UPDATE 2-UK landmark energy reforms cushion heavy industry

* Wind farms to get most from low-carbon budget

* Utilities welcome bill, urge speedy legislation

By Karolin Schaps and John McGarrity

LONDON, Nov 29 Britain is considering exempting industrial users from extra costs arising from landmark energy reforms announced on Thursday while consumers face higher bills as the country replaces ageing capacity with low-carbon power.

Britain's Energy Bill, introduced to parliament on Thursday, aims to ensure the EU's second-largest economy can keep the lights on and diversify its energy mix in view of legally binding carbon targets.

"We propose nothing less than the biggest transformation of Britain's electricity market since privatisation (in the 1990s)," Edward Davey, Secretary of State for Energy and Climate Change, told parliament.

While energy-intensive industries could be spared much of the extra costs arising from reforms to reduce carbon emissions in Britain's energy industry, consumers will have to pay around 75 pounds more a year by 2020 to fund technologies such as wind farms, nuclear power stations and carbon capture, the energy ministry said.

"With or without reform, household electricity prices are likely to increase over time. However, Electricity Market Reform will help to reduce the amount that prices and therefore bills will increase," the energy ministry said in its policy outline.

Household energy bills are estimated to rise 5-9 percent less between 2016-30 than if no changes were made, delivering a net benefit of 1.3-7.4 billion pounds up to 2030, it added.

Demand for power is expected to rise by 30 to 100 percent by 2050, the government said, by which time Britain has undertaken to slash it greenhouse gas emissions by 80 percent.

Details on how heavy industry will be cushioned from the reform costs have yet to be agreed, a spokesman for the energy ministry said.

The government will launch a consultation next year, but exemptions for industrial users will be subject to European Union state aid approval.

"Energy-intensive manufacturing is finally getting its place in the sun today, by the exemption from necessary new energy costs," said John Cridland, director general of UK business lobby CBI.

The government's Energy Bill will intervene in the energy market in four crucial aspects: setting up contracts to guarantee a minimum power price for low-carbon generators, such as wind farms and nuclear plants; a mechanism to encourage back-up capacity; a minimum price for carbon; and a maximum allowance for carbon emissions from power plants.

Around 20 percent of Britain's generating capacity is scheduled to be taken off line over the next decade, and the cost of meeting future demand with low carbon generation could swell to 330 billion pounds by 2030, according to the London School of Economics.

Last week, the government spelled out that the amount of taxpayers' money spent on low-carbon power generation would be capped at 7.6 billion pounds in real terms by 2020, an increase from 2.35 billion pounds currently allowed.

Wind power projects, especially those built offshore, will receive the "quite a lot" of the levy money, Secretary of State Davey told journalists on Thursday, adding that an exact division of the funds among technologies was not set.

The bill is expected to receive royal assent next year and come into force in 2014.

Britain's utilities, which are expected to front a substantial amount of investment needed to modernise the country's energy market, largely welcomed the proposals.

Scottish Power said it had committed to spending 3.5 billion pounds in Britain by 2014 and called for legislation to be passed quickly.

"Where there is a clear, long-term commercial and regulatory framework, Iberdrola and Scottish Power will invest," Keith Anderson, Scottish Power's chief corporate officer, said.

Three of Britain's largest low-carbon energy associations said the bill could help create around 95,000 jobs in the energy sector.

"This bill is crucial in setting the investment framework for the next 20 years and ensuring that we can build on our current world lead in offshore wind and marine technologies, and guarantee clean domestic power and tens of thousands of green jobs," said Maf Smith, deputy chief executive of RenewableUK.