* Germany wants to replace nuclear with green energy
* Ambitious targets look hard to hit as investors stay away
* Problems in offshore wind industry need to be fixed
By Andreas Kröner
FRANKFURT, Aug 14 Felix Goedhart knows how to turn a company green.
Six years ago Capital Stage was a small investment holding company. Today it is a renewable energy utility producing nearly 200 megawatts (MW) of solar and wind power that posted operating earnings of 25 million euros in 2011.
"When the financial crisis broke out we decided to change our business model and generate steady returns," says Goedhart, Capital's chief executive. "This is why we became an operator of power plants."
Germany's energy industry needs to achieve a similar transformation on a massive scale to meet a looming capacity gap prompted by the government's decision to exit nuclear power.
But it will not be straightforward. Goedhart's firm is one of only a few profitable companies in the green energy sector and replacing nuclear with renewable power will mean fixing many problems in the fledgling industry in order to secure backers.
Questions about predictability of earnings and legal liabilities are worrying some investors. Others have fallen victim to the financial crisis that provided such inspiration for Goedhart: banks that would previously have provided funding now want safer investments, to comply with new laws.
If Germany's energy revolution -- heralded as the "Energiewende" -- succeeds, it could become a model for other industrialised countries seeking to curb both greenhouse gas emissions and their dependence on imported energy.
If it fails, the backlash will be huge.
Germany's nuclear reactors provided 23 percent of the country's power supply in 2010 and 18 percent in 2011. Having scrapped the reactors in the wake of Japan's Fukushima disaster, Germany wants at least 35 percent of its power to come from green energy, up from 25 percent now.
That's some way ahead of European Union targets that set countries the challenge of meeting 20 percent of their power needs with green energy by 2020.
At the forefront of Germany's efforts to plug the gap is offshore wind power, which near-neighbour Denmark currently uses to supply a quarter of its electricity.
But wind power is also the project's Achilles' heel.
Offshore wind farms are expensive to build and maintain because of their huge size and the logistics of constructing and repairing platforms. This makes profitability hard to predict.
In addition, grid operators are reluctant to build power lines out to sea because they have to pay compensation should they break down. So many wind farms could lack the means to transfer the power they are generating back to the mainland.
Berlin wants to have more than 10,000 megawatts (MW) of o ffshore capacity installed by 2020, and 25,000 MW by 2030, to replace 20,500 MW in nuclear capacity gone by the end of 2022.
So far only 220 MW in offshore capacity has been installed .
Experts predict the state will have to provide guarantees -- such as its proposal last month to pay compensation for any grid connection delays -- in order to bring in more backers and get its targets back on track.
The cost of the project is huge. Estimates range from 85 billion euros for new plants and transmission infrastructure to well above 300 billion euros if support payments to green power producers ar e included.
"The need for investment for the energy shift is enormous. We assume that in the area of electricity, 27 billion euros will be needed every year until 2020," said Ulrich Schroeder, chief executive of German state development bank KfW.
KfW plans to offer some 100 billion euros in loans for green energy projects over the next five years, as well as a 5 billion-euro programme to invest in 10 offshore wind facilities.
Commercial banks, a traditional source of finance, are now reluctant to step in because new rules forcing them to hold more capital and to make fewer risky investments discourage the long-term lending that infrastructure projects require.
Insurers too are worried that new rules in their sector, known as Solvency II, will force them to set aside too much capital as a buffer against any energy projects going wrong.
Holger Kerzel, a managing director responsible for renewable energy at Munich Re's asset management unit MEAG thinks financing the energy shift can be done.
The world's biggest reinsurer has earmarked 2.5 billion euros for projects from 2011-2016 and has invested about 600 million euros so far.
"Regardless of how big the total cost will be in the end, there is a large number of potential investors - state funds, insurance companies, infrastructure funds or even private investors," Kerzel said.
In particular, pension funds hampered by low interest rates and poor returns on government bonds are attracted to the sector as they seek higher returns. Many, like reinsurer Munich Re, are taking direct stakes in wind power projects.
But others, like private equity firms, will continue to steer clear of a project they see as beset by problems.
"If something is heavily subsidised and regulated, we keep our hands off it," said Ralf Huep, a general manager at UK-based private equity investor Advent International.
Many in private equity advocate a slower approach and suggest that offshore wind should play a smaller role in the energy revolution. By comparison, solar and onshore wind farms cost less to build and run and involve less risk.
"There is no compelling reason to push offshore power that strongly. Solar works, onshore wind farms work - the government does not have to do anything there," said Goedhart. (With reporting by Jonathan Gould, Christoph Steitz, Vera Eckert, Philipp Halstrick and Markus Wacket; Editing by Sophie Walker)