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UPDATE 1-Terra Firma plans up to $5 bln energy fund-source

* Terra Firma joins with China Development Bank -source

* Wants $3bln-$5bln for new fund -source

* Will target renewable energy in China, globally -source

(Rewrites first paragraph, adds details on fund, renewable energy)

By Simon Meads

LONDON, Oct 8 (Reuters) - Terra Firma , the private equity firm led by high-profile dealmaker Guy Hands, is planning a multi-billion dollar fund with a Chinese bank to invest in renewable energy, underscoring its faith in green power despite waning enthusiasm in some markets.

The partners are expected to start raising between $3 and $5 billion in the next few months, with China Development Bank

to put an as-yet-undefined amount into the fund, a person familiar with the situation said.

Terra Firm declined comment.

After suffering the bruising loss of music group EMI to Citigroup last year after Terra Firma defaulted on loans from the lender, the new fund presents a chance for Hands to repair Terra Firma's reputation by refocusing on core investments in areas including energy and infrastructure.

Terra Firma already owns three renewable energy companies - landfill gas producer Infinis, U.S. wind farm group EverPower and Italy's leading solar power generator Rete Rinnovabile - and has done successful deals in utilities and waste management.

Its latest planned fund indicates confidence in the growth of renewables at a time when the costs of solar and wind power have prompted some governments to reduce subsidies as they battle to balance their budgets.

Such cuts have not much dented the investment picture overall and global spending on renewable energy reached $257 billion in 2011, according to a report according from the United Nations Environment Programme and the Renewable Energy Policy Network for the 21st Century, nearly the total in 2007.

A number of private equity firms, including Blackstone

and KKR , and their mid-sized rivals Bridgepoint

and HgCapital, have invested in renewable energy deals. SAFER DEALS

China Development Bank will market the new fund to potential investors in China, while Terra Firma will seek backers in Europe and the United States among traditional private equity investors and infrastructure fund investors, the person said.

Terra Firma, whose last investment was the 825 million pounds ($1.3 billion) purchase of care homes operator Four Seasons in April, put plans to launch a buyout fund on ice earlier this year after scant interest from its private equity investors.

The latest move would focus Terra Firma's new investments on potentially safer deals, after the firm lost 1.7 billion pounds of its own and investors' money on EMI, which it bought in a highly-leveraged deal at the peak of the buyouts boom in 2007.

But it could also offer lower-return deals than the industry has targeted in the past.

Hands has been one a of a growing number of private equity executives to warn that annual returns from private equity will be lower than the 20 percent-plus which buyout houses promised before debt markets seized up.

In the current environment, investors should be happy with a 15 percent annual return, TPG co-founder David Bonderman told the Asia SuperReturn conference in September.

That's bringing private equity returns closer to those of infrastructure groups that typically promise annual returns of between 10 and 12 percent, from relatively safe long-term investments.

Terra Firma's new venture will look for investments in China as well as internationally, the source said. ($1 = 0.6176 British pounds)

(Editing by David Holmes)

((simon.meads@thomsonreuters.com)(+44 20 7542 9969)(Reuters Messaging: simon.meads.thomsonreuters.com@reuters.net))

Keywords: TERRAFIRMA ENERGY/