UPDATE 1-EU clears Vattenfall sale of German lignite assets to Czech EPH

* EU regulators says deal will not harm competition

* Predicts lignite will face competition from lower carbon energy (Adds more on sale, debate over lignite)

BRUSSELS/LONDON, Sept 22 (Reuters) - EU regulators cleared on Thursday Swedish utility Vattenfall’s sale of German lignite power plants and coal mines in a deal that will see it divest some of the most polluting fossil fuel generation.

The deal has whipped up controversy because the operations are being sold to a new operator rather than closed down. Environmentalists say lignite, the most carbon-intensive form of coal, should no longer be burnt.

Vattenfall has said it will become one of the greenest utilities in Europe and is also planning to sell another coal asset in the next five years.

The European Commission said it had found the sale to Czech energy group EPH and private equity group PPF Investments would not adversely affect competition in the relevant markets.

Analysts say the economics of fossil fuel versus renewables have shifted as sources such as wind and solar become cheaper and the regulatory pressure mounts to scrap carbon-intensive coal.

But many of those still supporting coal say it will have a role as backup for intermittent renewables for years to come and its life-time could be extended if technology to capture and bury emissions becomes commercially viable.

EPH teamed up with Czech private equity group PPF Investments, to buy the lignite coal assets from Vattenfall for a nominal fee.

EPH has said the assets were among Germany’s most efficient lignite operations and would be among the last to closed without indicating when that might be.

Once they are shut down, the owners will have to rehabilitate the area, which Vattenfall estimated would cost 1.4 billion euros. ($1.6 billion)

A report from the Institute for Energy Economics and Financial analysis published on Thursday concluded that could be an underestimate and suggested an upper cost of 2.6 billion euros based on previous clean-up bill.

EPH and PPF could still make a profit, especially as the price of pollution permits, stuck at around 4 euros a tonne , is very low.

The Vattenfall sale demonstrates investors will continue in coal until there is regulatory certainty coal-fired generation must end, analysts say.

“The EPH sale highlights the lack of clarity over the role of lignite, the dirtiest form of coal, in Europe, and the broader regulatory uncertainty over any phase-out,” IEEFA analyst Gerard Wynn said. ($1 = 0.8902 euros) (Reporting by Philip Blenkinsop in Brussels and Barbara Lewis in London,; additional reporting by Anna Ringstrom in Stockholm, editing by William Hardy)