"Gas is cheap, has much less carbon than coal and will be the largest single source of our electricity in the coming years. And so the energy secretary will set out our new gas generation strategy in the autumn to secure investment," George Osborne told MPs in a speech on Wednesday in a parliamentary debate on the draft energy bill.
Contracts for difference will be a key part of a new system of incentives and allow utilities to sign long-term contracts to supply electricity at fixed prices that may be higher than prices in the wholesale market.
The long-term nature of contract for difference gives investors in new nuclear or fossil power generation capacity a stable return by guaranteeing price certainly for the electricity produced, which lowers the costs of investments.
The legislation will go into effect in 2013, if passed.
Utilities need to invest up to £110 billion ($174 billion) by 2020to replace Britain's aging power plants and upgrade electricity grids, according to the government projections.
Natural gas will also be a key focus of the Government's new energy policy as the comparatively short construction times of gas-fired plants, combined with their low carbon intensity, makes gas an easy option to backfill the capacity gap as several coal-fired and nuclear plant are due for retirement by 2020.
Gas-fired power plants currently provide up to 50 percent of the UK's energy demand, but given that the gas price has almost doubled in three years, the Government is backing an expansion of Britain's fleet of nuclear plants.