Changes to competition rules will attract investment to electricity generation and the grid, Energy Secretary Ed Davey has said.
The government said it plans to scrap so-called unbundling rules that prevent companies from investing in both energy generation and transmission networks at the same time to enable more firms to invest in energy infrastructure in Britain.
The changes were announced as a report by the Energy Department showed that £45bn had been invested in the UK's power generation and networks since 2010 with an average of £7bn a year in renewables, which now produce 15 per cent of the country's electricity.
But around £110bn of investment in energy infrastructure is needed to replace ageing coal and nuclear plants and prevent power shortages into the 2020s, hence moves to loosen regulation.
"These rules were designed for good competition reasons, but over-rigid interpretation is stopping infrastructure investment that could not possibly result in any discriminatory behaviour," Ed Davey told a Confederation of British Industry (CBI) conference.
Davey said he had written a letter to the chairman of British gas and electricity market authority Ofgem about amending the unbundling rules, in which he said any changes would still meet the requirements of a European Union directive on unbundling.
The government will work with Ofgem on amendments this summer so that the new rules can come into force in early 2015, he added.
Davey also revealed details of an auction for the first £10m of a £20m pilot scheme that will see businesses and organisations compete for funding for projects that reduce electricity demand, with about 300 organisations including hospitals, airports and supermarket chains expressing an interest so far.
The scheme will provide funding for projects that would not otherwise have happened, and will save businesses money on their bills, cut carbon emissions and reduce demand on the grid.
Greater electrical efficiency could create savings equivalent to 9 per cent of total demand by 2030, the Energy and Climate Change Department (Decc) said.
The Government is testing whether schemes to deliver electricity savings at peak times – such as replacing old light bulbs with LEDs – could get payments under the "capacity market" which aims to ensure the country has enough power to meet demand.
Davey said: "Our plan is powering growth and jobs in the UK economy. We are building a secure, sustainable energy system for the future, dealing with an historic legacy of underinvestment and neglect that threatened to undermine the whole economy.
"The funds we invest now in keeping the lights on could, in the future, be available to support cheaper projects that deliver lasting reductions in peak electricity demand. I want to unlock the untapped potential of better efficiency in electricity use – so that more efficient kit can compete with building new power stations in the future.
"Our £20m pilot will fund schemes that will help reduce our demand – not only saving businesses and their customers’ money, but reducing the amount of electricity we'll need to generate.
"And by stripping away barriers to investment in our energy market, we'll make attracting capital investment cheaper and easier – meaning real benefits for the British economy and British consumers."