The government's rush to cut a subsidy for people who generate solar electicity on their roofs was clumsily handled and may have fatally damaged a growing industry which had the potential to provide tens of thousands of jobs, says a new report by MPs on two influential select committees.

By giving both consumers and companies just a few weeks' notice that they intended to halve solar "feed-in tariffs" (FiTs) from 43.3p to 21p paid per kWh of energy generated, they have created uncertainty among investors and undermined public confidence in energy policy, said the MPs.

"There is no question that solar subsidies needed to be urgently reduced, but the government has handled this clumsily. Ministers should have spotted the solar gold rush much earlier. That way subsidy levels could have been reduced in a more orderly way without delivering such a shock to the industry," said Tim Yeo, chair of the energy and climate change committee.

In addition, plans to require homes to meet a C-rated energy efficiency standard before they can receive subsidies will limit access to wealthier households and could have a "fatal impact" on the industry, the MPs warn. Eighty six per cent of homes would need to be better insulated before they could qualify for the scheme under the government's proposals – increasing up-front costs for homeowners by between £5,600 and £14,000, even before the panels are purchased, they said.

Joan Walley, chair of the environmental audit committee said: "It doesn't make economic sense to let the sun go down on the solar industry in the UK. As well as helping to cut carbon emissions, every panel that is installed brings in VAT for the government and every company that benefits from the support is keeping people in work. The government is right to encourage people to focus on saving energy before fitting solar panels, but these proposals will stop nine out of 10 installations from going ahead, which will have a devastating effect on hundreds of solar companies and small building firms installing these panels across the country."

Rising energy bills and the falling cost of solar panels made the original subsidy rates so attractive that tens of thousands of households, companies and community groups have rushed to install photo-voltaic (PV) systems since the scheme was introduced last year. The government had evidence that solar panel prices were falling significantly as early as March 2011, but ministers did not act to stem rocketing levels of small scale solar installations until the end of October.

According to the MPs, the consultation then announced by the government was based on an inadequate impact assessment and unfairly set a 12 December deadline for changes to come into effect before the close of the consultation on 23 December. The scale and pace of the changes proposed was a shock for the solar industry and the suddenness of their introduction has damaged investor confidence across the whole energy sector, the MPs said.

The government has proposed an even lower tariff (80% of the new rate) for generators who have more than one solar system registered for FiTs, in recognition of the economics of scale such aggregated schemes can achieve. This, said the MPs, will have an adverse impact on community solar projects.

"This could have a disproportionate impact on disadvantaged and poorer communities for whom such schemes are a good way of accessing the benefits of renewable energy and reducing electricity costs. The social housing sector and community owned schemes are going to be particularly hard hit by the reduced tariffs being brought in by the government retrospectively," said the MPs.

Separately, on Wednesday, government plans to cut incentive payments for householders who install solar panels were ruled "legally flawed" by a high court judge. The ruling opens the door for a judicial review that could force the government to delay its plans, potentially allowing thousands more people to claim the higher subsidy.

The judgment on Wednesday comes after a challenge by Friends of the Earth and two solar companies who argued that the government's decision to cut the feed-in tariff – from 43.3p to 21p per kWh of energy generated – with only a few weeks' notice was premature and unlawful, and had led to unfinished or planned projects being abandoned.

Many thousands of individuals, farmers, councils and community groups had applied to install solar PV to take advantage of the generous subsidy which had been set deliberately high to encourage people to invest, when the scheme was launched in April 2010.

But the government announced in October that it would cut the subsidy with effect from 12 December. This was 11 days before the consultation ended.

The judgment, made by Mr Justice Mitting after a two-day court hearing, was hailed as a major victory by green campaigners and the solar industry, after firms warned that the scale and pace of the proposed cuts would have a crippling effect on the sector resulting in thousands of job losses.

Mitting said the minister was proposing to make an unlawful decision.

Friends of the Earth's executive director, Andy Atkins, said: "These botched and illegal plans have cast a huge shadow over the solar industry, jeopardising thousands of jobs. We hope this ruling will prevent ministers rushing through damaging changes to clean energy subsidies – giving solar firms a much-needed confidence boost.

Lawyers for the Department of Energy and Climate Change immediately moved to apply for permission to appeal the judge's ruling.

The MPs' report and court ruling follows the decision by BP to close its solar division, blaming the "commoditisation" of the sector. It emerged this week that Mike Petrucci, chief executive of BP Solar, wrote to his remaining 100 staff last week to say that "the continuing global economic challenges have significantly impacted the solar industry, making it difficult to sustain long-term returns for the company."

• This article's headline and structure were amended on 22 December