* Energy reform is flagship policy of Merkel's coalition
* Rapid growth in renewables has pushed up power costs
* SPD minister shielded heavy industry from higher costs (Adds quotes from news conference, reaction)
By Markus Wacket and Madeline Chambers
BERLIN, April 8 (Reuters) - Chancellor Angela Merkel's cabinet approved on Tuesday a reform of Germany's renewable energy law designed to curb a rise in the cost of electricity in Europe's biggest economy driven by the rapid expansion of green power.
The reform will slow the growth of green energy, which accounts for 25 percent of Germany's electricity, and force new investors in green power to take some risk.
Although some industrial companies will have to pay more for power in future, the sector has managed to hang on to many of the benefits it says it needs to stay competitive. Household consumers, who have among the highest electricity bills in Europe, are likely to see power bills rise at a slower pace.
The blueprint is a victory for Economy and Energy Minister Sigmar Gabriel. The Social Democrat (SPD) leader has had to balance maintaining growth in renewables with the requirement to keep heavy industry happy with affordable power.
"Some 100 days after the start of the new government we have given the energy shift a new start," Gabriel told reporters.
He stressed that he had seen it as his task to make sure Germany protected jobs by preserving its industrial base.
Although Berlin is reducing exemptions from a surcharge which finances green subsidies and are granted to industry, the sector's contribution will stay roughly the same, he said.
Gabriel has also had to accommodate the interests of the European Commission and Germany's 16 states, which have differing energy priorities.
Germany's shift to green energy and away from nuclear power and fossil fuels is one of conservative Merkel's flagship policies but the cost of ballooning subsidies has threatened to undermine it. The reform is a centrepiece of her four-month-old "grand coalition" with the SPD.
Under the draft law, the government plans to increase the share of renewable sources to 40-45 percent of total electricity production by 2025 and to 55-60 percent by 2035. This is needed to offset the elimination of nuclear power by 2022.
It will scale back green subsidies and upper limits will be placed on onshore wind power expansion (at 2.5 gigawatts in capacity per year), photovoltaic (2.5 GW per year) and offshore wind plants (6.5 GW to 2020).
From 2017 green energy producers will have to compete more on the market with conventional power generators. The draft is due to become law in August. For a factbox, click on
An original law on renewable energy was brought in by an SPD-Greens government in 2000, and was designed to support new, green technologies but the subsidies were so generous that the cost of Germany's renewable energy boom has become unsustainable.
Since Merkel decided to speed up Germany's nuclear exit after Japan's 2011 Fukushima disaster, the energy shift has taken on a new importance.
Environmental group BUND criticised the plans, saying they would slow the 'green revolution' and they favoured industry.
"Merkel and Gabriel are handing out gifts to companies at the cost of ordinary citizens," it said in a statement.
After months of wrangling, Gabriel has also agreed with Brussels to continue some exemptions that protect some heavy industrial users of power from a renewable energy surcharge, worth about 5.1 billion euros ($7 billion) a year but which adds 6.3 cents per kilowatt-hour to the power bills of ordinary consumers.
The European Commission - the EU's executive arm - was looking into whether such discounts on surcharges were giving Germany's industry an unfair advantage over rival companies in other countries within the bloc.
The deal will be passed by the cabinet in May.
The powerful industrial sector, which accounts for more than a quarter of the German economy, has warned that some 800,000 jobs would be at risk if companies had to pay the surcharge.
"If we don't want to lose jobs, we have to make sure that our companies remain competitive .. And we have to ensure energy and raw materials are affordable," said Gabriel. "This is about hundreds of thousands of jobs."
He said households pay some 8 billion euros towards the green surcharge and industry about 7.4 billion euros.
"In future it will remain roughly that size," said Gabriel, even though about 400 of the 2,100 firms that enjoy the exemption will have to relinquish it.
Germany's powerful chemical branch said it was relieved at the plans for exemptions.
"Many jobs in the third-biggest industrial sector have been secured, as extremely high additional costs have been avoided," said Utz Tillmann of chemical industry lobby VCI.
The BDI industry association and German Steel Federation echoed those comments.
Germany's wholesale electricity prices are among the lowest in Europe thanks in part to a surge in wind, solar and biofuel capacity in recent years. The boom in renewables also helped drive down wholesale prices in Europe as Germany has become a major exporter of green electricity. ($1 = 0.7277 euro) (Additional reporting by Erik Kirschbaum and Frank Siebelt in Frankfurt; Writing by Madeline Chambers; editing by Keiron Henderson)
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