CERAWEEK-UPDATE 1-U.S. utilities ponder carbon-free future

* Coal power plants responsible for 40 pct of U.S. CO2

* Sequestration technology unproven at industrial scale

* Climate bill stalls in US Senate

(Adds status of Southern Co grant in paragraph 18)

By Eileen O'Grady

HOUSTON, March 11 (Reuters) - U.S. electric utilities face questions of how to limit carbon dioxide emissions while relying on the plentiful American coal supply that fuels about half the country's power needs but also emits more carbon dioxide than other fuels.

"We don't have the luxury of abandoning coal," said David Ratcliffe, chief executive officer of Southern Company (SO.N), speaking at the CERA Week conference in Houston.

For Atlanta-based Southern and Ohio-based American Electric Power Co Inc (AEP.N), two of the biggest U.S. coal-burning utilities, stakes are high in the push by Democrats in Congress to limit U.S. emissions of trapping carbon dioxide.

Coal-burning plants are the single biggest source of carbon dioxide -- 40 percent of total U.S. emissions.

Coal-burning utilities say it will be difficult to move away from coal plants, which are the workhorse of the U.S. electric fleet and generate some of the nation's most affordable and reliable power.

The U.S. House of Representatives passed a bill last July based on a "cap and trade" system that would phase in lower limits on emissions while allowing trading of emission credits between those who can comply quickly and those who cannot.

The bill is stalled in the U.S. Senate, as Senator Lindsey Graham, a Republican working on a compromise climate bill, declared economy-wide cap-and-trade "dead" this month.

Under cap-and-trade schemes being discussed by lawmakers, utilities must either buy credits to emit carbon dioxide or diversify their generation fleet to include cleaner sources.

But options for cleaner-burning generation are less than perfect -- power generated from natural gas is cleaner than coal, but still has a significant carbon footprint.

"Coal and natural gas are basically in the same boat," said David Hobbs, chief energy strategist for IHS CERA.

Utilities might seek to take advantage of plentiful natural gas supply from unconventional sources like shale rock, but the economics of generating power from gas could change drastically once U.S. carbon rules take effect, Hobbs said.

Industry officials are looking at new technology that can isolate carbon dioxide emissions from coal plants and store them away in underground reservoirs, but so-called sequestration methods are unproven at industrial scale.

"This is a major chemical process engineering challenge," Hobbs said.

AEP has succeeded in sequestering carbon dioxide from a small portion of generation at its Mountaineer plant in West Virginia.

"Technically, commercially, we are already ready at small scale," said Philippe Joubert, president of Alstom Power (ALSO.PA), which develops carbon-capture technology. "We will be ready by 2015 for larger-scale projects."

While carbon-capture technology shows promise, the storage issue is thornier, Ratcliffe told Reuters in an interview.

"Thats another huge question and we haven't even scratched the surface of that yet," he said, referring to unresolved issues including the legal liability for carbon dioxide once pumped underground.

Last month, Southern informed the U.S. Energy Department that it would not pursue expansion of a carbon capture demonstration project in Alabama, even though the plan had been awarded a $295 million grant.

Southern received a commitment for an $8.3 billion federal loan to build two new nuclear reactors in Georgia, which could be the first reactors built in three decades.

Nuclear plants are attractive because they produce carbon-free electricity, but many U.S. utilities are hesitant to commit to building plants without a dedicated federal repository to store nuclear waste.

It will be impossible for utilities to meet rising U.S. electricity demand without leaning heavily on coal, Alstom's Joubert said.

"It is really not possible to fulfill the electrical needs of the country without fossil fuel for the next 20 to 30 years," Joubert said. "You will have to find a way to deal with coal." (Writing by Chris Baltimore; Editing by David Gregorio/Marguerita Choy)