(Reuters) - Public Service Enterprise Group Inc, New Jersey's biggest power company, plans to spend $1.6 billion over five years to expand its natural gas and other power plants to take advantage of cheap prices from swollen gas supplies.

"We have been talking about this low gas-price environment for years. We are building new combined-cycle gas units, while also making investments in existing plants to get more out of them," William Levis, president and chief operating officer of PSEG Power told Reuters.

While PSEG's investments regularly include capital for upgrading and expanding existing units, the combined-cycle plants, planned in its 2015-2019 budgets, would be the first significant new generators built in a decade or so.

Combined-cycle facilities are the most efficient gas-fired power plants because they use both gas and steam turbines to get more electricity out of the same fuel than a simple-cycle plant. PSEG is building one in Maryland and another in New Jersey and hopes to build a third in Connecticut, Levis said.

ADVERTISEMENT

"One of the biggest changes we have seen with the collapse in gas prices is that our combined-cycle plants have become one of the workhorses of our fleet," Levis said, noting some of the combined-cycle units were running about 70 percent of the time up from just about 20 percent a decade ago.

Use of gas as fuel for electricity accelerated over the past decade with the increase in production from shale formations like the Marcellus in Pennsylvania and West Virginia.

That increase in output pushed U.S. gas prices down to $2.61 per million British thermal units last year, the lowest level since 1999.

"We have this dash to gas, which has been good for our country in many ways, creating jobs, lowering energy costs, cleaner for the environment, but we still believe in a diversified fuel supply," Levis said, noting PSEG owns nuclear, gas, coal and renewable power plants.

Power companies in 2015 may have burned more gas than coal to produce power for the first time in history as generators retired a record number of coal units because weak gas and power prices made it uneconomic to upgrade older coal units to meet stricter federal environmental rules.

Levis said PSEG has an agreement in principle to shut its 383-megawatt coal plant in Bridgeport, Connecticut, in 2021, the only coal plant in the state. Before doing that, PSEG wants to first get approval to build a new gas plant at the site.

He said the company hopes to build the new combined-cycle plant with a capacity of around 500 MW in Bridgeport by the summer of 2019. One megawatt can power about 1,000 homes.

ADVERTISEMENT

Levis said PSEG has no immediate plans to shut its other coal plants. "We will run them as long as we make money at them."

(Reporting by Scott DiSavino; Editing by Alden Bentley)