Germany must scale back its financial support for the development of renewable energy to contain spiraling costs that could damage its economic competitiveness, Chancellor Angela Merkel said Wednesday.

Ms. Merkel told an energy conference in Berlin that she still supports further expansion of renewable energy such as wind and solar power in order to reduce carbon dioxide emissions, but said the costs need to be contained as global rivals are benefiting from lower energy prices.

Energy policy is an increasingly a hot issue as Ms. Merkel faces parliamentary elections in September, with households and businesses complaining about big energy bills. Many companies are also concerned that high electricity costs across Europe are becoming increasingly unsustainable, particularly as their U.S. rivals benefits from low energy prices resulting from the shale gas boom.

German utility executives supported the call for reforms to renewable subsidies, but criticized Ms. Merkel for remaining vague on how exactly she intends to contain the rapidly rising cost of the scheme.

Germany promotes the expansion of renewable energy by setting high fixed prices for the power produced from wind turbines and solar panels. The prices are guaranteed for 20 years, although they decline each year by a certain percentage. A surcharge to cover the cost of this scheme is added to consumers' electricity bills.

This system has proved lucrative and spurred a rapid expansion of the renewable energy industry, which in turn has driven up subsidy costs rapidly to around 20 billion euros per year ($27 billion). The government expects these costs to rise further this year.

Traditional energy providers have been stepping up the heat on Ms. Merkel's center-right government. On Monday, Germany biggest energy industry group said that the next government must make energy policy reform a top priority.

Ms. Merkel's actions are constrained by the fact she governs in coalition, and uncertainty tied to the impending election.

Environment Minister Peter Altmaier, a member Ms. Merkel's Christian Democrat party, previously announced plans to freeze subsidies at current levels until the end of 2014. However, the proposals were blocked, in part by opposition from the economics ministry, which is led by Philipp Roesler, the leader of the business-friendly junior coalition partner, the Free Democrats.

While opinion polls suggest that Ms. Merkel will win the election in September, the poor approval rates of the Free Democrats means her existing center-right coalition could end after the vote.

Ms. Merkel's plans remain "pretty hazy" said Rolf Martin Schmitz, chief operating officer and deputy chief executive at German utility RWE AG.

He pointed to the fact that the German Chancellor ruled out the most aggressive measure available to cut costs--retroactive cuts to renewable energy subsidies. She also assured investors that "green" power will continue to be treated preferentially compared with electricity produced in coal, gas or nuclear fueled power plants.

Mr. Schmitz said that renewable energy needs to be integrated into the broader electricity market. One way to do that would be for wind, solar, biomass and other forms of sustainable energy to receive a premium on top of wholesale electricity prices that could be adjusted according to the circumstances in the market, rather than a fixed price unrelated to wider electricity prices under the current system, he said.

Ms. Merkel said she will give changes to renewable energy subsidy schemes priority over reforming the European Union's other main mechanism for supporting clean energy-a trading scheme for industrial emissions of carbon dioxide.

The price of emitting carbon in the scheme--aimed at providing incentives to invest on low carbon technologies by putting a cost on each ton of CO2 emitted in power generation--has collapsed amid an oversupply of emissions permits.

European lawmakers will vote next week on a proposal to support carbon prices by delaying the auction of some permits. A similar proposal was rejected in April.

Several German utility executives, including RWE's Mr. Schmitz, have said that salvaging this market-based mechanism to support clean energy is one of the most important issues that European policy makers have to address.

Mr. Schmitz said he supports the proposal to delay the auction of some permits. Germany 's government, so far, hasn't formulated its position on the issue and Ms. Merkel didn't touch on the issue in her speech.

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