The Chancellor has stepped back from a windfall tax confrontation with the domestic energy industry after threats that the Government would not be able to then persuade Britain's utilities to invest tens of billions of pounds for much-needed new power stations.

Alistair Darling is set to announce in Wednesday's Budget plans to force retail energy companies to cut tariffs for the country's poorest 15% of households, many of whom pay more for their gas and electricity through pre-payment meters than more well-off homes that pay by monthly or quarterly direct debit.

The Chancellor has been keen to attack the energy firms over accusations that they have been profiteering at the expense of the nation's households.

The issue came to a head last month when the country's largest supplier, British Gas, reported a £600 million annual profit just weeks after a 15% increase in fuel charges took average household bills above the £1000 a year mark again. Those figures saw the regulator Ofgem call an immediate investigation into whether competition in the market was working.

However, after the Treasury raised the issue of a windfall tax - similar to that raised by Labour when it first came to power in 1997 - the Chancellor reined back his plans after officials were told private sector investment in windfarms, cleaner gas-fired power stations and new nuclear reactors would dry up.

Dieter Helm, an Oxford don and industry expert who has been at the heart of energy policy for the past decade, accused the Treasury of opportunism and arm-twisting with the threat of a windfall tax and warned the credibility of the liberalised market and its regulator Ofgem was under threat.

"It has apparently not dawned on them that a windfall tax will not solve the fuel poverty problem," he said.

"Worse still, the fact that the market sees such blatant political opportunism now must give rise to the expectation that in a year's time - and especially if prices have increased again - they will do it again. With perhaps 35 gigawatts new capacity needed by 2020 [around half the country's current electricity generating capability], a mountain of renewables targets and with the desire for a whole fleet of new nuclear power stations, this is one of the worst times to behave in this way," he said.

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