UPDATE 4-Merkel to push back against EU if green energy support questioned
* Merkel says Germany needs clear agreements with Commission
* Berlin proposed firms with on-site plants pay higher levy
* Oettinger says Germany should pass the reform this week
* Econ Min says Commission trying to hold Berlin hostage
* Retailer Metro halts investment in own power units (Adds retailer Metro freezing investment in combined heat and power units)
By Michelle Martin and Vera Eckert
BERLIN, June 25 (Reuters) - German Chancellor Angela Merkel said on Wednesday she would push back decisively against the European Commission if it raised further objections to Germany's system of green power subsidies.
Berlin and the Commission have been at odds over the German policy under which consumers pay a surcharge to finance renewable energy while heavy industrial users are exempt. The Commission raised new objections on Monday, which led to Germany offering to change its planned reform at the last minute.
"You can't simply start to question support systems which have been in place for years without thinking about how we make the transition. We'll campaign for that decisively in Europe," Merkel told the Bundestag lower house of parliament, which is due to vote on the renewable energy act on Friday.
"We'll only have planning security for investments with a clear framework overall and of course that also means we need to have clear agreements with the European Commission," she added.
The government has now proposed that industrial companies which generate their own power on site in new renewable or combined heat-power plants will pay a higher surcharge than previously planned.
That will hit industrial firms, which now produce around a quarter of the electricity they use on-site. More and more firms in commerce and trade are now generating their own power too.
In the new draft, industry producing its own electricity in new renewable or combined heat-power plants will pay 30 percent of the current 6.24 cents per kilowatt hour surcharge in 2015, rising to 35 percent in 2016 and 40 percent from 2016.
Merkel said exemptions from the surcharge had helped to keep Germany's economy competitive, adding that for the population to accept the cost of shifting to renewable energy from nuclear power, it had to ensure the protection and creation of jobs.
Chemical and steel companies, which are big electricity users, have attacked plans to amend the surcharge system, with BASF saying they send a "disastrous signal" which "casts doubt on Germany as an investment location".
The chemical industry body VCI said the plans jeopardised investment in the upkeep and expansion of existing on-site power production plants. The steel industry and the BDI industry body have called for at least existing power plants to be protected.
Retailer Metro said it was putting on hold plans to invest in combined heat-power units.
A spokeswoman said the company could not ensure the viability of new units if the surcharge was increased, confirming a report on the website of German daily Handelsblatt.
It already runs five such generating units in Germany and was reportedly planning a further six. Such units, typically with an output of some 250 kilowatts, cost around 500,000 euros.
Issues still to be resolved include how to deal with imported electricity but European Energy Commissioner Guenther Oettinger urged Germany to pass the reform this week anyway so that industry has time to apply for exemptions for next year.
Asked if Germany should postpone the law, Oettinger said: "That won't be possible. Why? Because members of parliament have a summer recess and the matter certainly can't wait until September or October to be decided."
Merkel said the shift to renewable energy would remain a "Herculean task" even after the renewable law has been passed.
German Economy Minister Sigmar Gabriel said the Commission was trying to hold Germany hostage, adding that and Berlin would resist demands it exempt imported power from the surcharge.
"We were meeting regularly for six months ... never once did the Commission ever indicate it wanted to see surcharges on imported energy dropped," he told a conference in Berlin.
"They are trying to hold us hostage... we will oppose this."
His ministry on Wednesday laid out various scenarios for the development of energy prices, on which the amount of the renewable energy levy depends. They showed the surcharge could fall to between 5.8 cents and 6.6 cents per kilowatt hour in the next three years from 6.24 cents now.
But that does not necessarily mean a lower price for customers; the ministry said that would depend upon whether energy providers passed on lower wholesale prices.
Based on an assumption the market price for electricity is 4 cents per kilowatt hour, a level most experts expect, the surcharge would dip to 6.1 cents per kilowatt hour next year before rising to 6.2 cents in 2016 and 6.4 cents in 2017.
The surcharge has risen in the last two years; in 2012 it was 3.6 cents and in 2013 it was 5.3 cents.
Speaking at the same energy conference, General Electric Chief Executive Jeff Immelt criticised the system of subsidies and feed-in tariffs.
"Subsidies pervert markets," he said. "You never want to enter into that realm, it creates a lack of trust ... Looking forward you need to see how these subsidies can be transformed."
Subsidies and surcharges had financed projects rather than spurred true technical innovation, he said. Politicians should set goals and timeframes and let the world innovate around them. (Additional reporting by Noah Barkin, Stephen Brown, Gernot Heller, Markus Wacket, Vera Eckert and Alexandra Hudson, Matthias Inverardi; Writing by Michelle Martin, editing by David Evans)