People in Shetland have been left frustrated by a stand-off between an energy company and the regulator that has put a stop to the building of a long-awaited new power station and shows no sign of early resolution.

Last month, Scotland's Energy Minister Fergus Ewing gave planning permission for a new 120-megawatt power station a couple of miles north-east of Shetland's capital, Lerwick.

A Government press release announced Ewing's satisfaction that construction work on the project would create 400 jobs.

But neither the press release, nor most of the subsequent media coverage, mentioned the fact that national energy regulator Ofgem earlier this year ordered the developer Scottish Hydro Electric Power Distribution (SHEPD) to take the project back to the drawing board.

According to Ofgem, Scottish and Southern Energy's distribution arm SHEPD had not done enough work to prove that the plan represents best value for consumers across the north of Scotland, who effectively cross-subsidise the cost of electricity generation and distribution in the islands.

Ofgem also claims SHEPD had not "sufficiently tested the market for an efficient and economical solution" and had not adequately considered alternatives to the building of a new power station in Shetland.

Plans for the new power station, which would have replaced a 67-megawatt power station which dates back to the 1950s and which no longer meets modern environmental emissions standards, were unveiled by SHEPD in 2013.

SHEPD spent three years drawing up plans for the new plant after being required in 2010 to draw up an integrated energy plan for Shetland.

After consultation with the local community, SHEPD's plans were unanimously approved by the planning committee of Shetland Islands Council in February before receiving approval from the Scottish Government in August.

The current harbour-side power station at Gremista, which burns heavy fuel oil in some of its generators and also uses some diesel, is blamed by many Lerwick residents for sooty emissions that often make it impossible for them to dry their laundry outside.

The power station proposed by SHEPD would have burned greener, light fuel oil with the option of burning natural gas from Sullom Voe oil terminal, 25 miles north of Lerwick.

SHEPD's energy solution for Shetland for a new power station incorporated "smart grid" plans to help balance local demand for electricity.

It would also have allowed small-scale renewable energy sources to feed into the island electricity distribution network, which is not connected to the national grid.

The new power station would also have seen heat from the generating process being pumped into the local district heating scheme.

SHEPD claims it examined more than 20 other potential options before submitting its plans for the dual-fuel power station, which were turned down by Ofgem.

A spokesman for SHEPD said last week that, in line with Ofgem's requirements, it was close to appointing an independent auditor who will oversee the "competitive process" that will identify a new solution to Shetland's energy needs. A consultation process to precede the competitive process will get under way soon but it is likely to be several months before new plans are drawn up.

Until the process has been completed SHEPD says it cannot say for certain if Shetland will get a new power station and, if so, whether it would be built on the site it now has planning permission for.

The chairman of Lerwick Community Council, Jim Anderson, said that people in Shetland were "quite confused as to why the new power station has not been built".

"People in north Lerwick will be glad to see the back of the old power station," he said. "Everybody was happy with the proposal on the table until Ofgem pulled the rug out from underneath it."