Exclusive:Rachel Reeves says new subsidy agreement with Drax power station is 'pragmatic approach' to energy transition

However, the amount of subsidies Drax receives will be halved, from around £950m a year currently to £470m.

Energy Minister Michael Shanks had stern words for the firm, saying it cannot be allowed to operate in the way it has until now, or with the level of subsidy it previously received, which enabled Drax to make “unacceptably large profits”.

Campaigners have decried the decision to grant more financial support, with TV star Chris Packham describing it as “absolute madness”.

Labour’s MP for Leeds Central and Headingley and chair of the Net Zero All-Party Parliamentary Group Alex Sobel said the move “is going to make it difficult to meet the Government's clean energy commitments”.

Chancellor Rachel Reeves defended the decision on a visit to Leeds yesterday, saying that Drax “is a really important part of our economy in Yorkshire creating good jobs for people in Selby and beyond”.

“If we are going to power that transition to clean energy, Drax is an important part of that to provide back up when the sun isn't shining and the wind isn't blowing.

“So this is a pragmatic approach to make sure that we can do that energy transition while supporting good jobs in Yorkshire with that support for Drax.”

In a written ministerial statement, Mr Shanks explained that the power plant will play “a much more limited role in the system, providing low carbon dispatchable power only when it is really needed”.

It will go from running about two-thirds of the time, to only operating as “dispatchable power” when wind and solar energy is not available.

The Energy Minister said there would be “significant risks” in trying to replace the controversial wood-burning plant with gas-fired stations, and claimed Labour had inherited an energy system with no long-term planning.

But he added that Drax’s sustainability arrangements “must urgently be improved going forward”, and the company will face strict "substantial penalties” if this does not happen.

The proportion of woody biomass burned that comes from sustainable sources must increase from 70 per cent to 100 per cent, and supply chain emissions must be cut to stricter levels in line with Europe under the new arrangements.

Material from primary and old growth forests will be excluded from receiving payments. There will also be a windfall mechanism to recover excess profits and ensure fair prices.

Last year, Drax agreed to pay £25m after a probe by energy industry regulator Ofgem found that the company had failed to properly report data on the types of wood it uses for its biomass pellets.

While a BBC Panorama investigation found Drax has held logging licences in Canada and used wood, including whole trees, from primary and old-growth forests for its pellets. The company has maintained its biomass is sustainable and legally harvested.

Mr Sobel urged the Government to give greater scrutiny to Drax’s North American operations saying it “undermines energy security … and has implications for national security”.

Drax Group chief executive Will Gardiner said: “Under this proposed agreement, Drax can step in to increase generation when there is not enough electricity, helping to avoid the need to burn more gas or import power from Europe, and when there is too much electricity on the UK grid, Drax can turn down and help to balance the system.”