(Corrects Somerset to Yorkshire in final paragraph)
* EU Commission approves Britain's capacity payments, CfDs
* Green groups criticise decision on capacity market
* Commission not decided on investment contracts to biomass
LONDON, July 23 (Reuters) - The European Commission gave the go-ahead to Britain's proposed energy capacity market and a scheme to support renewable energy generation on Wednesday, paving the way for sweeping reform of the country's electricity market.
Britain is overhauling its electricity market to help deliver low-carbon energy and reliable electricity supplies as existing and ageing nuclear and coal plants go offline over the next decade.
The government plans to introduce a capacity market by the end of this year to ensure there is enough electricity generating capacity available at all times to meet demand.
The European Commission decided to look into the plans to make capacity payments to domestic power producers after Norway complained last year that its exporters would be excluded from the system.
However, it has found the scheme will contribute to ensuring Britain's energy supply security without distorting competition.
"The UK Capacity Market embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules," Commission vice-president in charge of competition policy Joaquín Almunia said.
KEEPING THE LIGHTS ON
The capacity market will offer all capacity providers - new and existing power stations and electricity storage operators - predictable revenue from capacity payments. In return, they have to deliver energy when needed or face penalties.
Environmental groups criticised the Commission's approval as pollutant-heavy coal plants will also be eligible to apply for capacity payments.
"The capacity market risks pushing up bills and holding up progress towards a decarbonised power sector by throwing money at the UK's old, dirty coal plants," said Jenny Banks at WWF-UK.
According to Brussels-based thinktank E3G on Wednesday, around 10 gigawatts of UK coal capacity could be in line for payments later this year and a further 5 GW in the future.
The Commission has also gave the green light to the British government's so-called "contracts-for-difference" (CfD) scheme, which promotes renewable energy generation.
Under the CfD scheme, qualifying renewable energy projects will be guaranteed a minimum price at which they can sell electricity, replacing a mechanism for direct subsidy payments.
Almunia the scheme was a "fine example" of how to promote low-carbon energy with market-based support mechanisms, at the lowest possible cost for consumers.
The scheme will run for 10 years starting in April 2015, with a total budget of 15 billion pounds and selected projects will be able to receive support for up to 15 years.
The Commission also approved government investment contracts worth 9.7 billion pounds to five offshore wind farms under the CfD scheme.
A spokeswoman for the Department of Energy and Climate Change told Reuters the Commission has still not decided whether to approve contracts awarded in April to three biomass plants.
These are Drax Group's third biomass conversion unit (called unit 1) at its coal plant in Yorkshire, Lynmouth Power's biomass conversion unit and a MGT Power's dedicated biomass unit with combined heat and power in Teesside. (Additional reporting by Susanna Twidale; Editing by David Evans)