The move, which PowerGen has agreed to, coincided with a new drive to bolster the renewable energy market, with the green light given to new projects worth pounds 1bn.
Approving the PowerGen-East Midlands deal, the Secretary of State for Trade and Industry, Peter Mandelson, said vertical integration between generators and supply companies was "not in itself objectionable". This was taken as an indication that the Government will look favourably on more consolidation, including the Scottish Hydro-Electric merger with Southern Electric.
It also emerged that Mr Mandelson took his decision against the advice of both the director-general of Fair Trading, John Bridgeman, and electricity regulator Professor Stephen Littlechild. Mr Bridgeman recommended referring the PowerGen deal to the Monopolies and Mergers Commission. Professor Littlechild agreed that competition concerns could be overcome through undertakings rather than a referral, but recommended PowerGen have to sell off 6,000 megawatts, or three coal-fired stations.
Other conditions imposed on PowerGen include an early end to its "earn- out" agreement with Eastern, which bought 2,000 megawatts of plant from PowerGen in an earlier disposal, and ring-fencing East Midlands' supply business.
PowerGen shares slid on the announcement but recovered. National Power shares fell 3.5 per cent on fears that it would be forced to divest up to 6,000 megawatts of coal capacity.
PowerGen welcomed Mr Mandelson's announcement and indicated that it expected to raise about pounds 1bn from the plant sales. It has received 12 expressions of interest from UK and US groups, including British Energy, Centrica, Southern Electric, Scottish Hydro and Mission Energy, which took over the National Grid's pumped storage stations.
The Government yesterday also gave the go-ahead for renewable energy projects worth pounds 1bn in its drive to cut emissions, but indicated that it would stand by its ban on gas-fired stations.
The move will more than double the electricity produced by wind farms, hydro stations, landfill sites and other sources from 2 per cent this year to 5 per cent by early next century.
John Battle, the Energy Minister, has approved 261 new projects involving almost 1,200 megawatts of capacity under the latest Non-Fossil Fuel Obligation (NFFO). This is the largest increase in the renewable programme since the government-backed scheme to encourage alternative energy sources was launched in 1990.
The NFFO sets the amount of electricity regional suppliers have to buy from non-fossil fuel generators and lets them pass on the higher costs to consumers. This year the extra cost of the scheme will be about pounds 116m, the same as last year.
The price of power generated from the latest projects averages 2.71p a unit, compared with up to 9p a unit when the NFFO first began and a current pool price of 2.67p a unit. Mr Battle said the 261 new projects would increase overall electricity charges by pounds 16m to pounds 23m.
Environmental groups welcomed the move. Friends of the Earth's energy campaigner, Dr Patrick Green, said it dispelled doubts about the viability of renewable energy.
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