(Reuters) - The Obama administration on Thursday took a major step toward encouraging development of renewable energy on federal lands in six Western states by establishing a competitive bidding process similar to how oil and gas leases are awarded.

Solar and wind developers have long sought to unlock the potential of millions of acres of federal lands in the U.S. West, but have primarily sited projects on private lands because building there is quicker.

Under the current system, it can take up to 18 months to two years to permit a renewable energy project on federal lands. The new rule, finalized on Thursday, could cut that time in half in the areas designated as most suitable for development, said Amanda DeGroff, spokeswoman for the Department of the Interior.

Employing competitive leases, like those in the oil and gas industry, will give the Bureau of Land Management fair market value for its land, Assistant Secretary for Land and Minerals Management Janice Schneider said in a statement.

It also designates 700,000 acres of public lands in Arizona, California, Colorado, Nevada, New Mexico and Utah where projects will have the least impact on wildlife habitats. Developers will receive financial incentives to site projects in those areas.

The rule will go into effect 30 days after it is published in the Federal Register, which is expected to happen in the coming weeks.

Solar and wind developers have raised concerns that the rule, which was proposed in 2014, would increase costs.

An internal study found the rule will generally increase rents and fees for wind projects and decrease them for solar projects.

"We have not had a chance to fully review it, but we hope this rule paves the way for increased solar development at predictable rates on public lands," Christopher Mansour, vice president of federal affairs for the Solar Energy Industries Association, said in a statement.

Several environmental groups applauded the rule, saying it strikes a balance between encouraging development and conserving natural resources.

"It's important that these projects are built in the right places in the right ways," said Alex Daue, assistant director, energy and climate for land conservation group the Wilderness Society. "What this rule does is it puts in place a program that facilitates responsible development."

(Reporting by Nichola Groom; Editing by Lisa Shumaker)