* UK power market faces severe shortage after 2015
* Lowering carbon output calls for phasing out older coal-fired capacity
* Huge investment needed to replace retiring power plants
By Nina Chestney and Henning Gloystein
LONDON, Dec 4 (Reuters) - British lawmakers rejected an amendment on Wednesday that would have forced tougher rules on old coal-fired power plants, sparing the energy market from an even tighter squeeze as ageing nuclear plants shut later this decade.
The amendment would have extended the so-called emissions performance standard (EPS) to cover old and inefficient coal plants, as well as new ones, unless they were fitted with costly carbon capture and storage technology.
It will now go back to the House of Lords to be discussed again and possibly reworked.
Supporters say the move would have delivered rapid and cheap carbon emissions reductions.
However, critics say the amendment would have made coal plants uneconomical, forcing more to close around the end of this decade - thereby threatening the country's energy security, raising consumer energy bills and adding to a supply squeeze.
Energy minister Michael Fallon told parliament that government calculations showed the early closure of old coal plants would lead household bills to increase by around 4 percent and industrial bills by 4 to 6 percent.
"The (aim) is to put another nail through the heart of coal in the next few years," said Peter Atherton, analyst at Liberum Capital.
Britain's power market is already tight as ageing capacity is being retired and little new generation is being built.
National Grid has warned of winter blackouts if more is not invested in new capacity, and energy regulator Ofgem says the power market could tighten significantly by the winter of 2015/2016.
"The investment climate for UK generators has never been tougher ... There is a highly predictable capacity squeeze coming towards the end of the decade," said Julian Critchlow, head of Bain & Company's Global Utilities practice.
"Until markets are clear on the future mix and structure of markets, utility boards will rationally procrastinate on investment.
He added that regulatory uncertainty meant little new capital would be deployed, creating the risk of capacity squeezes.
Analysts said avoiding a capacity crunch would largely depend on the success of government market reforms.
"The real issue will hit in the second half of the decade, with further regulatory mandated closures and economic closures of older CCGT (combined cycle gas turbine) plants due to energy margins not recovering fixed costs," Olly Spinks of consultancy Timera Energy said.
The government expects its energy bill to trigger 100 billion pounds ($164 billion) of new investment to replace its ageing energy infrastructure by 2020.
"If the energy bill doesn't unleash that investment, there isn't a new-build programme from next year and we are still shutting coal plants and driving remaining coal plants off the system, then yes - you could hit a power squeeze," Atherton said.
Britain's power demand is usually slightly below 40 gigawatts (GW) a day, although needs can rise to almost 60 GW or fall to 20 GW during times of lowest demand, National Grid data shows.
Britain's installed thermal (coal, natural gas and oil), nuclear and hydro power capacity is currently slightly over 70 GW, although output is usually around 40 to 60 GW as some facilities are in maintenance or mothballed.
Adding 4.6 GW in capacity via interconnectors with continental Europe as well as the country's more than 10 GW in renewable capacity (mostly wind), the system is well set up to meet Britain's demand for electricity.
The problem lies towards the end of the decade, as the country's ageing nuclear fleet is retired before new reactors have been built.
From 2017, Britain could face power shortages during days when high demand clashes with low renewable output, data shows.
On cold winter days, which often have little wind, Britain would need to rely on imports to keep the lights on, according to energy analysts and meteorologists.
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