Britain's green ambitions have been dealt a blow as a big six energy company has pulled the plug on one of the world's largest offshore windfarms, with the political storm enveloping the industry threatening the multibillion-pound investments needed to meet emissions targets and head off a looming capacity crunch.

Weeks after warning that the government was treating environmental subsidies as a "political football", the German-owned RWE npower is pulling out of the £4bn Atlantic Array project in the Bristol Channel because the economics do not stack up.

The move comes as figures show that energy firms reaped a 77% increase in profits per customer last year, due to bill increases that the big six say are partly due to government green levies.

The shelving of the Atlantic Array is a setback for the government, which is banking on bigger windfarms in deeper waters to help provide low-carbon power. The RWE cancellation is the first axing of a Round 3 windfarm – schemes such as those in Dogger Bank, Hornsea and East Anglia, which are supposed to help the government meet a target of generating 15% of energy from renewable sources by 2020. It will also raise further concerns about investors being frightened away by political rows and policy uncertainty.

The Renewable Energy Association (REA), which lobbies for more low-carbon power, said government infighting over subsidies was causing deep uncertainty in the industry.

Ahead of next week's autumn statement, the chancellor is looking to transfer the £1.6bn cost of the energy companies obligation (Eco) and the smaller warm home discount to the taxpayer, removing the burden from household bills.

"We need assurances from George Osborne in the autumn statement about where we stand," said a spokesman for the REA. "Nick Clegg says one thing about the green levies, Michael Fallon [the energy minister] another."

Last week David Cameron was reported to have talked about the need to get rid of "green crap" from energy bills. Number 10 said it did not recognise the phrase but did not deny the sentiment. Peter Atherton, a leading energy analyst, warned last week that investment in power generation was "killed stone dead" until the next election by Ed Miliband's call for a price freeze and government delays in introducing promised electricity market reform.

The political and public environment for power companies is set to become more hostile following the publication of figures on Monday showing that the average profit per customer for the big six rose from £30 to £53 last year. The industry watchdog said the rise was due to higher bills and increased energy use during a harsh winter, not due to cost reduction.

RWE indicated that the government might have to raise green subsidies – and thus increase bills or the burden on the taxpayer – after admitting that technical difficulties had pushed the price up so far that it could not be justified under the current subsidy regime.

"This is not a decision we have taken lightly; however, given the technological challenges and market conditions, now is not the right time for RWE to continue to progress with this project," said Paul Cowling, director of offshore wind at RWE Innogy.

The Atlantic Array would have provided clean energy for almost 1m homes and provided thousands of jobs in the construction phase. Cowling insisted RWE remained committed to offshore wind and would be proceeding with a range of other projects off the coast of Britain.

Richard Sandford, head of European projects offshore at RWE, also denied that the Atlantic Array was dropped in a bid to save money at the German-based company. "This really is project-specific and not at all down to other considerations. We are still proceeding with schemes like Galloper and Triton Knoll, off the east coast of the country."

But RWE has already pulled out of a £350m nuclear-power project, is selling its DEA North Sea oil business and last week disposed of part of its UK gas and electricity supply arm. Developers have been warning for some time that they would need more subsidies from the government if ministers were to realise low-carbon energy targets.

The demise of the 240-turbine Atlantic Array will be welcomed by Geoffrey Cox, the local Conservative MP for Torridge and West Devon, who has been campaigning against the scheme. He and his supporters believe the project for 220-metre high turbines is unsightly. The plans to build it nine miles off the coast in the Bristol Channel were also rejected by North Devon council in September.

But the pullout will also raise concerns about the investment landscape in Britain for energy companies such as RWE, which have been under ferocious attack by politicians, regulator and the public.

The Crown Estate warned at the weekend that some Round 3 schemes might never see the light of day and insisted this was to be expected.

Huub den Rooijen, the Crown Estate's head of offshore wind, said on Mondaythere would be further "attrition" to come. "Paradoxically, this is a positive development because it provides greater clarity to key stakeholders such as supply chain and consenting bodies, and brings greater focus to the investment opportunities."

The Crown Estate, which has control over most of the seabed around the UK, has just given the go-ahead to Statoil to experiment with a floating windfarm off the coast of Scotland. The Hywind scheme is seen as important because it could help reduce costs offshore.

Renewable energy companies have promised to try to reduce offshore wind costs by 30% through a raft of measures as government ministers are under pressure to reduce public subsidies.

RWE has declined to put a cost on developing the Atlantic Array but said it was more expensive than the Gwynt y Môr project off Wales, which will cost £2bn and is about half the size.

The Departtment of Energy and Climate Change said: The decision not to proceed with the development is a matter for RWE. It was made on purely technical grounds and reflects the many complex challenges of constructing offshore windfarms.

"The UK still expects to deploy significant amounts of offshore wind by 2020 and we remain well placed to meet our 2020 renewable energy target.