UP to £11 million will be made available through a new scheme to fund "innovative" local energy systems.
The aim is to encourage the development of projects to provide energy at a scale ranging from clusters of buildings up to whole districts.
Universities and Science Minister, David Willetts, launched a funding competition to help UK companies exploit the rapidly developing market and "revolutionise" the way energy is generated, distributed and stored.
Mr Willetts said: "This funding will enable innovative companies to bring their ideas into reality. This will help the UK to move to a low-carbon economy, drive growth and get ahead in the global race.”
The competition for research and development funding will allow businesses to develop new products, services and solutions.
Iain Gray, chief executive of the Technology Strategy Board - and former managing director of Airbus UK at Filton - said: "The development of localised energy systems is an important part of what will be a complex mix of technologies for generating, transmitting, distributing and storing energy as we continue the transition to a low carbon economy in the coming decades.
“This funding competition is therefore critical, not only in developing the individual technologies, but also in developing solutions to how technologies are integrated to deliver robust, flexible and cost-effective systems.”