Environmental campaigners were celebrating tonight after controversial plans for a new coal-fired power station at Kingsnorth in Kent were shelved, as the company behind the scheme postponed the project and blamed the recession.

Energy group E.ON said recent falls in demand for electricity had forced it to rethink, but that the plant could still be built if economic conditions permitted.

However, green campaigners were claiming a major victory over what they viewed as in effect a cancellation of the Kingsnorth station, which has become a focus for protest and concern over carbon dioxide emissions and climate change.

In a statement to green groups including Greenpeace, the company said: "We can confirm that we expect to defer an investment decision on the Kingsnorth proposals for up to two to three years. This is based on the global recession, which has pushed back the need for new plant in the UK to around 2016 ... we remain committed to the development of cleaner coal and carbon capture and storage".

John Sauven, head of Greenpeace, said: "This development is extremely good news for the climate and in a stroke significantly reduces the chances of an unabated Kingsnorth plant ever being built. The case for new coal is crumbling, with even E.ON now accepting it's not currently economic to build new plants."

Professor Jim Hansen, one of the world's leading climate scientists, welcomed the decision: "This is a step in the right direction. But there must be government leadership to make it truly important. The requirement is to phase out coal emissions, if we want to be fair to our children and grandchildren. We desperately need a nation to exert some leadership, adopting policies to move promptly in that direction. I still look on UK as being perhaps the best hope for leading a fundamental change.

"But as yet there seems to be no government, the US included, with the guts to say what is needed and move in that direction. Instead we hear goals for emissions reduction – what a fake – the coal must be left in the ground or we can never achieve the needed goals for atmospheric carbon dioxide."

Andy Atkins of Friends of the Earth said: "We're delighted that E.ON has shelved its Kingsnorth plans – we should be investing in clean energy sources not building new dirty coal-fired power stations. Plans to build this power plant have seriously undermined the UK's credibility on climate change ahead of crucial talks in Copenhagen. The government must now show real leadership and say no to all new coal plants which aren't fitted with 100% carbon capture and storage from day one. The UK has one of the best renewable energy resources in Europe, but our record on developing green energy is a national disgrace. It's time to make the UK a world leader in developing clean power and cutting energy waste."

At its most far reaching, E.ON's decision is a blow to government plans to develop so-called clean coal technology, which would trap and store polluting emissions underground. The unproven concept is attractive to ministers because it provides a way to burn fossil fuels while introducing other policies to curb carbon emissions.

E.ON first applied for permission to build the Kingsnorth facility in 2006, but subsequently asked for the decision to be deferred until ministers had decided whether it must be fitted with carbon capture and storage (CCS) technology.

Earlier this year, Ed Miliband, the environment secretary, said new plants such as Kingsnorth would have to trap and store a large portion of their emissions, which would significantly raise the cost.

How this cost would be met has yet to be decided. The government has pledged funds to the winner of a competition to develop a CCS plant by 2015, in which Kingsnorth is one of three contenders. Ministers have also talked of funding an additional three CCS plants by 2019, perhaps through a levy on electricity bills.

A source close to the process said tonight that E.ON's move could be an act of "brinkmanship" intended to force ministers to place less of the financial burden for CCS on energy companies.

Ministers have talked up the need for clean coal plants to meet future electricity needs and to help Britain rely less on gas supplies from nations such as Russia.

A spokesman for the Department of Energy and Climate Change said: "E.ON's decision to delay their proposed project is a response to the global economic situation and they remain committed to developing clean coal. They have not said they are withdrawing from our CCS demonstration competition and we will be discussing with them the implications for this and for their planning consent application."

Greg Clark, the shadow climate change secretary, said: "This latest news underlines the chaos in Labour's energy policy. At a time when the government is predicting power cuts by 2017 its plans for new capacity with carbon capture and storage are disintegrating."