Cheaper gas forcing U.S. coal retirements

HOUSTON (Reuters) - Low natural gas prices from plentiful new sources will allow utilities in the United States to solve several thorny problems while keeping electricity affordable, Exelon Corp (EXC.N) Chairman John Rowe said on Tuesday.

Ample gas from shale formations will allow utilities to quickly build more gas-fired plants to replace polluting coal plants, making "it possible to have a much cleaner supply while still being economical," Rowe told the Reuters Global Energy and Climate Summit.

"For the next decade, natural gas will dominate the new supply of electricity," Rowe said.

Utilities are weighing the costs of pending federal regulations to reduce air pollution from coal-fired power plants, but Rowe said cheaper gas, not stricter regulation, is prompting companies to shut older, smaller coal units.

Warnings that the tougher regulations could result in huge price increases or threaten grid reliability are "a bit of a red herring," Rowe said.

"Building new natural gas plants and using more gas at existing plants is half the price of new nuclear, much cheaper than wind, much cheaper than solar, much cheaper than experimental forms of coal and cheap enough to be a primary driver of the announcements that companies are shutting down coal units," Rowe said.

Earlier this week, American Electric Power Co (AEP.N) said unrealistic timelines to comply with U.S. Environmental Protection Agency rules would force it to shut nearly one-quarter of its coal fleet and to spend about $8 billion.

Environmental concerns about shale gas production could lead to more regulation, but Rowe said even an increase of $1 per million British thermal units would not hurt the fuel's economic advantage.

MERGER PROGRESSING

Rowe said Chicago-based Exelon's $7.9 billion merger with Baltimore-based Constellation Energy Group CEG.N is progressing "slowly, but positively," with key hearings in Maryland set later this year.

"Our job is to make the case to Maryland that we're going to do enough good things that they want us there," Rowe said.

"Substantial" industry consolidation is needed but only will occur "in fits and starts," Rowe said.

"U.S. utilities are not big enough for the kinds of costs and kinds of problems they encounter," he said.

"Efficiency is driving (the industry) toward consolidation on one hand; local pride, state regulation and company pride are driving in the other direction," Rowe said.

"If you had a situation where utilities got to keep all the benefits of the merger, you'd see the company issues go away very quickly. But you don't have that situation and you aren't going to," he said.

As the largest operator of nuclear plants in the country, Exelon expects some regulatory changes following the Fukushima disaster in Japan to increase costs for existing operators.

"I don't think those costs will be huge, but I'm not even sure where they will be," Rowe said.

He said U.S. nuclear operators need to be better prepared to handle a broad range of possible accidents and disasters.

Rowe predicted only four new nuclear reactors will be built in the United States due to low gas prices. However, as nuclear capacity expands around the world, international safety standards and enforcement need to be toughened.

"The more companies that develop nuclear, the more there is a need for a strong set of international standards and some cooperative way of enforcing them," Rowe said.

Issues of national sovereignty stand in the way. "Most nations don't want people from the U.S. or Western Europe coming around telling them how to do things."

(Reporting by Ernest Scheyder, Braden Reddall, Michael Erman, Matt Daily, Chris Baltimore and Matt Robinson; Editing by Matthew Lewis, Phil Berlowitz)