Energy Industry: End of biofuel subsidy 'only serves to muddy Whitehall's position'

The Government will pocket £550m from the cancellation of a biofuels subsidy programme in a move that the energy industry said was indicative of a package of energy and climate change policies that muddied Whitehall's stance on the issues.

Alistair Darling said the Government would end the programme that seeks to increase biofuel investment by granting a 20p per litre subsidy. It will be replaced by the Renewable Transport Fuel Obligation (RTFO), which sets a minimum legal threshold on the fuels. Under the scheme, at least 2.5 per cent of all fuel sold in UK forecourts will have to be biofuels. This will rise to 5 per cent in 2010.

No subsidy will be provided to encourage the oil companies and other suppliers to meet the targets. Penalties for non-compliance will be paid into a common pot and redistributed to those who hit or exceed targets. The Government estimates it will save £550m from the end of the 20p per litre subsidy, which takes effect in 2010. Graham Hilton, chairman of the Renewable Transport Fuels Working Group for the Environmental Industries Commission, said: "By removing the duty incentive before the RTFO is proven to work, the Government is making it very difficult to get investment to develop biofuels in the UK."

The energy companies were coolly receptive to Mr Darling's much ballyhooed measures to combat fuel poverty. The issue has become a political hot potato as all but one of the UK's energy companies pushed through major rises to energy bills. After publicly floating at least three different ideas to combat fuel poverty in the past 10 days, including legislative powers to force power companies to subsidise their most vulnerable customers, Mr Darling backed down from taking any decisive action.

Instead he called on the energy companies to triple the money they devote to the problem and backed it up with a threat. He said: "We want to see the five million customers on prepayment meters given a fairer deal and energy companies to increase their support to vulnerable customers. We will work with the companies to take further action on a voluntary and statutory basis – to underpin this as necessary we will legislate."

Fuel poverty is defined as affecting those who pay at least 10 per cent or more of their salary on energy bills. The companies said the Chancellor's focus on those using pre-paid meters was wrong, as four out of five of them are not in fuel poverty.

"The Chancellor's warm words do not constitute a fuel poverty strategy," said Duncan Sedgwick, head of the Energy Retailers Association. "We need to be clear how the Government plans to work with energy companies to target low-income families. It needs to get better at sharing the information it has in order to target those most in need. Energy companies are willing to support the Government, but we need a complete re-think on how to tackle fuel poverty. That doesn't mean tinkering around the edges."

The Chancellor did give the UK energy sector a fillip by extending tax relief on the cost of decommissioning oil platforms. The move will extend the productive life of its dwindling fields, and thus slow the rising dependence on imported gas. Exposure to high European gas prices has been one of the primary drivers behind the hikes to energy bills.

Mike Tholen, economics director of the industry group Oil & Gas UK, said: "Although the changes announced today are a step in the right direction, we believe the future of the North Sea can only be properly secured by simplifying and reducing the overall tax burden to ensure investment can be sustained."