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Energy prices to surge

Electricity bills are set to soar under a new subsidy regime that will lock in generous payouts for offshore wind and biomass power developers for years to come.

The controversial scheme, likely to be unveiled this week, has been delayed for several months by bitter disagreements between the Department of Energy and Climate Change, which wants to promote low-carbon investment, and the Treasury, which wants to keep a lid on spending.

The dispute is part of a deeper clash at Whitehall. One in five households is “fuel poor” – when more than 10% of its income goes on energy bills – but the government is nonetheless pushing ahead with a radical £200 billion overhaul of the energy industry that promises to ramp up bills even further.

The latest squabble centres on the subsidies paid to onshore wind farms. In February, 101 Tory MPs called for dramatic cuts to the £400m-a-year assistance for wind generators. Developers are paid double the market price of electricity.

The energy department was set to unveil a rejigged scheme for all renewable technologies – wind, biomass, waste from energy – in March. This included a proposed 10% cut to the onshore wind payout.

George Osborne, the chancellor, attempted to push through a 25% reduction, but the renewables industry threatened legal action. It is understood that the energy department is still debating the final figure this weekend, but it is expected to reveal an amount closer to the original 10% reduction before parliament rises on Tuesday for its summer recess.

Subsidies for offshore wind, which receives three times the wholesale electricity price, are likely to remain unchanged.

The government has also stepped up efforts to jump-start the troubled nuclear power building programme. Last week KPMG, the accountant, was appointed to advise on talks with EDF Energy and Centrica, which plan to build Britain’s first new atomic reactor in more than 20 years at Hinkley Point in Somerset. The companies say they need billions in subsidies to cover the upfront cost.

The EDF-Centrica group is in a strong negotiating position after a rival consortium of Eon and RWE, the German utilities, put their nuclear joint venture up for sale in March. Citi, the investment bank, said the government could have to guarantee a payout of up to £166 a megawatt hour – more than triple the current wholesale rate.

Over the past five years the average annual household bill for energy has doubled to £1,345.