American Electric Power — The Coal Problem

AEP Generation Resources operates 60 electricity generation stations across 11 states with total capacity of 31,000 MW. Based on capacity, AEP is the second largest US electricity generator but leads its competitors in CO2 emissions. What can AEP do to remain competitive and reduce its CO2 emissions?

AEP Generation Resources operates 60 electricity generation stations across 11 states with total capacity of 31,000 MW[1]. Based on capacity, AEP is the second largest US electricity generator but leads its competitors in CO2 emissions[2].

Generating electricity requires superheated steam which is converted into mechanical energy via a turbine. AEP needs a lot of superheated steam and gets it by burning coal and natural gas, representing the fuel for 50% and 28% respectively of the firm’s total power production[3]. The average coal plant boasts an extremely low efficiency of 33%, this means that 67% of the energy in coal is lost to inefficiencies like incomplete combustion[4]. Compounding increased emissions from low efficiency is coal’s combustion characteristics; it releases about two times the CO2 of natural gas per thermal unit of energy generated[5].

With the highest greenhouse gas emissions of any electricity producer in the US, AEP is in a precarious position. The firm simply releases significantly more CO2 per unit of electricity then any other producer. No matter what form regulation of COemissions takes, AEP will have to make changes in how it produces electricity to comply. Fortunately for AEP, there are three ways to reduce its emissions per electricity unit:

  1. Replacing coal with natural gas
  2. Improving plant efficiency
  3. Increasing alternative sources including renewables and nuclear

Compared to coal, natural gas releases about half the CO2 and almost no secondary pollutants like NOx and FEV when combusted. Over the past five years the price of natural gas per unit of energy has decreased due to increased gas production in North America leading to convergence with the price of coal[6]. This phenomenon aligns economic incentives with reducing greenhouse gas emissions by making it feasible to retool coal power plants to burn natural gas. By switching plants from coal to natural gas AEP could reduce its greenhouse gas emissions by almost 25%.

In addition to fuel switching, AEP can modernize its plants to increase efficiency by minimizing heat loss. It is possible to achieve efficiency of 40%[7] in coal plants and 45%[8] in natural gas plants. These increases would result in an additional 7 to 9% reduction in greenhouse gas emissions.

Even though there is plenty of natural gas in North America, generating electricity from gas is still relatively inefficient. Depending on regulation pressure in the future AEP may need to add alternative energy sources to its portfolio including wave, solar, wind, geothermal, hydroelectric, and nuclear. These energy sources come with their own challenges including availability, cost and safety. Due to current price conditions it would be difficult for AEP to replace a significant portion of its capacity with alternative sources even though they may make sense over the long term.

Fuel switching and increasing efficiency are operational changes that AEP could implement today to reduce emissions. These options will come with significant capital costs that AEP may not be willing to invest without the external force of regulation or significant increases in the price of coal. Whatever form regulation takes AEP will need to change how it produces electricity to reduce its greenhouse gas emissions and ensure a healthy planet for future generations.

 

[1] AEP, “Power Generation,” https://www.aep.com/about/MajorBusinesses/PowerGeneration/, accessed November 2016.

[2] Jeff McMahon, “And the Biggest Polluter is: American Electric Power Compay,” Forbes, May 28,

2014, http://www.forbes.com/sites/jeffmcmahon/2014/05/28/and-the-biggest-power-polluter-is-aep/#253d2a251236, accessed November 2016.

[3] AEP, “Power Generation,” https://www.aep.com/about/MajorBusinesses/PowerGeneration/, accessed November 2016.

[4] World Coal Association, “Reducing CO2 Emissions,” http://www.worldcoal.org/reducing-co2-emissions/high-efficiency-low-emission-coal, accessed November 2016.

[5] Energy Information Agency, “How much CO2 is released when different fuels are burned?,” https://www.eia.gov/tools/faqs/faq.cfm?id=73&t=11, accessed November 2016.

[6] Energy Information Agency, “Natural Gas Expected to Surpass Coal in Mix of Fuel Used in 2016,” http://www.eia.gov/todayinenergy/detail.php?id=25392, accessed November 2016.

[7] World Coal Association, “Reducing CO2 Emissions,” http://www.worldcoal.org/reducing-co2-emissions/high-efficiency-low-emission-coal, accessed November 2016.

 

[8] Energy Information Agency, “What is the efficiency of different types of power plants?,” https://www.eia.gov/tools/faqs/faq.cfm?id=107&t=3, accessed November 2016.

 

(631 words)

Previous:

Levi’s, Cotton, and Climate Change

Next:

Yamaha Motor or how to (intend to) lead the electric motorcycle industry

6 thoughts on “American Electric Power — The Coal Problem

  1. Flint,

    Great post. You did a great job identifying the climate-change-related issues with AEP’s operational model, as well as identifying a sensible series of steps AEP can take to address those issues.

    A couple questions the post left me contemplating:
    1) Has AEP identified these issues as well? Has management spoken about them publicly?
    2) If YES, what steps are they taking to address these issues? All of the suggestions you outline, or just some? What’s the timeline for implementation? Do you think they are doing enough, or should they be doing more to address climate change?
    3) If NO, why do you think they have failed to recognize and/or address these issues? What role do other market participants (e.g. consumers, regulators, government) play in pushing them towards addressing these issues?

    Overall, nicely done, and thanks for bringing this issue to everyone’s attention!

  2. Nice post FH!

    Sometimes when I drive through the Arizona dessert I drive past massive solar power plants. I see these installments and think to myself, “Wow, that is a lot of power and no CO2!” Do you think companies like AEP are buying that power? It certainly would make me feel better when I turn on the lights!

    Another question, in your post you say AEP is the largest CO2 generator compared to its peers. Is that larger in CO2/MW or is it just an aggregate number?

    -JP

  3. Flint,

    I enjoyed your post very much. Growing up in “coal country”, West Virginia, it was nice to see someone taking on a topic I witness every day. It is undeniably true that the low efficiency of coal combustion and government regulations are causing many Power Plants in the United States to convert to Natural Gas, or in many causes shut down completely. The entire state of WV has seen this first hand as U.S. coal production dropped 10.3% in 2015. In the same year, low production has led to many lay-offs at the coal mines and the average number of employee per coal mine decreased 12% to the lowest level ever recorded. Although it is an unfortunate event to watch as the economic depression sweeps across the state, it reminds us of the necessity to continuously strive for more efficient and sustainable energy sources.[1]

    [1] “Annual Coal Report 2015,” U.S. Energy Information Administration website, https://www.eia.gov/coal/annual, accessed November 2016.

  4. #guy who sits scribe#:

    1) Has AEP identified these issues as well? Has management spoken about them publicly?

    Yes, they acknowledge the need to update their generation with more renewable and NG on their website. I imagine that the 28% of production they are fueling with NG has been developed over the last decade as they phase out old coal plants.

    2) If YES, what steps are they taking to address these issues? All of the suggestions you outline, or just some? What’s the timeline for implementation? Do you think they are doing enough, or should they be doing more to address climate change?

    Per answer to #1, they do appear to taking action. It is a slow process due to the capital outlays and basic economics of producing electricity.

  5. Interesting post, kfh! I’m intrigued by the conditions it would take for AEP to move faster on these points. You mentioned that pricing conditions are unfavorable at present, but how far would prices have to move for them to make significant changes? I’m also curious what “carrot” government programs exist, in addition to “stick” regulation, that could help facilitate these changes. I know it’s something that’s been in the press a lot, but I wonder how these play out on the ground. On the demand side, are there movements from customers to clean up their operations? Are the preferences of end consumers getting translated up the chain, or getting stuck in the middle? I also wonder what additional changes their competitors have made that help them produce less CO2 – perhaps AEP can adopt these changes as well.

  6. kfh,

    Thanks for the informative post! With the country’s shift towards natural gas and cleaner sources of power, I was surprised to learn from your post that the second largest electricity generator in the U.S. is still so heavily dependent on coal. I was even more surprised to see that AEP’s share price has actually appreciated 16% over the past year. I think a portion of this could be attributed to the fact that power generation is a comparatively smaller piece of their overall business, consisting of 17% of AEP’s total 2015 revenue, versus its Regulated Utility business (55%) and Transmission & Distribution business (27%) according to their 2015 10-K. Despite this, I agree with you that it poses a huge risk to the Company’s long term sustainability. Do you think M&A with another (more “green”) power provider could be an option for AEP to diversify its fleet of generation assets?

Leave a comment