* French onshore sector hostage to EU court decision
* Wind firms freezing hiring, investment
* Government struggles to cut bureaucracy
By Michel Rose
PARIS, Feb 1 (Reuters) - A legal battle with anti-wind activists has frozen investment in France's onshore wind sector, threatening a "sea change" in energy pledged by Socialist President Francois Hollande and his coalition partner Greens.
Hollande wants to see France boost its renewable energy output from sources such as wind and solar power while closing the oldest of its nuclear plants and eschewing shale gas development.
But legal wrangling that threatens to drag on for months has created uncertainty over the future of tariffs paid to producers of wind power, halting needed investment.
Europe's largest electricity exporter fell to fourth place behind Italy in installed onshore wind power capacity last year.
"We had to stop hiring. And that's a shame, because we see the French unemployment rate rising, and we would have the means to hire and projects that are ready," Peter Schuster, head of German turbine maker Enercon's French unit, told Reuters.
Enercon last year installed one quarter of all new wind turbines in France and has invested heavily since 2003, employing 400 people and building a factory in Compiegne, 60 kilometres north of Paris.
But with the outlook for French wind power unclear, the company has moved about 50 staff out of France to Germany and Austria, where wind power is booming.
"It's not helping us because we created everything necessary: training centres, transport, offices. But we're not using them," Schuster said. "The potential is here, and that's frustrating."
French anti-wind group Vent de Colere - Wind of Anger - has battled against the development of the sector for years and last year contested France's onshore wind tariffs.
A French court has referred the case to the Court of Justice of the European Union in Luxembourg which will now determine whether the tariffs constitute undeclared state aid.
"Projects that need banking funding are finding it extremely complicated, so we think there will be another slowdown in added capacity this year," Jean-Louis Bal, head of the SER renewables energy lobby said.
"We're not on the right track (to meet France's 2020 energy use targets), the current trend is really not good," he said.
France under former president Nicolas Sarkozy set itself a 2020 target to install 25,000 megawatt (MW) of wind power capacity supplying 10 percent of French electricity production.
But only 757 MW of onshore capacity was added to the grid in 2012, bringing the total to 7,449 MW versus more than 30,000 MW in Germany.
Wind - onshore and offshore - makes up just over 3 percent of France's electricity production.
Some in the industry also feel frustrated as the government stands firm, refusing to issue a new decree over the tariffs while it awaits an EU court decision which could be as much as a year away.
"In terms of legal tactics, it's in their interest to wait, use every opportunity to express support to the sector ...but stop short of issuing a decree, because that would be a demonstration of guilt, a mea culpa," said Serge Savasta, head of renewable energy at private equity firm Omnes Capital.
The legal limbo could put some 1,000 jobs at risk in the second half of this year, wind lobby group France Energie Eolienne has warned.
France has Europe's second-largest wind potential after Britain, yet the tariff dispute reflects broader problems with bureaucracy and litigation which have slowed its bid to tap this energy source.
It takes on average eight years to set up a wind farm in France, compared with about four years in other European countries, Enercon's Schuster said, because of repeated legal challenges and a lengthy, two-track French permit process.
"Our problem is bureaucracy, and legislation changes every second year," Schuster said.
Any wind turbine higher than 12 metres, for example, requires a permit from the local prefect and approval from a dozen authorities including the culture ministry's heritage department, the ministry of defence, the weather forecaster, the civil aviation authority, and the radio spectrum agency.
A green energy bill under discussion in parliament contains measures to simplify administrative procedures, but the text has gone back and forth between the two houses, following filibustering by the opposition.
Omnes Capital's Savasta said onshore wind power for France compared favourably with other sources.
"Offshore wind takes time and French coasts are not very suitable. Solar power is good but it's much weaker in terms of output capacity. Onshore wind is the most easily, quickly deployable energy source," he said.
"By delaying every fundamental decision to the end of the debate, we're shooting ourselves in the foot," said SER's Bal. "In the meantime, foreign competitors have not stopped." (Reporting by Michel Rose; editing by Muriel Boselli and Jason Neely)