June 24 (Bloomberg) -- American Electric Power Co. and Southern Co., the largest U.S. producers of power from coal, are withdrawing from the FutureGen project, which is aimed at lowering carbon-dioxide emissions.

American Electric will pull out of the project July 1, spokesman Pat Hemlepp said in an interview in San Francisco today. Southern is withdrawing “immediately,” the company said in an e-mail.

Southern will focus on coal gasification in its Kemper County, Mississippi, power plant and a carbon research center in Wilsonville, Alabama, Valerie Hendrickson, a company spokeswoman, said in the e-mail.

The U.S. Energy Department, which started the project, initially wanted the FutureGen plant in Mattoon, Illinois, to be a near-zero emission facility. It recently scaled it back to a plant that can capture 60 percent of the carbon emissions generated by a conventional coal plant.

“Southern and AEP have been key members of the alliance,” Lawrence Pacheco, a spokesman for the FutureGen Alliance, which represents the companies who would help pay for the project, said in a phone interview. “However, there is still a strong core membership in the alliance who are committed to moving the project forward.”

DOE Support

The Department of Energy expected that the 275-megawatt plant would get $1.1 billion in federal funding and as much as $600 million in industry support.

Energy Secretary Steven Chu supports the project, Stephanie Mueller, a department spokeswoman, said.

“Secretary Chu believes the FutureGen project holds great promise and looks forward to working with the members of the alliance who are committed to developing a flagship commercial- scale carbon capture and sequestration facility,” Mueller said.

Capturing and sequestering carbon emissions tied to global warming is considered crucial to the continued use of coal under carbon-constraining policies being debated by Congress.

BHP Billiton Ltd., Peabody Energy Corp., Consol Energy Inc., E.ON AG, Anglo American Plc, Rio Tinto Plc, Foundation Coal Holdings Inc., a Xstrata Plc unit and China Huaneng Group are other companies involved in the alliance.

American Electric, based in Columbus, Ohio, will spend some of the money previously earmarked for the investment on carbon capture and storage at its Mountaineer Plant in New Haven, West Virginia, Hemlepp said.

Consol’s Plans

Consol plans to remain in the alliance during the current design phase, Thomas Hoffman, a senior vice president at Consol, said in a telephone interview today.

“Once that’s done, I think all of the members as well as the DOE will have to huddle again and decide what the next steps are,” he said.

Vic Svec, a Peabody spokesman, didn’t immediately return a telephone call and e-mailed message seeking comment. Rick Nida, a spokesman for Foundation Coal, said he wasn’t aware of the AEP withdrawal and had no immediate comment.

Lynette Williams, a spokeswoman in Washington for London- based Anglo American, had no immediate comment on the status of the FutureGen project. Ruban Yogarajah, a spokesman for BHP Billiton, declined to comment on the FutureGen project. Tony Shaffer, a spokesman for Rio Tinto, had no immediate comment.

To contact the reporters on this story: Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net; Mark Chediak in San Francisco mchediak@bloomberg.net.

Last Updated: June 24, 2009 19:05 EDT