The idea is to encourage investment in low-carbon power production, but the plan could backfire as consumers and small businesses struggle under the burden of paying for expensive new infrastructure.
The Energy Bill plans to use contracts for difference to fix energy prices for suppliers and encourage investment in green power plants.
Energy secretary Ed Davey said the bill was “designed specifically to reduce consumer bills”, in the long-term arguing that without a move to renewable energy, bills would be higher because of a reliance on volatile gas prices.
The green industry welcomed the plan, with The Carbon Capture and Storage Association, the Nuclear Industry Association and RenewableUK claiming the more stable investment environment will create up to 100,000 jobs.
And Ernst and Young believes the measures will boost investment from the £10bn seen last year closer to the £16bn it estimates is needed to hit green energy targets.
But there will also be a major downside for other parts of the economy – the changes will be funded by the consumer, hitting households already squeezed by high inflation and low wage growth, and hurting small firms which have long suffered under the burden of high utility bills.
The state itself expects household bills to rise by £75 per year as the green levy on bills will triple from £2.3bn to £7.6bn per year by 2010.
The Federation of Small Businesses warned energy bills are already the main source of rising costs for its members, and pointed to research showing eight per cent of small firms believe they will go out of business if bills rise by 25 per cent or more.
But the most energy-intensive firms will be exempt from extra charges.
WHAT DOES THE PLAN PROPOSE?
■ Renewable power firms will be able to fix prices at a set minimum using derivatives called contracts for difference
■ The aim is to give them certainty that they will receive enough income to attract investors, rather than relying on the relatively volatile energy markets
■ The government will act as a counterparty in the derivative trades, but the consumer will pick up the tab, paying more to ensure firms receive this minimum price
■ A new capacity market will encourage gas firms to expand facilities
■ They will be paid for the capacity they have on hand, even though they may not be generating electricity
■ That means the country should have enough capacity even at times when wind generators cannot work – but again, customers will pay higher bills
■ A carbon floor price is due to come into force this April, starting at £16/tCO2
■ And the levy on bills to pay for more investment will rise from £2.35bn to £7.6bn