* Planned levy on coal plants dropped
* Utilities to be compensated for reserve power
* Some brown coal generation to be mothballed
* Ends months of wrangling, law expected this year
* RWE shares up after news of agreement (Recasts with details)
By Markus Wacket and Madeline Chambers
BERLIN, July 2 (Reuters) - Germany has abandoned plans for a levy on coal-fired power plants but will reduce brown-coal power generation to safeguard its 2020 carbon-reduction targets, coalition leaders agreed on Thursday.
The plans, which follow months of wrangling within Angela Merkel’s government, were welcomed by industry but condemned by environmental groups which accused the chancellor of selling out to business interests.
Some 2.7 gigawatts of power generation from brown coal, equivalent to the output from five power plants, will be closed but retained as reserve power in case of emergency, parties in Merkel’s right-left coalition agreed early on Thursday.
Shares in utility RWE were up 5.6 percent at 20.42 euros as of 1058 GMT after plans for a charge on coal power plants was dropped.
In another positive for utilities, the parties also agreed that power providers would be compensated if they participated in a new “capacity reserve” system where brown coal plants can be switched back on if there are power shortages, something the firms had long pushed for.
“We are sending an international signal to show we are achieving the switch to renewables in a highly industrialised country,” Social Democrat (SPD) Economy Minister Sigmar Gabriel said.
There will also be support for power and heat co-generation, more investment in efficiency measures and the coalition settled a dispute over high-voltage power lines needed to carry green energy from the north to Germany’s industrial south.
Gabriel’s ministry is expected to draw up a law for later this year on the details.
Environmental group Greenpeace derided the plans, saying they made a mockery of a Group of Seven (G7) climate deal brokered by Merkel at Schloss Elmau in Bavaria in May.
“Angela Merkel has broken her climate promises from Elmau. Instead of starting the exit from coal, she has ensured all the dreams of the plant operators come true,” said Greenpeace’s Tobias Muenchmeyer.
Industry had warned a coal levy could put up to 100,000 jobs at risk.
Germany’s BDI industry association welcomed Thursday decision.
“With the agreement .. the German government has cleared a backlog of decisions on the switch to renewable energy. This clears the way for greater acceptance and investment security,” the BDI’s Holger Loesch said in a statement.
Some experts also said the levy risked pushing coal-fired power generation into other European countries.
“Power stations that are necessary for security of supply in winter might have been closed for good,” said Matthias von Bechtolsheim, a partner at consultancy Arthur D Little.
Germany is boosting renewable energy production and phasing out nuclear energy. It has also set a target of reducing its 2020 carbon emissions by 40 percent versus 1990 levels.
Coal accounts for about 44 percent of Germany’s power generation compared to about 27 percent from renewable sources. (Additional reporting by Michael Nienaber, Andreas Rinke and Vera Eckert in Frankfurt; editing by Jane Merriman and Jason Neely)