* Money still tight in the sector - DII's van Son
* Better distribution grids needed - German watchdog
By Christoph Steitz
BERLIN, Aug 31 Germany's renewables industry needs faster cost cutting to attract investment necessary to make solar, wind and other forms of alternative power a reliable part of the energy mix, senior executives said.
The industry, particularly the solar sector, has had to swallow drastic price cuts over the past two years, and even Germany's decision to abandon nuclear power by 2022 in response to the disaster in Fukushima in March has not changed that trend in a significant way.
"We now have a market risk premium (in the renewable sector) and we're trying to switch this system depending on feed-in tariffs into one that is market-oriented," said Matthias Kurth, president of the German network agency at a renewable energy conference in Berlin.
"Bringing the sector closer to real market rules will be the challenge we're facing in the next year," he added.
The dilemma faced by renewable energy is that it is still not competitive when compared to fossil-fuel based power. As a result it depends on so-called feed-in tariffs, through which investors receive a guaranteed return on generated energy output.
Those, however, need to be lowered to force companies in the sector to cut their production costs at the same rate, if politicians answering to a critical public have their way.
Inevitably, this leads to money outflows, financial losses and job cuts at companies in the sector.
So if any good is to come out of Germany's "green boom", which is largely supported by the public, the industry knows it needs to address the fact that renewable power still costs up to eight times as much as conventional forms of energy and gas.
"Money was always tight in this area and maybe has become even tighter," said Paul van Son, managing director of Desertec Industrial Initiative (DII) which aims to bring to life a 400 billion euro ($577 million) project that could supply up to 15 percent of Europe's power demand by 2050 through solar projects in the Sahara desert.
"We need support and help and are in talks with governments and Mr (EU energy commissioner Guenther) Oettinger to make it happen," van Son said.
The onus is also on utilities to increase spending on renewables as the sector needs big players to move ahead. But since the nuclear exit, they have seen their profits slashed and are worse off when considering new engagements.
So far, they've been scared off by high costs and the lack of utility-scale projects in many parts of the sector, being a major stumbling block of renewable expansion.
"It's painful. They (utilities) have overslept the trend and now they're trying to save face," a senior manager at one of Germany's biggest renewable companies said.
In the first half of 2011, less than 9 percent of E.ON's (EONGn.DE) generated electricity came from renewable power. At peer RWE it was less than one percent.
If costs fall further quickly, however, it will accelerate expansion, said Cord Landsmann, chief financial officer at E.ON's Climate & Renewables, the group's renewable operations.
"For us the main point is lowering costs. We will be able to manage without subsidies," he said.
One way to do this, German network agency's Kurth said, was to improve distribution networks as part of so-called smart grids, by which renewable energy -- subject to volatility due to varying degrees of sunshine and wind -- can be allocated more effectively.
"Our distribution networks are not smart yet. That's where we need to step up," he said, adding technology was needed to better measure, steer and capture energy from renewable sources. ($1 = 0.693 Euros) (Editing by Jason Neely)