The National Audit Office has warned that the government's green energy policy will cost Britain's taxpayers and consumers about £1 billion a year by the end of the decade, and will increase the price of electricity by around 5 per cent.

The government plans to increase the level of electricity produced from renewable sources to 10% by 2010 by supporting project such as wind farms, and bioenergy power stations.

Despite at present only achieving a 2.4% increase against a quota for 4.3%, the NAO says the government is still on target to achieve 10% by 2010.

But Sir John Bourn, head of the NAO said a number of challenges remain before the target will be met. Among these will be revised planning guidance for England to allow planners to process new renewable energy sites. Upgrading the electricity grid to take power from new generators will also need to be funded and installed on time.

The report said the cost of cost of reducing carbon dioxide emissions through the Renewables Obligation is currently significantly higher than other ways such as promoting better efficiency and use of power.

The government hopes to double the level of energy generated by renewables to 20% by 2020. The NAO said in its report: "The use of renewable energy on this scale would reduce carbon dioxide emissions by between 20 million and 27 million tonnes, and increase the diversity and hence the security of the United Kingdom's energy supplies."

Sir John Bourn said: "The Renewables Obligation is increasing the level of renewable generation, and thus helping reduce carbon dioxide emissions, though at a price to the electricity consumer."

"The department needs to keep track of the scheme’s progress in improving the commercial viability of renewable generation and ensure that consumers benefit from reductions in generation costs."