The cabinet agreed it was more responsible to “cut the council’s losses” than risk spending further money with no guarantee of it being returned.
The decision was taken by the cabinet last week after it reviewed analysis of the business plan for the company, which was conducted by audit firm PricewaterhouseCoopers.
PWC’s initial analysis of the proposed Victory Energy, carried out in 2017, estimated that the company would require £3.8m of investment from the council.
However, the audit firm said the investment needed was now likely to be £15.2m.
Council leader Gerald Vernon-Jackson said: “It is just too big a risk to take with the city’s money with no guarantee of it ever being fully repaid.
“It is one thing to be entrepreneurial but another to be cavalier with public money.
“It is not the role of a council to be effectively acting as a hedge fund, playing roulette with public money.”
The PWC report expressed concern that the project might not be able to attract enough customers.
It said: “There is a risk that [the project] will not deliver the required level of acquisitions, with the current proposition and untested sales and marketing plan.”
The £2.5m was invested by another administration in 2017; control of the council changed in May 2018.
Vernon-Jackson said: “The previous administration spent money setting the company up. That money has been spent and is gone – we have taken this decision to limit the council’s losses and make sure no further money goes the same way.”
The council leader stressed that the loss of this money will not put “extra pressure” on future council budgets.
In May, Bristol City Council was forced to switch its energy contract away from its own energy company back to British Gas because the procurement process found it provided better value for money.