IT was still dark when 10 of the City’s top financial brains joined Tony Blair and Margaret Beckett, environment secretary, for breakfast last Thursday at No10 Downing Street.

As they filed in, one or two of them were wondering whether they were there at the behest of Blair or his wife Cherie, as green energy is said to be a subject close to her heart.

Bob Diamond, head of Barclays Capital, Steve Newhouse, chairman of Morgan Stanley International and Andrew Pisker, chief executive of Dresdner Kleinwort Wasserstein, as well as representatives from ABN Amro, BNP Paribas and Société Générale and others, were there to discuss business.

The meeting was held with one aim in mind — to get London’s financial institutions to put themselves in the front line for a new commodities market that could be worth up to £21 billion a year, according to Tony White, head of research at Climate Change Capital.

The development will not just affect thousands of companies but also consumers who may have to pay higher energy bills.

On January 1, 2005 the European Commission’s Emission Allowance Trading Directive will come into force. This will put a cap on carbon-dioxide emissions. The system will work by issuing allowances, or emissions trading certificates, which will be divided between all the companies that need to be covered. These will include power generators, cement producers, metal companies and others. Power generation is estimated to account for nearly 70% of the carbon dioxide emitted in the European Union.

Individual companies will be allowed to emit only a certain tonnage of harmful gases, but they will be able to buy additional certificates if they want to break their allowances. If they emit less, they can sell their surplus certificates.

This is what has caught the interest of Blair and the investment-banking world, because the trading of certificates could become big business.

Brian Senior, managing director of RWE Trading, a big energy trader operating in Britain, says the price for wholesale electricity is already rising in anticipation of the arrival of the new scheme.

“This should have the potential to create a genuine market,” he says. “We are already gearing up to trade.”

At present little commodities trading is done in the energy market in Britain because the large utilities such as Scottish & Southern Energy and Centrica can hedge their own risk through owning the entire chain from generation to supplying customers. This means that if prices are forced down in one part of the business, the loss can be recovered through better management elsewhere. Many banks such as Morgan Stanley, which has a large energy trading business in America, do little business here. All that could be about to change.

The bankers at the meeting told the prime minister that there would need to be a standard market across Europe for trading to really take off.

Blair left his guests in no doubt that he wants this to happen. New Labour’s dedication to green energy and its love affair with business are an irresistible combination.

Only last March, the government launched a long white paper on Britain’s future energy needs, and announced that Britain will produce 10% of its energy from renewable sources by 2010. That figure caused some shock, given that green power today accounts for only a small part of the country’s energy supply.

But the promise of generous subsidies has already led to power generators and financial backers clubbing together to build wind farms, refurbish hydroelectric power stations and convert existing power plants into ones that burn only organic material.

Meanwhile, Blair’s new recruit to head Ofgem, the industry regulator, is set to make renewables a key plank of his agenda.

In an exclusive interview with The Sunday Times, Sir John Mogg, Ofgem’s new chairman, says that a central part of his brief will be to ensure energy companies have enough money to invest in green energy and the infrastructure needed to transmit it to where it is needed.

“Some have said that the investment to rewire Britain could cost £2 billion and someone has to pay for it. We have to make sure that whatever is done is carried out at the least cost to the consumer,” he says.

Consumers will certainly be interested in anything that Ofgem does. Scare stories that Britain could be plunged into darkness if there is a cold winter have dominated the press after blackouts during the summer in London and New York.

The generating industry will be watching, too. The last regulator, Callum McCarthy, was repeatedly lambasted for allowing wholesale power prices to crash. This was blamed for the collapse of TXU, now owned by Powergen, and British Energy, the nuclear generator.

But Mogg is not expecting to take a different route from his predecessor. He believes that the market will provide and, given that two power stations have already been brought back online as wholesale power prices are once again rising, he may be right.

Yet Britain is not out of the woods yet. The problems with electricity are being resolved but there is another headache around the corner — the lack of gas. Many power stations run on gas and Britain will be a net importer of this from 2006.

Just as Britain is running out of gas, the new European directive will put the onus on burning greener fuels — of which gas is at the top of the list.

Gas prices could go through the roof, hitting consumers hard in the wallet. So while Blair and his bankers look forward to seeing London at the centre of the action, they should not forget who may end up paying for it.