Shares in German power utilities E.ON (EOAN.XE) and RWE AG (RWE.XE) fell sharply Monday after the government last night said it will accelerate the gradual phase-out of all nuclear power production by 2022 and keep a tax on nuclear fuel rods.

Though a drastic u-turn from a previous German policy settled in 2010, the 2022 phase-out was largely expected given the strong anti-nuclear shift in German politics after Fukushima. However, the decision to keep the nuclear tax in place and not give relief to the utilities was noteworthy after comments last week from some politicians that suggested the Germany might withdraw the tax.

RWE shares Monday closed lower EUR0.71 or 1.7% at EUR40.31, while E.ON ended the day down EUR0.46 or 2.3% to EUR19.55. Both shares underperformed a broadly flat market.

Meanwhile, shares in solar energy and wind power equipment makers gained sharply as investors anticipated the accelerated nuclear phase-out will result in faster expansion of alternative and greener energy sources. Shares in solar cell makers Q-Cells SE (QCE.XE) and SolarWorld AG (SWV.XE), as well as wind turbine maker Nordex SE (NDX1.XE), closed the trading session sharply higher, posting gains of 8.5%, 8.8% and 13.3% respectively

On Sunday night, Environment Minister Norbert Roettgen announced to reporters following a meeting with German Chancellor Angela Merkel that Germany would end the use of nuclear energy by 2022 at the very latest.

The country's seven oldest nuclear reactors, which have been shut down since mid-March, will never resume power generation, the government said.

An eighth power plant--the 1.4-gigawatt reactor Kruemmel that has been glitch-prone and offline for the best part of three years--will also be shut down permanently.

By 2021 six other reactors will gradually be decommissioned, while the remaining three will be shut down in 2022.

In 2010, nuclear reactors accounted for around 23% of Germany's power production, making them the second largest contributor to overall output behind lignite-fired power plants.

Roettgen also said the government plans to keep the new tax on nuclear fuel rods that was introduced at the beginning of the year. The tax is expected to generate proceeds of around EUR2.3 billion per year and was officially introduced to help plug public budget holes.

Many observers, however, have also linked the tax to the extension of reactor operating lives, for which the power plant operators had to make several concessions.

RWE and E.ON have threatened in recent weeks that they are considering to sue the government over the levy, particularly if the extension of reactor lives were to be retracted while the tax remains untouched. In a separate a case, RWE has filed litigation challenging Germany's temporary suspension of seven nuclear plants after Fukushima.

RWE Monday said it is in the process to analyze the government's decision, adding that it will keep open all options for possible legal action.

"The planned time-line for the nuclear exit doesn't reflect what we consider necessary...," the company said.

Over the last four weeks, RWE and E.ON had reiterated their earnings expectations for 2011, but had added that the forecasts are subject to changes in Germany's nuclear energy policy.

A spokesman for RWE said that the company would provide a new 2011 outlook at the second-quarter results presentation in August. The company's medium-term guidance will be updated in February, he added.

E.ON couldn't immediately comment on the government's decisions.

-By Jan Hromadko, Dow Jones Newswires; +49 69 29 725 503; jan.hromadko@dowjones.com