The report from the Department of Trade and Industry to be published on July 25, will show companies built just 38 megawatts (MW) of new capacity in 2001, compared with 844 MW installed in 2000 and a government goal of 600 MW each year.

"This is clearly a threat to Britain's green goals," the industry source said.

The government wants to double the installation of CHP, which harnesses excess heat from electricity generation instead of wasting it, to 10,000 MW by 2010 compared with 5,000 MW in 1997.

The Combined Heat and Power Association blames the drop in investment on record low UK electricity prices, high gas prices and new market rules which penalise small generators, like many CHP plants, which cannot guarantee their output.

"This is very worrying but in line with what we expected," David Green, director for the CHP Association, told Reuters.

UK Environment Minister Michael Meacher told Reuters in May that Britain might change the electricity market rules if a proposed government strategy, including tax breaks for CHP plants, failed to boost the struggling industry.

"The two things we would look at are a CHP obligation and changes to the (electricity market) balancing arrangements," he said, adding he would wait for a review by regulator Ofgem on the impact of the new market, due at the end of July, before taking any action.

Increasing CHP output is one of Britain's tools for meeting its commitment under the U.N. Kyoto Protocol on climate change to reduce greenhouse gas emissions by 12.5 percent on 1990 levels by 2008-2012.

The government also faces a struggle with another strand in its environmental policy aimed at raising green power output to 10 percent of the country's electricity needs from 2.8 percent at present.

"With the renewables and CHP targets both looking bleaker, the government's targets seem very tough," a spokesman for the CHP Association said.

The association said it did not expect much increase in investment in CHP until 2005 because of the poor economics.