* Merkel says Germany protecting jobs, industry
* Industry faces prospect of paying back billions of euros
* Renewables sector concerned about uncertainty
* Commission launched consultation into subsidy guidelines
By Barbara Lewis
BRUSSELS, Dec 18 (Reuters) - Germany's multi-billion euro exemption of heavy industry from green energy charges will be investigated fully to see whether it is unfair, the European Commission said on Wednesday.
The decision prompted warnings from German industry and the renewables sector that it would shatter investor confidence and cost jobs.
Around 2,000 German heavy energy users such as BASF and ThyssenKrupp have been exempt from a surcharge ordinary consumers have to pay, but now face the possibility of having to pay back discounts totalling some 5 billion euros ($6.9 billion) a year.
Germany and some other European countries have imposed levies on power bills to subsidise the development of renewable sources such as wind turbines and solar panels, but such policies have become increasingly controversial during a period of slack economic growth.
The European Union executive said Germany's industrial discounts on green surcharges might sometimes be justified to keep energy-intensive firms in Europe, but it still had concerns that aspects of Germany's law distorted competition.
German Chancellor Angela Merkel, speaking on Wednesday before the Commission's announcement, said Germany was seeking to remain a strong centre for industry and she did not see how the discounts could be unfair.
"This is about companies and when it's about companies, it's about jobs," Merkel said in parliament. "As long as there are countries in Europe where electricity is cheaper for industry than it is in Germany, I cannot see how we are distorting competition."
Representing heavy industry, the chairman of copper smelter Aurubis, Peter Willbrandt, said it might reconsider its investment in Germany.
"My concern is above all that we hardly have any planning security here and it doesn't look like we will get this in the coming weeks or months either," he said in Hamburg this week.
The renewables sector and Green politicians say the many months needed for a full enquiry could shatter confidence.
"The lengthy and exhausting legal fight this will trigger risks putting renewables deployment on hold and killing off any investors' appetite," Claude Turmes, a Green party member of the European Parliament, said.
Brussels-based lawyers said the Commission was focused on the clash between German law and EU-wide legislation aimed at preventing market distortion, but it had also signalled that some parts of German green energy law were well thought-out.
Germany's BSW solar industry association urged the German government to ensure swift clarification that its green energy law did not constitute illegal state aid, saying it was vital to encourage a shift to renewable energy.
The utilities sector, which has said renewables subsidies distort the market and mean gas-fired plants cannot compete, said an investigation was necessary but any changes should not be abrupt.
"There needs to be a level playing field for subsidies and a fair distribution of costs. It's the job of the Commission to investigate," said Susanne Nies, a unit head at Eurelectric, which represents the EU electricity industry.
To guide future decisions, with a view to keeping subsidies to a minimum, the Commission also on Wednesday announced a consultation on EU energy and environment state aid guidelines.
The guidelines will cover the period 2014 through 2020 and should be adopted in time to take effect from July 1 next year, EU Competition Commissioner Joaquin Almunia told reporters.
Nuclear energy is not included in the guidelines, meaning the EU treaty, which is the basis for all EU law, would be used to assess any state funding of atomic generation.
The Commission also announced a separate investigation into Britain's plans for funding a new nuclear plant at Hinkley Point, southwest England.