How Coal-Dependent Utilities Will Stay Clean


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

Fortnightly Magazine - January 2007

Energy producers already have begun to prepare for coming CO2 regulations. As a first step, many companies are implementing internal trading schemes. These schemes include defining a scope for participating business units and geographies, and in some cases even setting penalties and creating auditing systems. Some companies have gone so far as to set up internal auctions, formal audit systems, and databases of reduction initiatives. Many of these companies also have designated internal brokers and set externally verified baselines that will lead to meeting reduction targets.

In this article, we have focused on AEP and Southern Co. as case studies of how companies are preparing for a carbon-constrained world, because they are in the top 5 companies in the United States with the highest proportion of coal-fired generation in their fleets.1

Case Study: American Electric Power (AEP)

AEP owns more than 36,000 MW of generating capacity in the United States and is the nation’s largest electricity generator. AEP also is the largest emitter of CO2 within the utilities industry due in large part to its heavy use of coal (in 2004, 83 percent of total generation was from coal).2 Through U.S. utility operations, AEP emitted 160.8 million U.S. tons of CO2 in 2004.3 Being the largest player in the industry, AEP has communicated to investors a well-developed plan for addressing the coming emissions restrictions. As stated by AEP, this plan includes:

1. Taking voluntary proactive action in the short and intermediate term (e.g., Chicago Climate Exchange commitment is from 2003-2010);

2. Being engaged in the development of climate policy so that it is as cost-effective as possible;

3. Evaluating longer-term investment decisions such as new generation (e.g., IGCC) in light of the climate issue and the possibility of future mandatory legislation; and

4. Investing in R&D for the technologies that may ultimately substantially reduce CO2 emissions (e.g., FutureGen, carbon sequestration).

While AEP realizes that “companies that have a strategy that considers climate change now in their investment decisions and are taking voluntary actions to reduce their CO2 footprints should be a better value for investors than companies that do not,” it opposes mandatory reduction programs.4 AEP instead is championing the Chicago Climate Exchange, of which AEP was one of 14 founding members, as the path to self-regulation. AEP does not predict any significant U.S.-based program before 2009. How soon an emissions trading system program will be started depends on who is sitting in the White House.

To meet CO2 emissions restrictions, AEP plans to make extensive use of offsets and credits provided by new renewable capacity (specifically wind) and by agricultural offsets. 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 CO2 from power plants during 2005. For 2005, Southern’s CO2 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 CO2 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.



1. “Trucost Joins Yale Professor to Devise Tool to Gauge Financial Cost of Environmental Impacts” Bill Baue, Aug. 25, 2006,

2. “Carbon Disclosure Project Report 2006 Global FT500,” Carbon Disclosure Project, 2006.

3. Carbon Disclosure Project (CDP) AEP Greenhouse Gas Emissions Questionnaire.

4. Carbon Disclosure Project (CDP) AEP Greenhouse Gas Emissions Questionnaire.

5. “AEP and Climate Change” Bruce H. Braine, Vice President, Strategic Policy Analysis, Sanford Bernstein-CERES Investor Seminar, Sept. 20, 2006.

6. For a more complete understanding of the company’s position on mandatory greenhouse gas-control programs, please refer to the comments that the company submitted to the Senate Energy Committee in response to the Bingaman/Domenici Climate Change White Paper. These comments can be found at