The judicial review has prompted auction administrator, the department for business, energy and industrial strategy (BEIS), to delay the country’s third CfD tender.
Onshore wind was eligible to compete in the UK’s first tender in 2015, but was barred from the scheme's second round.
Banks Group argued that excluding consented onshore wind projects from the CfD scheme is "against the public interest, prevents consumers from benefiting from the lower energy prices that would result from their inclusion and, from a legal perspective, does not comply with either EU or UK law".
BEIS confirmed it was contesting the challenge.
"We have consistently expressed the view for many years that, as the most cost-effective method of low carbon electricity generation available, consented onshore wind farms should be included within the CfD auction process, and we have been in discussion with the UK Government over this matter for several months," said managing director of Banks Renewables, Richard Dunkley.
"It has so far indicated that it intends to continue with a policy which will result in slower decarbonisation and reduces competition in a way which leads to higher electricity bills for everybody, and we have therefore very reluctantly had to take this next step.
"This legal challenge is very much a last resort and we hope it will be resolved as quickly as possible, but we firmly believe that changes are required to ensure the UK Government complies with its legal obligations and to end the needless prejudice within the CfD process against the most cost-effective and popular form of renewable energy generation," he added.
The CfD scheme is open to developers of ‘less established’ technologies.
The bidding window for the third round was due to close on 15 August, but earlier this week BEIS pushed this deadline back by two weeks to 29 August, due to the legal challenge.
With an allocated budget of £60 million (€65 million) and maximum strike prices ranging between £53/MWh and £56/MWh, analysts had predicted between 1.9GW and 3.2GW of offshore wind capacity could be procured in the tender.
Banks Group operates 224MW of UK onshore wind capacity, and secured contracts for three onshore wind projects in the UK’s first CfD auction in 2015.
It also has two consented onshore wind projects with a combined capacity of 150MW.
In a statement, Banks Groups argued CfDs "incentivise investment in renewable energy by providing developers with high upfront costs" and with "direct protection from volatile wholesale prices".
It also cited a 2018 study that found if onshore wind were permitted to compete in CfD auctions, the strike price would be less than wholesale market prices — reducing the price of electricity and reducing net payments from generators to consumers.
A BEIS spokesperson said: "Our contracts for difference scheme has supported the investment of £490m annually in renewable technologies and more than 50% of our energy now comes from low-carbon sources - a vital part of our move to becoming a net zero emissions economy by 2050.
"We run the scheme lawfully and will be contesting this claim."