One of Britain’s oldest power stations will close on Tuesday after the government refused to award it a subsidy to switch from coal to biomass.

RWE npower, the energy supplier, said it had taken the “difficult decision” to shut down Tilbury on the river Thames in Essex after the government said a project to convert it to biomass was ineligible for its new low-carbon support mechanism.

The decision brings the curtain down on a plant that has been generating electricity for 46 years and casts a shadow over Britain’s plans to source a growing proportion of its power from wood pellets.

Tilbury B was scheduled to close under an EU environmental measure known as the Large Combustion Plant Directive (LCPD). Under the legislation, Tilbury was allocated a quota of 20,000 hours of operation from January 1, 2008. In 2011, RWE decided to switch it to biomass for the remainder of its LCPD hours, due to end at midnight on Tuesday.

RWE had hoped to convert the plant from coal to biomass, which would have given it an extra 10-12 years of life. But after the Department of Energy and Climate Change decided the project was ineligible for its low-carbon energy subsidy, the “contract for difference”, RWE said the plan was “no longer economically viable”.

The decision will be a blow to the biomass industry but will be welcomed by environmentalists, who have argued that increasing demand for wood pellets as a feedstock for biomass plants could lead to the destruction of biodiverse forests, as more land is taken up for tree plantations.

A fire at the Tilbury biomass plant in February damaged storage units holding thousands of tonnes of wood pellets, weeks after the facility began commercial production.