The UK's Department for Energy and Climate Change (DECC) said it will reward households and communities for producing low carbon electricity from April 2010.
Under the proposed new scheme, households installing solar photovoltaic panels and wind turbines up to 5MW will be paid for the electricity they generate for self use and for adding to the national grid.
The scheme is expected to encourage increased generation of locally produced green energy to help the country meet its energy target for 2020.
According to the department, the small scale renewable installations could meet 2% of electricity demand in 2020.
The department also plans to introduce feed-in-tariffs for renewable heat for the first time in the world from April 2011.