Existing and potential prison education providers will be given a year's notice from April 1 this year to submit tenders. All but a handful of providers are FE colleges. It is expected that private companies and local education authorities will take the opportunity to expand into the sector.
Colleges with large, cost-efficient, contracts could find themselves taking work away from their smaller counterparts.
Dan Taubman, national education official for Natfhe, the lecturers' union, said: "We have been here before, when we had a round of contract bidding in 1993.
"When colleges have the contracts, the lecturers come under the scope of Success for All. This means the extra money for pay is there and the need for qualifications applies. But if they work for private training providers these things do not apply."
The shake-up is the result of a review of prison funding led by the prisons learning and skills unit, in the DfES, and Downing Street's social exclusion unit.
Natfhe believes substantial investment is needed in prison education, combined with vocational training, including workshops, which are funded differently. It says the policy of bringing general and vocational education under one funding framework should be reflected behind the prison gates.
In its submission to the review, Natfhe said: "The amount of money spent on prison education will need to rise substantially to meet the challenges that the Government has set."
The document also went on to criticise contracting out of prison education since 1993. "It has led to instability, destroyed long-standing and valued arrangements and led to a reduction of learning programmes. We would prefer a similar system to before.
"However, we accept this is probably unachievable."