Coalition factions close in on deal to reduce wind-farm subsidies

A 10% reduction in wind farm subsidies expected to be ordered by George Osborne (PA)

Conservative and Liberal Democrat ministers are close to reaching agreement on cuts to wind-farm subsidies amid criticism that the Coalition parties are pursuing two different energy policies – and that the Chancellor, George Osborne, is engaged in "open warfare" with parts of the Department for Energy and Climate Change.

Mr Osborne is expected to drop Treasury demands for a reduction of up to 25 per cent in state subsidies to encourage the growth of onshore wind farms. The cut is likely to be close to the 10 per cent figure backed by Ed Davey, the Liberal Democrat Energy and Climate Change Secretary. David Cameron and Nick Clegg have been drawn into a long-running dispute between the two parties.

Although no agreement could be reached as planned before the Commons began its summer recess last week, a deal is expected to be announced shortly in an attempt to give potential investors certainty about the future level of subsidies. Liberal Democrat sources played down reports that the party would "trade" a bigger role for natural gas in Britain's energy mix in return for beating back the Treasury's demand for big cuts in renewable subsidies. They insisted the two issues were separate and that Liberal Democrats acknowledged an important role for gas while renewable sources were developed.

Asked about Mr Osborne's stance during a visit to Cornwall yesterday, Mr Davey said: "This deal will trigger, I believe, a lot of investment and jobs, whether it is in onshore wind, offshore wind, biomass or others. I think it will really drive jobs." In a leaked letter to Mr Davey, the Chancellor urged the Energy Secretary to make a "clear, strong signal" of support for "unabated gas" up to 2030 and beyond, including a promise that consumers would benefit from falling gas prices. "Setting inflexible targets on the energy sector is inefficient," Mr Osborne said.

A Treasury insider said: "George is arguing for a solution that is good for both investors and the businesses and consumers who pay the bills."

More than 100 Tory MPs have written to the Prime Minister demanding big cuts in wind-power subsidies and environmental groups fear Mr Osborne has diluted the commitment to green issues that Mr Cameron displayed as Leader of the Opposition before the 2010 election. Ruth Davis, Greenpeace's chief policy adviser, said yesterday: "The Chancellor is running an alternative energy policy out of the Treasury. There are now two totally parallel and incompatible energy strategies being pursued. If the Lib Dems cave in to Osborne and his very public blackmail it will be a massive blow to their credibility, as they established their credentials on the basis of their green concern."

Craig Bennett, director of policy and campaigns at Friends of the Earth, said: "The Chancellor's pre-election pledge that 'the Treasury will become a green ally, not a foe' has been completely trashed. He's now dancing to the beat of a drum being banged by a vocal minority of out-of-touch Conservative MPs who fail to recognise the huge benefits already being delivered by the low-carbon economy. If George Osborne gets his way Britain will be locked into expensive imports of dirty gas for decades to come."