(Updates with details, background information)
By Markus Wacket
BERLIN, March 26 (Reuters) - Leaders of the lower house of parliament in German Chancellor Angela Merkel's centre-right coalition have reached a compromise agreement on cuts in solar power incentives with the upper house after weeks of negotiations, sources told Reuters on Monday.
The deal will be a big relief for Merkel's coalition because the upper house, the Bundesrat representing the federal states, had unexpectedly threatened to form a two-thirds majority to thwart government plans to cut photovoltaic incentives.
Not only are those states controlled by opposition Social Democrats (SPD) and Greens opposed to the proposed incentive cuts, but several conservative-ruled states in Bavaria and eastern Germany were also against the cuts of up to 37 percent.
The government wants to slash the feed-in tariffs (FIT) that have helped the solar power sector in Germany become the world's largest market for photovoltaic energy, with 25 megawatts installed capacity - nearly half of the world's solar capacity.
Horst Meierhofer, a leader on environmental policies for the Free Democrats (FDP), the junior coalition partner, said that the FDP and Merkel's conservatives had reached an agreement that should help the measure win endorsement in both houses.
"The conservatives and FDP have reached an agreement," Meierhofer told Reuters, comments confirmed by sources in the conservative ranks. Solar power incentives will fall by between 20 and nearly 40 percent from April, the sources said.
The coalition agreed to water down some of the points in the incentive cuts after the upper house objected.
But exempted from the cuts are investors who have already planned projects and registered their applications with the respective local utility before February 24. They will have until June 30 to complete the projects planned.
Large open field projects will have until September 30 to complete those brown field projects.
On top of the incentive cuts, incentives for solar power will only be paid for 80 percent of the electricity produced for new installations of smaller plants, with the operators now forced to sell or use the remaining 20 percent on their own.
For larger plants, only 90 percent of the electricity produced for new installations will be eligible for the incentives with the remaining 10 percent sold independently.
Until now 100 percent was purchased at above-market rates.
The feed-in tariff (FIT), the lifeblood of the German scheme in which operators receive a fixed guaranteed price from utilities for solar electricity produced for a 20-year time period, will be cut further by 1 percent per month from May to November, the sources said.
From November, the monthly cuts will be based on how much solar power capacity was added in the third quarter. The monthly cuts from February 2013 will be based on the amount of new capacity added in the fourth quarter.
The maximum annual cuts will be no more than 29 percent in the future, up from 24 percent currently.
The government wants new installations of about 3.5 gigawatt per year. In 2010 and 2011, more than 7 gw were installed in each year, raising Germany's total to 25 gw.
If parliamentary groups approve the measure in their meetings on Tuesday, it could be rushed through the lower house on Wednesday and Thursday to take effect on April 1. The Bundesrat is expected to handle the measure in mid-May.
Several conservative states with significant solar power industries had threatened to block the measure in the upper house. They are not expected to block it if a deal has been reached, however.
The state-mandated FIT incentives have helped the sector blossom over the last decade, with 1.1 million solar power plants installed. About 150,000 jobs have been created.
At stake are jobs and investments in solar-heavy states such as conservative Bavaria, where resistance to the cuts is strong, as well as in eastern Germany, where solar has emerged as a key industry. (writing by Erik Kirschbaum, editing by Gareth Jones)