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* $5 bln, 2,100-MW thermoelectric plant struck down * Project can be resubmitted, supreme court says * MPX, E.ON say to re-evaluate business strategy in Chile * Environmental groups blast controversial coal project * World No. 1 copper producer struggling with power woes By Erik Lopez and Alexandra Ulmer SANTIAGO, Aug 28 (Reuters) - Chile's top court rejected the planned $5 billion Central Castilla thermoelectric power plant on Tuesday, citing environmental reasons, in the latest setback for the mega power project in the world's largest copper-producing nation. The decision on the planned 2,100 megawatt plant, a joint venture of Brazilian billionaire Eike Batista's MPX Energia SA and Germany's E.ON, comes as Chile grapples with steep power prices, a shaky transmission grid and reversals of several massive projects. MPX and E.ON said the joint venture would "re-evaluate its business strategy in Chile" in the wake of the court decision. Chile's supreme court said the companies could resubmit an environmental impact study grouping together the project's two main components -- a port and a thermoelectric power plant -- potentially leaving the window open for the complex to see the light at a later date. Castilla could "harm the constitutional guarantee that one can live in an environment free of pollution," the court said, citing a lack of information about the unity between the two projects as well as irregularities in land-use qualifications. Environmental groups have opposed mega-power projects ranging from coal-fired, thermoelectric plants in Chile's northern Atacama, the world's driest desert, to hydropower dams in the wild southern Patagonia region. The Castilla case was seen as a litmus test for several other environment-versus-energy disputes. Energy problems, as well as dwindling ore grades, regulatory setbacks and extreme weather are seen threatening an estimated $100 billion in mining investment by 2020. While mining helped Chile's economy grow 6 percent last year, the Andean country has the highest level of income inequality among the 34 OECD countries, according to a report by the body last year, and many feel a copper-led boom has bypassed them. Castilla's rejection is also a blow to Brazil's Batista, who is facing tumbling confidence among investors in his energy and mining conglomerate. More than $22 billion and over 8,000 megawatts in energy investment in Chile have been suspended, according to Libertad y Desarrollo, a conservative Chilean think-tank. Castilla was planned for Chile's copper-rich Atacama region, with the goal of providing energy to the booming mining area. Cerro Casale owned by Barrick Gold and Kinross , Lumina Copper's Caserones mine and Barrick's Pascua Lama mine are gearing up to operate in the surrounding area. "Miners are really going to deplore this ... Various projects in the (region) are somewhat fragile," said Ronald Guzman, mining professor at the Universidad Catolica in Santiago. "They're going to seek new sources of energy ... I think Argentina and Bolivia could appear as good sources." Years of under-investment, a destructive 8.8 magnitude earthquake in 2010, droughts and logistical issues stemming from the country's long, thin shape have debilitated Chile's power grid, drawing increasing fire from energy-intensive mining firms. Chile's power matrix has a capacity of 17,000 megawatts and the government aims to add another 8,000 megawatts by 2020. "We have to see if the company decides to resubmit the project, but clearly even if it does resubmit the project, it delays the project, which means future demand will have to be satisfied by other sources," said Andrew McCarthy, electricity sector research analyst at Banchile Inversiones in Santiago. A spike in lawsuits against key energy projects is increasing already steep power prices and inhibiting investment, deputy energy minister Sergio del Campo told Reuters in an interview in June. Violent protests against mining projects are increasing in neighboring Peru and Bolivia, where many citizens feel they have not benefited from metals-led economic growth but have suffered environmental costs. CHILE PEOPLE POWER WINS AGAIN A handful of fisherman and artisans from the tiny village of Totoral in northern Chile had opposed the Castilla project on environmental and health grounds, saying the coal-fired plant would harm air and water quality. MPX and E.ON said in their joint statement that the projects had been correctly evaluated and submitted to the highest of environmental requirements. The supreme court unanimously upheld an appeals court ruling against the Castilla power plant earlier this year. If Castilla resubmits its project, it would have to explain the transfer of coal and petrol from its port to its plant, the court added. The port and plant projects had been submitted separately. Shares in MPX gained 1.97 percent on Tuesday, while shares in E.ON closed 0.7 percent lower.