* AEP cites weak economy, lack of U.S. carbon plan * DOE picked AEP for up to $334 million in CCS funding (Changes dateline, previous NEW YORK, adds comment from analyst, Energy Dept) By Timothy Gardner and Ayesha Rascoe WASHINGTON, July 14 (Reuters) - American Electric Power Co Inc (AEP AEP AMERICAN ELECTRIC POWER COMPANY, INC. 37.1100 Change -0.3700 (-0.99%) AS OF 1:59 PM ET 07/18/11. Chart for AEP Research ) on Thursday shelved plans to capture heat-trapping carbon dioxide emissions from a coal-burning power plant in West Virginia, citing the U.S. government's failure to put a price on the emissions. The move by Ohio-based AEP is a blow to U.S. efforts to rein in carbon dioxide emissions from coal plants using carbon capture and sequestration, or CCS, which experts see as the most viable way of limiting emissions from existing plants. AEP's exit illustrates the quandary of big investor-owned utilities, which are reluctant to proceed with massive pollution-reduction investments without clear rules of the road to ensure that they will be able to recoup their costs. Experts had expected the costly technology would be supported by putting a price on carbon emissions: Coal plants could get credit for each tonne of the gas they permanently trapped underground. But the Senate last year failed to pass a bill that would have slapped first-ever limits on utility carbon emissions. AEP, one of the biggest U.S. CO2 emitters, cited the congressional inaction and weak economy in its decision to table the $668 million project to build an industrial-scale carbon capture facility at its 31-year-old Mountaineer coal plant in West Virginia. "We are placing the project on hold until economic and policy conditions create a viable path forward," Michael Morris, AEP chairman and chief executive, said in a statement. AEP's system was designed to capture at least 90 percent of the carbon dioxide from 235 megawatts of the 1,300-MW plant. The CO2, about 1.5 million tonnes per year, would be compressed and then injected into rock formations for storage about 1.5 miles (2.4 km) below the surface. The Ohio-based utility embarked on the CCS project at Mountaineer with a pledge from the U.S. Department of Energy in 2009 to cover half the cost. AEP proceeded on the assumption that the U.S. Congress would soon enact first-ever limits on CO2 emissions, AEP spokesman Pat Hemlepp said. AEP's shelving of the pioneer project may make it hard for the administration of President Barack Obama to achieve its goal of incentivizing five to 10 new CCS projects by 2016. The administration may have to find other ways of cutting U.S. emissions about 17 percent below 2005 levels by 2020 as the president has promised. Coal-burning power plants account for about a third of U.S. carbon dioxide emissions -- the single biggest source. NOT ANYWHERE CLOSE CCS for coal is only economic where carbon prices are $70 a tonne and natural gas prices are $15 per million British thermal units, said Michael Blaha, a power analyst in Houston with Wood Mackenzie, an energy research and consulting firm. Current natural gas prices near $4 per per million British thermal units -- driven in part by a bounty of unconventional domestic supply extracted from shale formations -- has turned the economics of building new power plants on their head. Building new nuclear plants and some types of wind power is cheaper than building a new CCS plant, Blaha said. The hope was that federal incentives would drive CCS prices down, but AEP's move makes future trends uncertain. "It is unlikely that large-scale implementation of CCS will take place in the absence of some sort of regulatory structure that requires it and allows companies that put projects in place to recover the costs," said Franklin Orr, director of Precourt Institute for Energy at Stanford University. AEP and partner French multinational Alstom embarked on the CCS project at Mountaineer with the pledge from the DOE in 2009 to cover half the cost. Other federally subsidized CCS projects are proceeding, including Southern Co's (SO Loading... Loading... ) 582-megawatt gasified coal plant in Mississippi, which will capture 65 percent of CO2 emissions. DOE STILL COMMITTED Even with the difficult economics, the Energy Department is "committed to working with industry partners to develop innovative and cost-competitive technologies that can be deployed on commercial scale," it said in a release. Under the terms of department's agreement with AEP, the company received money when it reached certain milestones. Prior to AEP's announcement, the department had provided the utility with just $11.5 million of the $334 million. AEP stock eased 21 cents or about 0.6 percent at Thursday afternoon, while the S&P Utilities index remained unchanged. (Reporting by Scott DiSavino in New York and Timothy Gardner and Ayesha Rascoe in Washington; Editing by Dale Hudson, Chris Baltimore and Lisa Shumaker)