* Says renewable power should no longer float in and out
* Wants conventional producers paid for stand-by capacity
* Says networks need bumping up to deal with new challenges
By Vera Eckert
FRANKFURT, March 1 (Reuters) - German local utility group VKU on Friday proposed reforms to make the power market more competitive to integrate the rising share of renewable power at reasonable cost and safeguard steady supply.
Wholesale power prices are teetering near eight-year lows due to weak demand and overcapacity in Europe's biggest power market of 517 terawatt hours (TWh) a year, partly caused by an unhindered renewables expansion.
This has eroded utilities' margins while driving up costs for consumers because their bills include fees used to subsidise renewable energy.
A national shift towards green energy from nuclear and fossil fuels is at risk of failing due to this overspend.
VKU, which represents 1,400 utility firms with 95 euros billion of annual sales between them, said a sweeping system change back to market forces was needed to integrate conventional and renewable power - already providing 25 percent of total usage - and transmission networks.
"Outdated structures must be speedily revised and with our energy market design we are handing politicians a constructive proposal for a solution," said Hans-Joachim Reck, managing director of VKU.
"We are not suggesting to change the power market abruptly but we're building on tried and tested structures," he added.
Currently, producers are paid only for the volumes they produce. But this no longer works for owners of conventional power and gas capacities because renewables get priority access at subsidised prices, as soon as and whenever they are produced.
Typically, wind and solar power units only generate from around a third of their installed capacity, depending on the weather, while traditional plants are becoming unprofitable.
VKU suggests building a traded market for capacity provision, in which producers would be rewarded adequately while customers could start steering their costs by reducing demand.
It recommended introducing this within three to five years to be able to cope with increased demand early next decade, when the remaining 12 gigawatts (GW) of nuclear power capacity is to be shut for good.
It proposed auctioning the subsidies for a fixed number of new renewable generation units in the future, replacing the current system of paying all units whenever they produce.
It said this new measure could be put in place within one or two years.
It also said grid innovations needed higher rewards because the current system of regulated network fees did not create enough incentives for operators to upgrade existing infrastructure.
So-called smart grids can handle increasingly intermittent power flows and send locally produced power back into the grid. (Editing by James Jukwey)