Against the background of one of Europe's most liberalised energy markets and a renewable generation subsidy scheme designed to be driven by market forces, there are signs that the Government is struggling to make the model fit with its challenging low carbon targets. Is Whitehall losing faith in the power of free markets to deliver the goods when it comes to climate change?

The Government's fix looks like taking the form of a contract for difference (CfD) mechanism bolted onto the existing market structure. Its current consultation on the Renewables Obligation (RO) includes a proposal that generators should be relieved of wholesale power price risk (and possibly also Renewables Obligation Certificate (ROC) price risk) through a long term CfD which swaps exposure to price volatility for a fixed reference price. The aim is twofold: to boost investor comfort while guaranteeing a reasonable return on the one hand and to reduce the risk of over-compensation, so minimising the cost of the RO to consumers, on the other. A long-term contracted approach also mitigates the current regulatory uncertainty arising from the Government's refusal to commit to 'grandfather' existing incentives.

The idea doesn't stop there. Also out for consultation is the Government's thinking on a financial support mechanism for carbon capture and storage (CCS) – on the face of it, intended only for up to four carbon capture and storage demonstration plants but surely to become essential in the short term for CCS across the board. Once again, a CfD features as the Government's choice; this time by taking away from generators the risk of fluctuations in the price of carbon allowances while ensuring an acceptable return for what would otherwise be an uncompetitive technology.

Though Government has been adamant that it will not provide subsidies for nuclear plants, some voices have been raised as to the viability of such large capital investments without some form of public support. Could a CfD scheme turn out to be the solution here as well?

Swapping the price volatility inherent in a liberalised market for a higher degree of revenue certainty and a guaranteed minimum return looks like the way the Government believes it must go if it is to have any chance of decarbonising the UK's power market. It remains to be seen whether this will be achieved through a series of limited and bespoke measures or through a unified scheme with common architecture and consistent implied returns.

Charlotte Morgan and John Pickett are partners in Linklaters' energy and infrastructure group.