government is planning a review of accountability across the energy system, including setting clearer expectations for the roles, responsibilities, priorities and outcomes of the National Energy System Operator (NESO), Ofgem and DESNZ. Prior experience has shown that fundamental institutional and market reforms need to be managed carefully and in consultation with industry to retain market confidence. Energy companies and their investors will want to understand these proposals, and what this might mean for their assets and investments, as soon as possible. In the meantime, there is a risk we will see a chilling effect on investment in the system under current arrangements until there is greater clarity about what will change and when.

A new Cost Control Framework

The allocation of energy costs, and particularly the impact of policy costs on consumer bills, was a key focus. As part of the government's "long-term action required to get energy costs down for good", a new Cost Control Framework (CCF) will be introduced at the Spending Review in 2027. This will set budgets for components of energy costs, including policy costs. In addition, until the CCF is in place, no further policy costs will be placed on energy bills unless they bring bills down or are essential for security of supply. The government also said it will ensure it procures clean power only when it lowers bills overall and can connect to the grid. It remains to be seen whether these statements have implications for new capacity under procurement, particularly for schemes which are funded by supplier obligations such as Allocation Round 8 of the Contract for Difference for renewables.

Wholesale CfDs

As part of the government's ambition to decouple electricity prices from volatile gas prices, the Chancellor announced plans to fix the price paid to some renewable generators. It is consulting on proposals for a Wholesale Contracts for Difference (WCfD) scheme, closing on 9 December, which could give merchant, certain Renewables Obligation (RO) supported generators and legacy nuclear assets the option to move to a voluntary contract for difference, effectively fixing the price for wholesale electricity revenues for eligible generators where this represents value for money for consumers. Existing generators accredited under the RO would enter into a WCfD for the wholesale portion of their revenues, in addition to receiving renewables obligation certificates (a further consultation on proposals for Fixed-Price Certificates for RO projects is expected later this year). Notably, not all technologies are proposed to be eligible, with plans for advanced conversion technologies, dedicated biomass, anaerobic digestion, large scale biomass (>100MW), energy from waste, sewage gas and electricity storage to be excluded. Interestingly the government is considering whether legacy merchant nuclear assets may be eligible via a direct award allocation route. As merchant and RO supported generators are currently exposed to the Electricity Generator Levy (which the Chancellor announced in the Budget would now endure for the duration of the longest WCfD contract), whether WCfDs are an attractive option will depend on the level of the strike price. With locational pricing for electricity ruled out in Great Britain, WCfDs represent a fresh attempt to intervene in the wholesale market. But with inevitable implications for wholesale energy trading strategies, whether the measure will have the desired effect on consumer bills remains an open question.

Grid connections for strategic demand

Alongside the Budget, DESNZ published the government's response to a consultation on Accelerating electricity network connections for strategic demand. The response confirms two key measures will be taken forward: enabling NESO to prioritise strategic demand projects identified by government and aligning data centre connections after 2030 to regional infrastructure targets. Government will also have the power to reserve future capacity for individual strategic projects which are not yet ready to join the queue and to reserve future capacity on a non-project specific basis. These prioritisation mechanisms are expected to be in place before NESO opens the next connection application window.

As a result, in future we expect priority grid access for strategic demand will be allocated by ministerial selection rather than by NESO queue management alone. The criteria for that selection are yet to come: the government has indicated that it will publish a Strategic Framework Document setting out the scope, criteria, and process for identifying qualifying projects, and has not defined "strategic demand". Projects will be assessed through the Connections Accelerator Service against economic, social, and strategic factors, and approved by ministers. The proposed regime will be sector neutral, projects such as data centres will compete alongside manufacturers, hospitals and prisons. Prioritised projects must still satisfy Gate 2 readiness criteria and progression milestones. Reserved capacity is also time limited, subject to annual review, and capable of redirection to another strategic project (or returned to NESO) if the agreed timetable is missed. Please see below for further details in relation to data centres.

Mixed news for low carbon hydrogen and CCUS

DESNZ spending cuts will affect the hydrogen and CCUS sectors. The £500m allocated in the 2025 Spending Review for hydrogen transport and storage appears to have been redirected to the Defence Investment Plan. In addition, the Chancellor has scrapped the proposed Gas Shipper Obligation, the intended funding mechanism for hydrogen production projects. Instead, the government has said it will directly fund the £27m cost of Hydrogen Allocation Round 1 contracts and any future hydrogen contracts it commits to, although this will be subject to value for money. Despite challenges, the Budget did contain some positive signals. The government confirmed that up to £300m may be available for "strategically important hydrogen projects" (subject to affordability and value for money) and that Hydrogen Allocation Round 2 projects will also shortly progress to the Invite to Offer stage, with funding to be considered at the next Spending Review.

DESNZ will also save £200m in CCUS capital grant funding. The government will continue to prioritise mature CCUS and hydrogen projects at the Teesside, Merseyside and North Wales clusters, and maintain grant funding for the Viking cluster. For future projects in development, the government is exploring support through private investment and government loan or equity investment with less reliance on grants. This includes the Acorn cluster, with the government stating that any such investment will ensure "a return on any investment for taxpayers".

Electric vehicle (EV) charging infrastructure

Alongside the Budget, the government published an independent review of the cost of public electric vehicle charging. The government announced a new taskforce to explore allowing drivers to use their domestic electricity tariff at local, lower-powered public charge points. In the meantime, it announced £100m over the next two years to reduce costs for local, lower-powered public street charging points, coming into effect from Spring 2027. The Department for Transport will set out next steps in due course.

Oil and Gas

Following the approval of the Jackdaw gas field last week, the Budget continues the government's "pragmatic approach" to the North Sea, confirming that oil and gas will remain a part of "our energy mix for decades to come". On Rosebank, however, the Prime Minister would not be drawn during PMQs on Budget day, calling it a quasi-judicial decision to be taken in due course. With that decision still pending, the Budget's measures focus instead on key short-term measures to support consumers at the pump and the long-term fiscal framework for the sector.

In the short term, the government has pushed back plans to add 5p back onto fuel duty and 3.7p on red diesel by six months from January 2027 to 1 July 2027 and is deferring the planned Retail Prices Index increase to 1 July 2027.

As previously trailed, the Finance Bill 2026-27 will legislate for a new, permanent Oil and Gas Revenue Levy (OGRL). Applying immediately after the cessation of the Energy Profits Levy (EPL) on 1 April 2030, or earlier if the Energy Security Investment Mechanism is triggered, the OGRL places an additional 35% levy on the portion of revenue from sales of oil and gas that exceed specified thresholds (currently $90 per barrel for oil and 90p per therm for gas).

Also, as announced in July 2026, the government will introduce legislation in the Finance Bill 2026-27 to explicitly treat profits arising from certain rights connected with exploration and exploitation rights (such as overriding royalty interests, net profit interests, net cashflow sharing arrangements) of natural resources undertaken in the UK or on the UK Continental Shelf as income from immovable property. This applies for accounting periods beginning on or after 13 July 2026 for corporation tax, and for profits arising from 6 April 2027 for income tax. This closes a tax loophole following the Supreme Court decision in Royal Bank of Canada v. the Commissioners for HMRC (2025) and is intended to ensure that income from North Sea oil and gas is taxed in the UK and not overseas. 

The Budget acknowledges that the UK refining sector faces stiff competition from imports which are not subject to the cost of compliance with the UK Emissions Trading Scheme and so is at material risk of carbon leakage. To tackle this and support the sector's decarbonisation, the government is consulting on expanding the scope of the Carbon Border Adjustment Mechanism (CBAM) to include refined products, thereby applying a carbon price to imports. However, given the large range of refined products, the feasibility of the measure is a key area for consultation.

Separately, in relation to gas networks, the government will legislate in the Finance Bill 2027-28 to spread certain corporation tax impacts of changes to revenue recognition requirements for qualifying gas distribution activities evenly over five years. This will not reduce the overall corporation tax due but is expected to mitigate charges which would otherwise fall on consumer bills (tax comprises one of the building blocks making up the allowed revenues network companies are permitted to recover from consumers). The precise tax outcomes and qualifying transitional amount will be set out in due course.

Data centres

The Chancellor has announced a “new deal for the development of data centres”, set out in the Data Centre Covenant (the Covenant). It sits alongside the wider strategy to reform demand connections, including the government's response to the consultation on strategic demand connections. While all data centres are encouraged to meet the tests outlined in the Covenant, strategic data centres must meet them where they seek enhanced government support. The Covenant balances two aims. Nationally, it supports AI sovereignty, with the government estimating that 6GW of AI data centre capacity will be needed by 2030. Locally, it reflects the Budget's theme of "good growth in every postcode", requiring nationally important infrastructure to benefit the places that host it.

Under the Covenant, operators are expected to cover the energy costs they create, meet high environmental standards (including local reuse of waste heat), create local jobs and strengthen national security. Strategic projects should also agree a Local Benefit Plan with host communities. In return, a new Ministerial Control Centre will “accelerate time to power” for strategic data centres by reserving and reallocating grid capacity. It may also permit temporary on-site generation for “exceptionally strategic” projects.

As mentioned above, data centres will be within scope of the measures to prioritise grid connections for strategic demand projects. The government is also considering the use of the Planning and Infrastructure Act to enable the transfer of data centre grid connection contracts to strategic AI developments where this is needed to provide access to power before 2030. In addition, data centres will be separately subject to regional infrastructure targets that will cap connection volumes after 2030. Developers are also facing the introduction of a Data Centre Commitment Fee, with Ofgem's decision expected before the next NESO grid application window. As a consequence of these proposals, priority access to scarce network capacity will increasingly be administratively defined and exposed to shifts in government priorities.

The Draft National Policy Statement (NPS) for Data Centres compounds that asymmetry. It carries the Covenant tests into the decision framework for projects directed into the development consent order (DCO) regime under section 35 of the Planning Act 2008 “where relevant to planning policy”, and does so unevenly. For example, the environmental test requires a metric (Power Usage Effectiveness of at least 1.3), whereas the Local Benefit Plan remains a commitment linked to "the development’s size", with no assessment criterion, minimum, or enforcement mechanism of its own. Until the government publishes the regional targets, the definition of "exceptionally strategic" projects, and the temporary behind-the-meter framework, the exchange of local returns for priority access to power remains, for now, a bargain in outline rather than in substance.

Finally, beyond the Budget, data centre developers are also preparing for the Cyber Security and Resilience (Network and Information Systems) Bill, now through the Report stage in the House of Lords. Once enacted, it will designate data centres of 1MW or more as essential services regulated by Ofcom. Those data centres will need to notify significant incidents within 24 hours and give the Secretary of State a power of direction on national security grounds.

Further measures supporting infrastructure and growth

Alongside fiscal devolution, the Budget sets out a series of housing, rail and planning measures intended to drive growth across the regions. The government describes affordable housing and reliable transport as "the foundations of a productive economy" and commits to delivering infrastructure and housing "faster and at lower cost".

Housing

On housing, the government is providing an additional £1.5bn to deliver around 10,000 homes in England, prioritised for Social Rent and council homes. This takes total investment into the Social and Affordable Homes Programme to more than £40bn over 10 years. To support delivery, the Budget introduces a new VAT relief on land sold to registered social housing providers and provides a one-year extension to the preferential Public Works Loan Board rate for council housebuilding. A new £4.7bn "Your First Home" equity loan scheme has been introduced, estimated to help around 70,000 first-time buyers with up to 20% government equity loans. The government has also committed to making no major changes to building regulations for the rest of this Parliament, other than to improve building safety.

The government will introduce an exemption from biodiversity net gain (BNG) requirements for residential brownfield developments on sites of up to 1.5 hectares in England, supporting the government's "brownfield-first" approach and aims to support the delivery of more homes. The government is due to publish its full response to its consultation and impact assessment in due course. Beyond housing, BNG requirements will become mandatory for Nationally Significant Infrastructure Projects from November 2026, meaning that projects consented through that regime will need to factor biodiversity delivery into planning and costs.

Rail

The Budget confirms progress on Northern Powerhouse Rail, including a new station in Bradford, and over £300m for the Leeds Existing Station Programme set to be delivered by 2030. Also committed is £30m to progress Cardiff Parkway station with the Welsh government and private sector. Subject to a full business case, a Tax Increment Financing mechanism at Euston, based on a business rates retention zone, will primarily fund London Underground upgrades. Additionally, the ethos and findings of the Fingleton review are intended to extend beyond nuclear, with Rachel Skinner CBE chairing a review of rail infrastructure costs, reporting in six months' time.

Funding reforms

The Budget includes some positive signals for energy and infrastructure investment in the UK. The National Wealth Fund (NWF) is expected to receive an extra £15.4bn, with spending also supporting the defence industrial base via investment in supply chains, dual-use technologies and enabling infrastructure. Included in the total is £2bn earmarked for the Energy Wealth Fund, a downpayment against future North Sea revenues collected. This new fund, which is to be established within NWF, will invest in renewable and low-carbon infrastructure. After a £200m saving, Great British Energy and GBE-Nuclear are expected to retain £8.3bn across the spending review period.

Building on previous announcements about how the government evaluates investment in major energy and infrastructure projects, the Chancellor confirmed that the social discount rate in the Treasury's Green Book investment manual will be lowered from 3.5% to 3%, placing more weight on the long-term benefits of such projects. Formalising this reduction, an updated version of the Green Book and a new version of discounting supplementary guidance has been published alongside the Budget. In line with the government's broader devolution agenda, this includes Guidance on developing place-based business cases, a framework intended to enable investment coordination across the public sector.

As a policy driver, devolving power and transferring resources to regional and local decision-makers underpinned several funding announcements. Good Growth Funds are to be established to support mayors and local leaders across England to bring together public and private funding into a single local investment approach for investment in "catalytic regeneration and development". To support Good Growth Funds, the government confirmed a £1.5bn bespoke lending facility, allowing mayoral strategic authorities to build up the capability necessary to operate devolved loan funding. Operational from April 2028, the facility will include mechanisms to enable concessional lending to support a broad range of locally determined projects. In addition, the Chancellor announced "the most radical act of devolution in a generation", launching a Fiscal Devolution Roadmap focused on income tax assignment and business rates retention, sharing tax revenues with local and regional leaders in England. From 2028, mayoral strategic authorities will be assigned a share of income tax generated in their areas and, from 2027, mayoral strategic authorities will retain 20% of local business rates in place of central government grants, rising to at least 70% of their business rate income by the end of the decade. The reformed funding model is intended to provide the long-term certainty that comes from access to tax revenues, enabling investment in projects that drive local economic growth. Further details will be set out later this year in a Rewiring the State Delivery Plan and through the Local Government Finance Settlement process.

Conclusion

The Budget, whilst primarily focused on tax and spending, featured a range of significant energy and infrastructure initiatives at its heart. Taken together with a raft of related policy publications, there are considerable developments for both the public and private sectors to digest. With significant reforms in progress and more on the horizon, companies, their investors and funders will be analysing the implications of the Budget for their own businesses in detail. But they will have to wait for more clarity around key issues like energy market reform and the future of North Sea oil and gas. What is clear from this Budget is that the government has limited resources that it can deploy to implement reforms and help deliver on its net zero commitments.