A “compromise” renewable energy policy being promoted by crossbench senators would result in windfall gains worth hundreds of millions of dollars a year for existing hydro-electric companies while stifling any new investment in renewables such as wind farms, according to analysts.

The plan has been developed by the Liberal Democrat senator, David Leyonhjelm, and has been included in a letter to Tony Abbott that is being circulated to crossbench senators for signature. It is understood to have the support of senators Bob Day, John Madigan and Jacqui Lambie.

The letter, obtained by Guardian Australia, said: “We, the undersigned, being cross-bench senators set out herein a proposal to modify and improve federal renewable energy policy.”

It outlined a plan that would recognise hydro-generation built before 1998 under the requirements of the renewable energy target (RET) and therefore “avoid the need to install more than 25,000 gigawatt hours of new large scale (renewable) capacity”.

It pointed out that ongoing uncertainty surrounding the RET had caused new investment to stop. It argued that if this continued and electricity retailers had no access to the renewable energy they were legally required to buy under the RET legislation, they would have to pay a “penalty charge”. It proposed the inclusion of pre-existing hydro as the best solution.

The executive director of the Australia Institute, Richard Denniss, called the scheme a “stinker” and said that if Leyonhjelm had “set out to design a scheme with the objective of undermining the RET and increasing electricity prices, it is difficult to think of a more effective way of doing it”.

“While electricity consumers are the biggest losers from this proposal, the biggest winners are the owners of the existing hydro generators. The vast majority of these are state governments, so it effectively becomes a state government tax on electricity users.”

Kane Thornton, the chief executive of the Clean Energy Council, said the plan “would deliver a massive payout to existing hydro power generation, while squeezing out newer types of renewable energy”.

“This proposal would represent a wealth transfer of some $906m per annum, or $13.5bn between now and 2030, paid to existing hydro power at the expense of $14.5bn of investment in new, large-scale renewable energy,” he said.

Because the scheme would not encourage new investment it would also not meet the objectives of the RET to encourage new investment and additional reductions in greenhouse emissions, but would impose the same costs on consumers.

Government sources said they had not seen the plan, but it is understood the government is planning a special briefing for senators on the details of the RET’s operations.

Guardian Australia revealed on Monday that Leyonhjelm was counting crossbench votes for some kind of compromise after newly independent Jacqui Lambie indicated she could vote for changes to the RET if the government made concessions over defence force pay.

A loose “coalition of common sense” comprising independent and minor party senators has a range of different concerns about the existing RET – which requires 41,000 gigawatt hours of electricity to be sourced from renewables by 2020.

The government wanted to reduce this to about 26,000 gigawatt hours but has failed to convince Labor and the Palmer United party (PUP) to back changes. Labor walked out of talks on the issue earlier this month.

PUP senators have vowed to block any change to the RET this term, but Lambie, who formally quit the party on Monday, has advocated including existing Tasmanian hydro projects in the RET. She said the RET was threatening 10,000 Tasmanian jobs.

She has also said she would vote against all government legislation until the prime minister agreed to increase the recent below-inflation defence force pay offer. The prime minister’s office has said Abbott might meet the newly independent senator in coming days.

“I am working on an alternative crossbench proposal … it is nowhere near final but it would solve some of the problems we are facing … including the problem of hitting the penalty price,” Leyonhjelm told Guardian Australia. “I have a plan on the table and I’m trying to get the crossbench numbers on that now.”

Leyonhjelm and Day support a reduction in the RET. Day told Guardian Australia he strongly supported Lambie’s call for the inclusion of existing hydro in the scheme.

Independent senator Madigan has supported a reduction in the RET and both he and the South Australian senator Nick Xenophon have argued it has allowed for too much investment in wind power at the expense of other kinds of renewables such as geothermal.

This could leave the Motoring Enthusiast senator, Ricky Muir, with the deciding vote on the issue.

He recently recommitted to voting alongside PUP senators to oppose any changes to the scheme, but he is being heavily lobbied by all sides.

Lambie also indicated she would be open to discussions with the government about its so-far thwarted plan to abolish the Clean Energy Finance Corporation, but that has also been opposed by the two remaining PUP senators, as well as Muir and Xenophon.

“We’re having great difficulties down in Tasmania. There’s 10,000 direct and indirect jobs on the line here over the RET and the clean finance situation that we’re in, so I just want to get to the bottom of it. I’d like to see also with Tasmania that the hydro … is counted … it’s 100% renewable energy down in Tasmania and basically we’ve been getting the worst end when it comes to the RET,” Lambie said in a speech to parliament as she resigned from the PUP on Monday.

“I am now free to negotiate with the government and other members of this parliament in good faith and for the best interests of my Tasmania, for reform of the following matters: the Clean Energy Finance Corporation and the renewable energy target.”

In a speech to the senate late on Tuesday, Lambie again demanded that Tasmania be entirely exempted from the RET because of its reliance on cheap electricity. “They have taken away our single best economic advantage – cheap electricity!

“Labor and Liberal’s RET policies have placed a boot on the throat of Tasmanian

industry and workers – and I want it removed immediately.”

As revealed by Guardian Australia, the same group of senators also moved to establish yet another inquiry into the alleged effects of wind farms on power prices, human health and wildlife.