The ‘Plug-In Car Grant’ was under threat from government cuts but Transport secretary Philip Hammond has promised the grant will start in January 2011, although it will only be offered to 8,600 customers.
On announcing the grant, Hammond said: "The coalition government is absolutely committed to low carbon growth, tackling climate change and making our energy supply more secure.
"We are sending a clear signal that Britain is open for business and that we are committed to greening our economy. This will ensure that the UK is a world leader in low emission vehicles."
Manufacturers and industry figures were quick to heap praise on the government for the scheme, which could encourage car makers such as Vauxhall to produce the electric vehicles in the UK in future.
Vauxhall workers at the Ellesmere Port plant in Cheshire, where the Astra is currently produced, hopes General Motors will choose the facility for the production of the extended range electric Ampera.
Renault, which will introduce four ‘Zero Emission’ vehicles from 2012, including the Fluence saloon and a Kangoo Van, greeted the news with ‘considerable enthusiasm’.
Renault UK’s managing director, Thierry Sybord, believes it is good news for the new Renault range. He said: "With this financial incentive in place, their affordability and lower running costs make the financial argument for electric vehicles, compared to conventional fossil-fuelled vehicles, as compelling as their environmental one.
"As a result of this morning’s news, we are even more excited about encouraging as many people as possible to consider using electric vehicles to drive down vehicle emissions, or as we say here at Renault, ‘Drive the Change’."
During the scheme, which runs until March 2012, motorists will be offered 25 per cent off the price of an electric car, up to £5,000.
Regions such as Greater Manchester, Cornwall, North East England and the West Midlands will bid to join London in receiving funding for a network of charging stations as part of the scheme.