"The outlook is for the capacity surplus to grow as more wind and CHP (combined heat and power) plant is connected in response to the government's incentives for renewable energy sources," McCarthy, chief executive of Ofgem told a Standard and Poor's seminar on the power industry this week.

Ofgem's calculations show that if the government's targets to expand renewable energy are met and all existing power stations run to the end of their projected lives, then the surplus capacity would grow to around 60 percent in 2010.

"That is a simplistic calculation, which I doubt many would expect to happen in reality. But the probability of continuing spare capacity is one that seems very high,", said McCarthy.

A rush to build new power stations in the 1990s when electricity prices were much higher, has left Britain's generators struggling with a capacity surplus of 25 percent of peak demand compared with a more usual level of 15 percent.

Now companies are gearing up to build dozens of wind farms, encouraged by the government which has a target of boosting renewables to 10 percent of the UK's electricity supplies by 2010 from three percent of presently.

The government is to publish its white paper on energy policy early next year which is expected to underline the need to encourage renewables as part of its stategy to cut greenhouse gas emissions.

PLANTS MOTHBALLED, LITTLE EFFECT ON PRICES

Cash-strapped generators have mothballed traditional power stations with two gigawatts of capacity but this has made little difference to prices levels.

UK electricity prices have fallen 40 percent over the last four years in the build-up to and after the launch of a more competitive trading market last year.

According to Standard & Poor's, it could take up to a decade for prices to start rising as it will be years before older power stations are closed down and demand is growing slowly at between one and two percent a year.

Ofgem plans to extend the new power trading market, which only covers England and Wales, to Scotland which will also help keep power prices depressed.

(Additional reporting by Stuart Penson).