* Only one new CCS demonstration project started up in 2011
* Drop in greenhouse gas emissions curbs interest in coal
* U.S., China focus on CCS to recover oil
By Valerie Volcovici
WASHINGTON, Oct 18 (Reuters) - Undercut by competition from cheap and cleaner-burning natural gas, analysts believe the expensive technology needed to make "clean coal" plants is unlikely to become commercialized in the United States without heavy government subsidies.
To remain part of the long-term energy mix, coal plants need to invest in systems that capture carbon dioxide emissions from coal-fired power plants and bury the emissions underground to keep them out of the atmosphere -- technology known as carbon capture and storage (CCS).
Coal used to account for more than half of U.S. power production, but that has shrunk to only a bit more than a third. CCS was touted as a way to keep coal jobs in the United States, but the technology's heavy reliance on financial, political and regulatory support has deterred progress.
Meanwhile, breakthroughs in horizontal drilling techniques and hydraulic fracturing, or fracking, have unlocked massive gas reserves trapped in shale formations, prompting a major shift away from using coal at power and industrial plants.
"Unquestionably, without a carbon price and with low natural gas prices these technologies are having problems drawing investment and attention," said Tim Profeta, director of the Nicholas Institute of Environmental Policy at Duke University.
President Barack Obama and Republican presidential candidate Mitt Romney have both pledged their support for "clean coal" on the campaign trail, but both campaigns have been short on details about how to pay for CCS.
Between the availability of cheap natural gas and the worsening fiscal crisis in Washington, the government has little incentive to prioritize these investments, Profeta said.
In addition, greenhouse gas emissions fell to the lowest levels in 20 years in the United States in the first quarter of this year because of increased use of cheap gas, making the need for clean coal seem less urgent.
The United States has been a global leader in CCS technology, but most growth is now happening in China, according to a report released last week by the Global CCS Institute.
Congress has authorized around $7 billion in spending since 2005 to support CCS projects, but utilities have been reluctant to invest their own money in CCS coal plants, which are 75 percent more expensive, according to a July report by the Congressional Budget Office.
Lawmakers considered but ultimately rejected legislation that would have set a cap and price on carbon emissions, which would have created financial and regulatory incentives to spur the technology.
Analysts warned that natural gas prices may not stay low forever. Historically, prices for the fuel have been volatile.
"If you allow your power fleet to be fired predominantly by a very large portion of gas turbines, your exposure to future fuel price changes is more vulnerable," said Revis James, director of energy technology at the Electric Power Research Institute (EPRI).
While the United States has ample gas available now, supplies may shrink if the country begins to export more gas and if countries like Japan and parts of the European Union start using more of the fuel.
The U.S. Energy Information Administration (EIA) has said it expects natural gas spot prices to average $2.71 per MMBtu in 2012 and $3.35 per MMBtu in 2013.
"The carbon sequestration process is very expensive and makes very little sense when you have $2 gas. It makes more sense when you have $7-8 gas," said A.J. Sabatelle, corporate finance analyst at Moody's Investors Service, in an interview.
Sabatelle argued, however, that investors and policy makers should take a longer-term view.
Natural gas "might be the most cost effective fuel source today and maybe for several years, but prices do change and the bad thing about natural gas is that when prices do escalate, they escalate quickly," he said.
Power equipment maker Alstom, which is working with partners on a CCS facility in Norway, saw one of its projects in West Virginia put on hold after a utility partner backed out, citing uncertain climate policy and poor economics.
"Until we have a (policy) framework, it will be hard to advance a large-scale project," said Robert Hilton, Washington-based head of government affairs for Alstom.
The "bedrock" of a sound energy policy is maintaining a balance between coal and gas in the energy supply, Hilton said.
"It's important to avoid short term-ism. The point is, we are going to need CCS and need to keep it as a part of the generating mix," he said.
Hilton added that although greenhouse gas emissions declined to low levels this year, they will rebound as the economy recovers.
Some U.S. CCS research is being kept alive by projects that capture carbon dioxide from fossil fuels and pump the emissions underground in order to push up and recover oil and gas, a process known as enhanced oil recovery (EOR).
For some investors, EOR provides a way to justify the expense of capturing carbon emissions by producing valuable oil supplies.
The technology has attracted interest in China, which has made CCS for use in oil recovery a feature of its five-year plan and also is investing in U.S. projects.
Last month, the Export-Import Bank of China agreed to lend $1 billion to the Texas Clean Energy Project, a $2.5 billion, 400MW EOR project.
Last month, Democratic Senator Jay Rockefeller from the coal-producing state of West Virginia introduced a bill that would allow EOR projects to claim a tax credit of $20 per ton of carbon dioxide captured when recovering oil or gas.
Rockefeller has said that the bill was part of a longer-term effort to develop more comprehensive legislation that would "help secure the future of CCS" in the United States.