ANALYSIS-Spain in energy policy reversal back to coal, gas

* Policy change more severe than in other European countries

* Bankruptcies expected, leading to job losses

* Debt defaults expected, adding to banks' losses

MADRID, Feb 22 (Reuters) - Spain's latest energy reform, which reverses years of policy to promote renewable power, threatens to reinforce its dependence on coal and costly gas and to bankrupt renewable firms that have built a competitive edge over a decade.

Once a poster child for renewable energy, Spain has slashed subsidies in its fifth attempt to reform a dysfunctional regulated power system, in which prices do not cover costs.

The reforms are designed to help the government cut spending and deal with a financial crisis.

But the reform also puts Spain's renewable firms at risk of going under and could pile more bad debt on its banks. In the long term it could undermine Spain's competitive advantage in renewables and increase its spending on gas and coal imports, adding pressure to its trade balance.

"It will always be cheaper (for Spain) to invest in renewables than to import gas from Algeria," said Javier Garcia Breva, chairman of Spain's Renewables Foundation.

"The crisis in the energy system is an obstacle for exiting the economic crisis," he added.

Spain, blessed with plenty of sun and wind, is well positioned to exploit renewable resources to ease its dependence on expensive fossil fuel imports.

It leads Europe's big economies in renewable capacity, with 30.8 percent of its power generation mix from wind and solar versus 20.6 percent for Germany and 12.4 percent for France.

The reforms, which include cuts to subsidies for renewables and a tax on generation that hit green power particularly hard, have sent investment in the sector plummeting.

Analysts say the latest cuts in renewables will boost Spain's dependency on fossil fuels, mostly coal - the only fossil fuel of which Spain has significant domestic reserves.

The measures could boost costly natural gas imports as well.

"I'm convinced that gas will form a larger part of the energy mix in the medium term. We have very efficient combined-cycle power plants that we can't let go to waste," said Antonio Llarden, chairman of Spanish gas distributor Enagas .

Spain already imports 76 percent of the fuel it needs for electricity, transport and other uses, spending about 40 billion euros ($53.4 billion) a year on foreign oil, gas and coal - the amount it sought in a bailout of its troubled banks last year.

By comparison, it has spent 4.75 billion euros a year on average on subsidies for alternative energy since 2004.

INVESTMENTS PLUMMET

The government, having avoided a bailout so far, is focused on cutting its budget deficit and getting its finances in order.

"(Reforms) sometimes upset one side or the other, or even everyone, but they are needed," Industry Minister Jose Manuel Soria said at an energy event this week.

Analysts also say reform is needed to protect the power grid from a possible collapse as it copes with increasing capacity of renewables, whose output varies depending on the weather.

"The long-term situation in Spain is to manage their debt, but also for utilities to come to grips with the mismatch between an oversupply of renewables during a time of falling demand," said Michael Bret at AXA Investment Managers.

"They should be worried about their energy security."

Also driving energy reform is a 28 billion euro electricity tariff deficit, a gap created after years of a kick-the-can government policy to include subsidies and other expenses in the cost base of electricity tariffs and then enforce consumer rates that did not cover that cost base.

The difference has been sitting on the balance sheets of big utilities Iberdrola, Endesa and Gas Natural Fenosa as money owed by the government.

The reform would reduce government subsidies and keep the tariff deficit from increasing further.

Other countries in Europe that have invested heavily in renewable energy over the past two decades, such as Germany, are also considering pulling back but in a more gradual way that reduces incentives for the future rather than jerking the rug out from under existing projects.

Spain's reforms threaten to wipe out profits for renewable companies and may send many into bankruptcy.

Revenues in the sector are seen falling by 30 percent as a result of the reforms, several sources in the sector said.

Spain's wind power association AEE says the industry has lost 15,000 jobs since 2008 and that another 15,000 jobs could be lost in coming months.

Foreign investors who poured money into green projects under more favourable rules are now threatening legal action against the government.

The reform could also pile more losses on Spain's banks.

Photovoltaic association UNEF said that of 25 billion euros invested in Spain in recent years, 80 percent is debt, including 15 billion euros held by Spanish banks and 5 billion by international institutions.

"Banks are starting to get worried," said Rocio Sicre, head of AEE, which estimates about three quarters of the 23 billion euros of investment in Spain's wind sector is financed by debt.

Large renewable firms such as Acciona and Abengoa as well as large utilities that rely heavily on wind power generation, such as Iberdrola, could survive without subsidies but need a stable regulatory framework.

"Once you've granted certain conditions (on renewables) they must be respected, even if the Treasury is suffering," lawyer and energy expert Vicente Lopez-Ibor said.

(Additional reporting by Henning Gloystein in London and Geert de Clercq in Paris; Editing by Jane Baird)