A ceiling of £200m a year will be placed on subsidies to some of the major forms of renewable energy from this autumn, affecting the funding of large-scale low-carbon installations from wind and solar farms to biomass-burning power plants.

The money will be available under the coalition's new “contracts for difference”, which subsidise renewable energy companies who offer electricity at a lower rate of carbon emissions than fossil fuel generators, and are paid for by levies on household energy bills.



Ed Davey, the secretary of state for energy and climate change, said the reforms would boost the market for renewable energy. He said: “Our plan is powering growth and jobs as we build clean, secure electricity infrastructure for the future. By radically reforming the electricity markets, we’re making sure that decarbonising the power sector will come at the lowest possible cost to consumers.”



He predicted there would be 250,000 jobs in the UK’s low-carbon energy sector by the end of this decade.



But some renewable companies said the spending represented a large reduction in the support they receive, and could lead to far fewer low-carbon installations being built.

For instance, under the scheme, about £50m a year will be made available to companies ranging from large-scale solar farms to landfill gas operations and hydro-electric plants. This would translate into a cut in large-scale solar installations of about 65% to 80% next year, according to the Solar Trade Association.

RenewableUK, the trade body for the renewable energy industry, said the level of funding was disappointing.

Dr Gordon Edge, its director of policy, said: "Whilst the industry understands the pressures facing government when setting this budget, we are disappointed with the overly cautious approach used.

"Although we appreciate that it’s necessary to hold back budget for future years in order to allow potentially cheaper projects to come forward later, this initial release of the draft budget risks being insufficient to drive industrialisation, competition and cost reduction."

The new rules were also slammed for being too complex for small companies, which will have to compete with multinationals for the funds available.



Contracts for difference are part of the government’s energy market reforms, which are intended to reshape the energy generation industry and “keep the lights on” as an increasing number of the UK’s ageing coal-fired electricity generation plants and nuclear reactors are taken out of service in coming years.



The electricity market reforms are expected to make only a marginal difference to consumer bills, however, saving as little as 6% or £41 on the average estimated energy bill by 2030.



The £200m will be divided among three broad sets of renewables: the more established technologies, such as onshore wind and solar power; less established technologies such as offshore wind; and the conversion of fossil fuel plants to biomass burning. Companies will have to compete for the pot of money available in their sector.



Leonie Green, head of external affairs at the Solar Trade Association, said the amounts to be devoted to renewable energy were dwarfed by the £80bn guaranteed to the nuclear industry under a similar contract struck by the government.

She said: “The message the government is sending out today is clear. It is backing nuclear and other more expensive renewables over value-for-money solar. This is an absurd decision that will ultimately hit energy bill payers across Britain. Solar is already cheaper than offshore wind; it will soon be cheaper than onshore wind, and it stands a realistic chance of being cheaper than gas by the end of the decade. But this is only achievable with stable government support and a level playing field."



The solar industry is likely to be particularly affected by the changes, because the old subsidy system - known as the renewable obligation, by which generators are obliged to produce a certain amount of power from renewable sources, and are paid above the market price of electricity for doing so - is set to end in 2017 for most operators, but for large solar farms will end in 2016 instead.



Paul Thompson, head of policy at the Renewable Energy Association, said: “It is vital that the most cost-effective sectors – biomass, solar, onshore wind and established waste to energy technologies – are given sufficient budget to minimise short-term costs for consumers. At the same time, contracts for difference must also foster those early stage technologies – geothermal, wave and tidal and advanced waste conversion – that will come down in cost as they mature, delivering low carbon energy security long into the future.”

