A plan to redraw the energy market risks undermining Britain’s industrial sector and its mission to attract billions in green energy investments, according to major business groups.

In a letter to Ed Miliband, the energy secretary, trade groups representing some of the biggest investors in green energy and manufacturing have spoken out against the government’s proposal for a “radical” overhaul of the market that could mean higher energy bills for those based farther away from energy projects.

Manufacturing groups including UK Steel and Make UK have joined RenewableUK and Scottish Renewables to warn that the plans would “undermine investment in low-carbon energy” by creating “new risks for clean energy developers”, which would raise the costs of meeting the UK’s clean energy targets.

Under the plans, which were put forward for consultation earlier this year, energy consumers would pay less for electricity if they were based close to electricity projects but more if they were based farther away.

The plans would also affect energy generators, who would earn less for the electricity if they were based far away from homes and businesses but more if they were sited close to areas of higher demand.

The plans would require government officials to redraw the power markets to create seven different zones. The “zonal pricing” proposals have won widespread backing from many energy companies, including Octopus Energy, which claim they would make the energy system more efficient and help cut the need for expensive transmission lines to shift power around the country.

The cost savings would be enough to ensure that bills were lower overall, according to supporters of the plan, meaning that those based close to energy projects would see a drop in their energy costs, and those based far from where electricity is generated would notice little difference to their bills.

However, major electricity generators and power users have disputed the claims and called on the government to scrap the plans in favour of less disruptive changes. They fear that the plans could lead to higher bills for factories and steelmakers, and lower earnings for large windfarms and solar farms.

The letter said: “We are clear that splitting GB into several regional price zones would undermine investment in low-carbon energy and risks penalising the UK’s energy intensive industries with higher electricity costs in globally competitive sectors.

“The volatility zonal pricingwould create new risks for clean energy developers, which would lead to increases in the cost of capital, the impact of which would outweigh the purported benefits of zonal, particularly when factoring in the new grid upgrades that are being planned.”

The government has yet to make a decision on zonal pricing or provide an update on its plan to change the electricity market.

Guy Newey, the chief executive at Energy Systems Catapult, a government-backed researcher that supports the proposed changes, said: “Zonal pricing is already common in a huge number of international markets and has driven down costs for consumers.

“Markets with zonal pricing have seen strong investment in renewables and it has supported industrial regeneration. Zonal is the ambitious, practical option on the way to 2050 – lowering energy bills, cutting carbon, and accelerating the transition to net zero.”

A government spokesperson said: “We are reviewing responses to the consultation on reforming electricity markets and ensuring that any reform options taken forward focus on protecting bill payers and encouraging investment.

“And our new industrial strategy will deliver long-term, sustainable growth right across the UK by supporting our industries and driving private investment into our economy.”