The WTO largely backed complaints from Japan and the European Union that the scheme set up by the Canadian province of Ontario discriminated unfairly against foreign companies.
The case has been closely watched because it deals with "local content requirements", where countries ensure their own firms get a guaranteed cut of big projects, that are at the centre of a number of other disputes.
The EU welcomed the ruling and said it would open up more business for the bloc's businesses in Canada.
"Exports from the EU into Canada in wind power and photovoltaic power generation equipment are significant, ranging from 300 to 600 million euros in 2007-2009," the European Commission said in a statement.
"These figures could be higher should the local content requirements be removed from the legislation in question," it added.
The Canadian government, acting on a request from Ontario, said it would appeal the ruling.
Separately, a spokeswoman for the Ontario ministry of energy said the program was consistent with Canada's obligations under WTO agreements.
Brazil, India, Indonesia and Nigeria have been criticized repeatedly in WTO committee meetings for having similar local content clauses in big infrastructure projects.
China has also launched a challenge against the EU over renewable energy rules in Italy and Greece, alleging they discriminate against Chinese suppliers of solar power components.
A WTO adjudication panel agreed Canada had broken some of the trade body's rules, but was split on the question of whether Ontario's scheme constituted an illegal subsidy that had disadvantaged importers.
The panel offered a suggestion about how the Japanese and EU cases could have been framed to overcome their objections.
The EU and Japan also have the right to appeal. (Reuters)