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How Coal-Dependent Utilities Will Stay Clean

Case studies on how AEP and Southern Co. are preparing for CO2 regulations.

Fortnightly Magazine - January 2007

AEP trumpets Integrated Gasification Combined Cycle (IGCC), and has announced plans to build the largest commercial-scale IGCC plant in the United States, but does not currently have any production-scale projects. 5 IGCC is a particularly good match for AEP, because the technology works well with high-Btu coals such as the bituminous Appalachian coals readily available in AEP’s eastern area. 6

AEP should therefore be expected to follow a strategy that relies on:

• Attempting to influence the baseline to maximize its credit allocation;
• Purchasing CECs and offset credits; and
• Setting top level caps and reduction targets that will depress CEC prices.

Case Study: Southern Co.

Southern Co. is the second largest coal-based power generator and electric utility in the United States, with 66 percent of its energy mix devoted to coal, according to Innovest Strategic Value Advisors. This makes Southern the second most polluting electric company in the country, according to advocacy group Clear the Air.

Southern strongly supports a voluntary, technology-based policy solution to the climate-change issue. Southern partnered with the Department of Energy to develop a unique IGCC technology at the Power Systems Development Facility in Alabama. This facility is DOE’s flagship gasification research facility for the United States.

Southern, whose operations are all within the southeastern United States, released about 137 million metric tons of CO 2 from power plants during 2005. For 2005, Southern’s CO 2 emissions intensity was 1,532 lb/MWh of electricity generated. These data were developed and reported under the DOE/Energy Information Administration 1605(b) methodologies and guidelines.

Important features of any such program would include full flexibility, straightforward accounting, measurement, and verification and economy-wide coverage. 6 Southern’s strategy is to continue to play a leadership role in the development and promotion of long-term technology research, development, and dissemination. Southern is not participating in the CDM/JI program since the United States is not a participant in the Kyoto Protocol.

Southern has spent more than $1 billion for NOx emissions controls at its coal-fired plants. It expects to spend an additional $4 billion or more by 2015 to further reduce overall emissions. Southern says it is considering the adoption of CO 2 emissions control targets. It has no plans to participate in voluntary emissions trading.

Southern does not support a Kyoto-type emissions cap. It favors the Bush administration’s Clear Skies proposal, with a focus on carbon intensity, development of new GHG-reducing technologies, and the transfer of those technologies to developing countries.

Policy statement: Southern issued its first environmental policy statement in 1992. Its most recent statement on climate change was issued in August 2000. 7 The 2002 proxy statement makes no reference to environmental issues discussed by the board of directors. The board has not conducted a formal review of the climate change issue. In 2005, Southern released an Environmental Assessment: Report to Shareholders that evaluated the strategic and financial impacts on the company of several potential carbon price scenarios. 8 Under the scenarios analyzed, Southern customers would have to pay from $280 million to $1.7 billion/year by 2020 in increased electricity costs.