The government is seeking to re-establish its green credentials after receiving clearance from Brussels for a delayed £860m scheme to subsidise heating by renewable sources.

The energy department announced the news on Wednesday just minutes after Chris Huhne, energy secretary, launched a staunch defence of green power, in a speech that reflected coalition tensions over green policies.

George Osborne, chancellor, told the Conservative party conference in Manchester last month that “we’re not going to save the planet by putting our country out of business”. Mr Huhne, a Liberal Democrat, used an industry conference in that city on Wednesday to stress his commitment to renewable energy.

The Renewable Heat Incentive will pay varying tariffs to users of solar power, heat pumps, plant matter and other non-fossil fuel sources for 20 years. However, the price of state aid approval from the European Commission was to drop the amount paid to generators of one megawatt and over, from 2.7p per kilowatt hour to 1p per kWh.

The scheme, delayed since September, should be open to applications from the end of November, subject to parliamentary approval. Within a year it should also be open to householders, who can get grants of up to £1,250 each for renewable energy systems. It comes a week after subsidies were cut for onshore wind and solar power.

The scheme is expected to bring in £4.5bn of private sector investment by 2020.

Around half the UK’s carbon emissions come from heating. The government expects 123,000 renewable installations by 2020 supporting 150,000 jobs. Its target is to increase the proportion of heating energy which comes from renewables from around 1.5 per cent to 12 per cent by then.

Tim Minett, chief executive of CPL Distribution, a supplier of wood pellets, said that “the financial ‘carrot’ ” of RHI “will be a game changer for the UK’s transition to a low-carbon economy”.

“Our calculations show that the owner of a commercial office block of 5,000 sq m could receive more than £25,000 a year through the RHI, while insulating their balance sheets from inevitable future price rises in oil and gas.”

He said bigger producers could still benefit, with the average-sized hospital saving more than £140,000 a year.

Mr Huhne also said there had been “overblown exaggeration of the differences” between himself and Mr Osborne. He also wanted special treatment for heavy energy users in sectors competing internationally, such as steelmaking, to avoid them being driven abroad.

Mr Huhne earlier told journalists the subsidies were addressing a market failure – global warming by fossil fuels – that had not been addressed because the EU’s emissions trading scheme had priced carbon too low.

“What large numbers of European countries are having to do is to compensate for the inadequate level of the EU ETS carbon price to provide incentives with other instruments,” he said.

A Commission spokeswoman said state aid approval was given at the end of September as the RHI met a larger EU objective of reducing emissions.

Nevertheless, the CBI employers’ group called for “certainty in both policy and language” to encourage inward investors.

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