A European legal ruling has cast doubt on the government’s plans to reduce carbon emissions through on-site energy generation.

Judges ruled that a German law allowing a monopoly for on-site power generation in some circumstances contradicted EU law.

The Citiworks ruling threatens to hold back the growth of the energy supply company (ESCo) market and level six of the Code for Sustainable Homes, which allow for on-site energy supplies that are exempt from UK competition law. Current law allows suppliers to supply energy without offering consumers a choice. This has encouraged the growth of the ESCo market, where a provider agrees to supply energy to a scheme for a set period, often via renewable sources.

Judges at the European Court of Justice at Strasbourg ruled last week that a similar arrangement in Germany, which permits a monopoly when they are “located on a geographically connected operating zone”, contravenes directive 2003/54. The directive ensures an open energy market and national laws are only able to “derogate” from the principle on certain, unrelated circumstances.

Legal and energy experts expressed concern at the ruling. Chris Dunham, head of Sustainable Energy, an ESCo consultant, said: “If this becomes unworkable the zero-carbon target might not be hit.”

Chris Baker, partner in law firm Davies Arnold Cooper, said it put into doubt the current ESCo model. He said: “Unless operators of ESCOs can be confident in retaining the demand for energy from all those requiring energy on the site there can be very little – if any – interest in this type of power generation.”

Industry is waiting for the results of a consultation jointly headed by Department of Business Energy and Regulatory Reform and energy watchdog OFGEM that would have allowed flexibility for medium sized ESCOs looking to generate power without the extra burden of licensing. But industry insiders say that consultation is to be delayed until the outcome of the ruling can be digested.

A spokeswoman for DBERR said that Government was looking at the implications of the ruling ‘within the context of consultation,’ and said there was no due date for its publication of the consultation.

The Citiworks case involves Leipzig airport, which has an onsite energy system which supplies the airport itself and the commercial operators at the airport.