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Fast Transition.
CO2 price: $30/ton + 3.5%/year escalation, starting 2028.
Energy Efficiency: More aggressive.
Electrification: More.
EV Penetration: Mid-point.
AEP Coal Unit Retirements: Book Life less 5 years, or 2040.
Technology Costs: EIA forecasts.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
• Both scenarios showed an increased build and use of wind and solar and decreasing reliance on coal and natural gas over time. The pace varies by scenario.
• An unexpected outcome was that the model did not select large levels of energy storage or dispatchable non-emitting resources. AEP believes storage plays a critical role; this will be further analyzed.
• Fast Transition assumes accelerated retirement of additional coal-fueled resources.
• Technology advances, non-emitting fuel sources, end-use electrification, continued growth of renewables and distributed resources, and public policies are all critical to achieving net-zero.
CLIMATE-RELATED PHYSICAL RISKS.
Climate change presents both risks and opportunities for AEP. In this analysis, we sought to understand both. Changes that cause the most concern are generally subtle and gradual but are more severe in extremes. For example, while the frequency of severe weather may be slightly higher, the severity of storms is more pronounced. In the case of rain events, they may be shorter but more intense, resulting in flooding that can affect our business operations. The variations in climate variables are geographically dispersed across AEP’s service territory, and they are gaining more attention from stakeholders as potential financial and operational risks associated with climate change.
In evaluating physical risks and opportunities, we looked across the enterprise to include both regulated and competitive businesses. Our analysis took into account a range of issues, including climate variables, aging infrastructure, capital investments to modernize and harden the power system, public policy, regulatory oversight, technology development and resilience. We examined the potential impacts to physical assets, such as buildings, substations, wind turbines, poles and generating units, and we applied our knowledge and experience garnered from more than a century of severe weather events.
In our assessment, we focused on the most probable climate-related physical impacts to the AEP system: • Ambient temperature • Precipitation amount and type • Severe weather • Sea level rise • Wind speed • Solar irradiance.
Physical risk is harder to discretely quantify. The inherent uncertainties and complexities in forecasting what a warmer climate might mean to the interconnected systems we rely upon — physical assets and natural ecosystems — are hard to predict. Our analysis revealed some vulnerabilities as well as demonstrated our experience and ability to effectively manage physical impacts to the AEP system.
Key Takeaways • Our analysis showed that investments to harden and build resilience and reliability into the system are essential and having a positive impact.
• Weather extremes are becoming noticeably more severe.
• AEP’s geographic diversity provides a hedge against physical extremes in many climate-related variables 6 AEP’s Climate Impact Analysis.
AEP CO2 Emissions 60 100% 50 95% 40 90% 30 85% 20 80% 10 75% 0 70% 2020 * 2030 2040 2050.
BAU Fast Transition Base % Fast Transition %
Emission projections are for AEP’s vertically integrated utilities only. Both scenarios arrived at >95% of historical emissions reduction by 2050. Under these scenarios, carbon offsets would likely be needed to achieve net-zero.
Note: 2020* data includes AEP’s competitive fossil generation, which will be fully retired by the end of 2030.
% Reduction from 2000.
Millions of Metric Tons.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
because the impacts tend to be local or regional and can vary greatly by location.
• An analysis of heavy rain events at six AEP coal-fueled power plants across our service territory showed that subtle changes are occurring over time and that the weather extremes — like Hurricanes Harvey and Laura — may be more intense.
JUST TRANSITION.
Community revitalization and workforce development have become central issues in the transition to a clean energy economy. As we shift from fossil-based electricity to cleaner resources, such as wind and solar, there are human and economic impacts. Our climate analysis included consideration of how we manage the transition to ensure environmental sustainability, as we enable 7 AEP’s Climate Impact Analysis.
Examples of Climate-related Physical Risks.
Climate Variable Potential Change Affected Assets Risk or Opportunity Physical Impact Operational Impact.
Temperature Hotter All Risk Equipment ratings and Components may not be able temperatures throughput can be to operate to design basis and temperature dependent need to be replaced.
(conductors, transformers, If incoming water temperature batteries, gear box, etc.); gets too high, it can result in water used for cooling may reduced cooling water be too warm efficiency and reductions in steam-electric generation.
Increased summer All Opportunity Increased summer heat Increased top line revenue heat increases demand for electricity.
Precipitation Increased All Risk Flooding Disrupt operation of precipitation (rain) substation facilities, offices, service centers.
Severe Weather Increased, more All Risk Severe weather can Outages; storm-related intense storms damage equipment costs; customer experience; cascading impacts from economic disruption caused by reduced demand from severe weather.
Sea Level Rise Sea level rise T&D Risk Flooding and expansion Loss of and/or need to of storm surge zones could relocate facilities, staging severely damage facilities. areas.
Wind Extreme wind All Risk Extreme winds could Power outages; cost to activity damage infrastructure and repair/replace infrastructure increase debris.
Increased wind Wind Opportunity Increase in renewable Increased power output speeds resource from wind.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
8 AEP’s Climate Impact Analysis opportunities for affected workers, social inclusion and poverty mitigation.
The Just Transition is an approach to working with communities, power plant owners and other stakeholders to prepare for and make the transition to new skills, new industries, and sustainable policies for the future. We intend to be an active participant in identifying solutions that empower communities to diversify and thrive long after the power plant is shuttered. Coal-fueled power plants are most often located in remote areas, are the largest employers with the highest paying jobs, are the largest taxpayers and are very involved in their local communities. The effects of a plant retirement are felt far beyond the fence line of the plant itself.
We conducted an economic impact analysis to understand the cumulative regional effects associated with plant closures. We modeled the hypothetical closure of four active coal units to help us quantify the effects of a plant retirement on regional employment, labor income and GDP. We estimated the direct (AEP), indirect (contractors/suppliers) and induced (consumer spending) economic impacts of a retirement. The results show the economic impact can be significant.
Our intent is to give employees and communities as much advance notice as is feasible, often up to five years, to prepare. We support our employees, including our labor unions, as they plan to reenter the job market. This includes connecting them with programs and services offered by AEP and external organizations to broaden their access to career opportunities.
The Just Transition plays an important role in our ability to move to a clean energy economy without workers and communities being left behind. We know we can’t do this alone, and we are committed to helping enable a transition to a resilient, sustainable, and economically strong future for affected communities.
Key Takeaways • On average, a typical coal-fueled power plant operated by AEP generates $160 million in regional economic activity, provides $63 million in labor income and supports more than 700 regional jobs annually.
• AEP’s past experience demonstrates that a successful transition for plant employees includes collaboration with union representatives, transparency about our plans, management of expectations, coordination to tap into internal and external resources, and frequent communications.
• AEP will be part of the solution to help our employees and communities make the transition. To be most effective, we will seek public and private partnerships for maximum impact.
• Early and frequent community outreach is critical.
Welsh Plant will cease coal operations in 2028.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
INTRODUCTION AND TCFD FRAMEWORK 9 AEP’s Climate Impact Analysis.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
INTRODUCTION.
Climate change is a defining issue of our time. It is also one of the most debated issues. AEP’s position is that there are unmistakable changes occurring to the climate but that the speed of change and the future effects of those changes remain uncertain. We have experienced it in the form of extreme weather events across our service territory, from extreme heat and droughts to more intense and frequent hurricanes. These are some of the visible impacts that have occurred.
For more than two decades, climate change has been a key issue for AEP and its stakeholders. Investors and non-government organizations (NGOs), as well as other stakeholders, ask us about the pace of our transition to cleaner energy resources, the financial and physical risks associated with early retirement of fossil-fueled power plants, the potential reliability risks to the electric power system if we move too fast, and the importance of working with regulators and other public policymakers to arrive at the best solutions for our customers and the environment.
We recognize that climate change is occurring. AEP initiated this analysis because it gave us an opportunity to expand our understanding of how it can affect the company now and in the future. This informs our strategic planning, risk management and how fast we can go. We have long believed that our clean energy transformation strategy is aligned with the Paris Agreement. The climate scenario analysis we undertook demonstrates that our strategy is on course with achieving the goals of the Paris Agreement. And, it reminds us that the transition must build resilience into the system to handle extremes. It also shows us that there are still many uncertainties about technology, resources and the pace and cost of the transition. Our path forward will evolve, and, as it does, we will continue to engage our stakeholders.
As we transition to a clean energy future, our decisionmaking is informed by: • Customer preferences for clean energy, particularly those with carbon-free energy and fleet electrification goals; 10 AEP’s Climate Impact Analysis • Availability and cost of advanced technologies, such as energy storage and modular nuclear; • New resources, such as green hydrogen; • Market demand and prices; • Low natural gas prices; and • Regulatory innovation, including alternative ratemaking mechanisms and deregulation.
This report presents our findings. It is a first step toward gaining clarity on actions, timing, physical and financial impacts, and possible outcomes. It is not a prescriptive, definitive path to net-zero but it gives us valuable insights into the work that still lies ahead.
PROJECT DELIVERABLES.
The project included three focus areas — transition risk, physical risks and opportunities, and the socioeconomic aspect of coal plant retirements — and involved a diverse team of more than 50 people, representing all parts of the company and including engineers; resource planners; meteorologists; and experts in generation, transmission, distribution, legal, air quality and environmental, along with enterprise risk and insurance, investor relations, economic development, customer solutions, and corporate sustainability, among others. AEP’s internal team conducted the analysis and modeled potential scenarios. In addition, we consulted with numerous external resources, reports and studies, and climate expertise to further inform our analysis. (See References.)
In addition to modeling three scenarios, we evaluated the advancement of new and emerging technologies; public policy and regulatory changes that could influence our actions; the pace of transition; and risk mitigation strategies to make the electric grid more resilient. We conducted desk research, benchmarking and interviews to frame our approach, capture legacy knowledge and identify best practices and potential new business opportunities.
This report is aligned with the Task Force for Climaterelated Financial Disclosure (TCFD) framework, which is emerging as the preferred approach for reporting on climate risk management. We also referenced the.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
TCFD Framework.
Governance The organization’s governance around climate-related risks and opportunities.
Strategy The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning.
Risk Management The processes used by the organization to identify, assess, and manage climate-related risks.
Metrics and Targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Metrics and Targets.
Risk Management.
Strategy.
Governance 11 AEP’s Climate Impact Analysis.
Fourth National Climate Assessment, among other climate-related documents. (See appendix for reference resource list.)
The five project deliverables identified were: 1. Identify risks and opportunities related to climate change 2. Inform capital investment and regulatory strategies 3. Advance electrification and electric vehicles 4. Explore impacts of potential future climate policy pathways 5. Inform strategic planning for the corporation.
This comprehensive report includes the process, scenarios developed, modeling outcomes, risks and opportunities, governance, the role of technology, public policies/regulatory considerations, and strategies for mitigation. For ease of understanding, each focus area — transition risk, physical risk, and Just Transition — is a self-contained section, though there is some overlap.
CLIMATE CHANGE GOVERNANCE.
AEP’s Board of Directors understands the importance of climate change issues and their significance to our employees, customers, investors and other stakeholders. The Board regularly discusses issues related to climate change, including carbon reduction goals, public policy and legislation, renewable investments and AEP’s strategy for a clean energy transition. The Board recognizes that climate change poses challenges to AEP but also creates new business opportunities; these challenges and opportunities are discussed during strategic planning sessions.
The Committee on Directors and Corporate Governance leads the governance of climate risks, but the full Board engaged in approving AEP’s strategy to invest in renewable energy, reduce carbon emissions and support our local communities and regional economies.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.