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Physical Risks and Opportunities
to make the transition. The various changes resulting from transition and physical risks, employee impacts and community transition are discussed and overseen by the Board’s committees. For example, to incentivize management to invest substantial resources to reduce greenhouse gas emissions, the Human Resources Committee adopted a long-term incentive compensation goal measuring carbon-free generating capacity growth. In addition, the Board’s Lead Director conducts an annual governance outreach with our largest institutional shareholders, which includes a discussion of climate risks and AEP’s clean energy transition. AEP’s Board Chairman also meets with investors on a range of issues; and both leaders are actively involved in our engagement with Climate Action 100 +.
AEP’s Board members bring a wealth of experience and expertise to the company that transcends any single issue or risk. We recruit Board members for their broad skill sets, including business strategy, risk management, regulatory, innovation and technology, business operations, finance, and governmental affairs. These disciplines are critical to the governance of a company as complex as AEP and give the Board members a diverse perspective on climate change. The Board also brings in outside experts on a range of issues, including climate change, to enhance its knowledge.
The implementation of AEP’s strategy for a clean energy transition and the Company’s advocacy on climate public policy are overseen by AEP’s management team. Public policy at the federal level is overseen by the Federal Affairs senior vice president, who reports to the executive vice president of External Affairs. State-level policy matters at each of AEP’s regulated electric utilities are managed by a vice president of External Affairs at each company.
12 AEP’s Climate Impact Analysis.
AEP’s Board of Directors: Governance and Risk Management Structure.
Committee on Directors and Corporate Governance • Oversees risks of climate change • Oversees the company’s sustainability/ESG reporting, including climate risks • Oversees political engagement • Oversees AEP’s shareholder engagement, including shareholder requests or proposals • Oversees AEP’s Corporate Compliance Program • Oversees the composition of the Board and committees, including making recommendations on new Board members.
Audit Committee • Oversees the company’s process of identifying and managing major risks, including strategic, operational and financial risks • Oversees the company’s financial reporting, internal controls and compliance risks, including those related to climate.
Policy Committee • Invites external experts to meet with the board on various policy issues, including climate change.
Finance Committee • Reviews the financial condition of the Company and makes recommendations regarding capital requirements and capital deployment, including those with respect to renewables and other non-carbon emitting assets.
STRATEGY.
For the nation to achieve its economy-wide clean energy objectives by 2050 or sooner, as called for in the Biden administration’s climate plan, the transformation of the electric sector is vital. Smart investments in clean energy — including renewables and advanced technologies — will help to lower the costs of electricity and stimulate economic growth. AEP’s strategy for a clean energy future includes: • Building and enabling renewables;
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Pirkey Plant will retire from commercial operation in 2023.
13 AEP’s Climate Impact Analysis • Transforming our fossil fleet for a net-zero carbon future; • Scenario planning for the future; • Investing to ensure reliability, resilience, affordability and security of the grid; • Engaging in the public policy process; • Engaging employees and supporting those impacted by the transition.
Renewables are only one part of a clean, secure and reliable energy future. AEP’s strategy also includes significant investments in its transmission and distribution operations to support the clean energy transition. AEP plans to invest $37 billion in capital from 2021 through 2025, with the bulk allocated to regulated businesses and renewables. This includes $26.7 billion in transmission and distribution investments to update and improve reliability and resilience of the grid. During this same period, AEP plans to invest $2.8 billion in regulated renewable generation and $2.1 billion in competitive, contracted renewable projects. By 2030, we project renewables will represent approximately 40% of our generation capacity.
AEP’s largest renewable project to date — the North Central Wind Energy Facilities — significantly advances our on-going efforts to diversify our energy portfolio. Once complete, North Central wind facilities will deliver 1,485 megawatts of clean energy to Southwestern Electric Power Company (SWEPCO) and Public Service Company of Oklahoma (PSO) for our customers in Arkansas, Louisiana and Oklahoma.
TRANSITION TO CLEAN: PROGRESS.
In the past decade, AEP has retired or sold nearly 13,500 MW of coal-fueled generation, and we recently announced plans to retire an additional 1,633 MW of coal generation by 2028, including Rockport Plant Unit 1 later this decade. Between 2010 and 2030, AEP will have cut its coal-fueled generating capacity by approximately 74%. This is a significant transformation of our generating portfolio.
AEP’s generation transformation includes an ongoing evaluation of our power plants combined with the addition of new renewable resources and significant investments in the development of grid solutions that include energy storage, modular nuclear, and research into the future use of hydrogen. (See Technology section for more.)
We are also optimizing the use of and continuously evaluating the remaining useful life of our coal-fueled generating units. This process informs how we offer this generation into power markets, how we invest additional capital to keep them operational, and whether we choose to retire or sell them.
SCENARIO PLANNING.
AEP routinely reviews its business strategy, evaluating potential scenarios that could affect the company’s future. These scenarios help us to identify and understand threats to our business, as well as new opportunities for growth. We typically convene a diverse team from across the company to help us determine trends, risks and uncertainties that could impact AEP’s business. We prioritize these drivers to help us develop our scenarios. We ask the team how they envision the electric energy business evolving, through the lens of the scenario framework. We evaluate the value and impact each scenario would have on the company, as well as their complexity to execute.
We have historically included a carbon price as a proxy for potential future climate regulations. Today, we.
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of four 9 MW natural gas-fired reciprocating internal combustion engine generators, along with 10.9 MW of photovoltaic solar energy at Fort Sill. This project will benefit all PSO customers during normal operations as the company gains experience in using the assets to balance load, including intermittent resources, as well as help to fortify the local system and Fort Sill against service interruptions from weather or other events.
Energy storage will play a pivotal role in building resiliency and flexibility into the electric power grid. Storage can serve as a short-term supply resource during an outage, providing backup power. It can also help smooth integration of intermittent renewable resources on the grid, and enable a more flexible and responsive grid as demand grows and changes. As various sectors increasingly adopt lithium-ion batteries, it will be imperative that both feedstock supply and battery manufacturing capacity grow commensurately, otherwise clean energy progress could be slowed. (Read more about storage in the Technology section.)
During certain pre-specified conditions and with agreement from PSO, the project would enable the Army to disconnect from the grid and isolate to sustain Fort Sill’s critical missions that protect the country for at least 14 days in the event of a power disruption. Fort Sill is a 94,000-acre U.S. Army training center south of Oklahoma City.
Learn more about the Fort Sill resiliency project in this video: https://www.
psoklahoma.com/community/projects/fort-sill 14 AEP’s Climate Impact Analysis recognize there are other climate change influences that could significantly affect our business beyond climate regulations. For example, our analysis of climate change-related physical risks created a new awareness of potential threats to our facilities and infrastructure. It showed us the vulnerability of some assets located in areas potentially susceptible to damage or loss from rising sea levels and increasing weather extremes. We will use our learnings from this exercise to inform our strategic planning as well as our risk monitoring.
For more information about the scenarios developed for this climate change analysis, please see the Transition section.
BUILDING RESILIENCY.
A resilient electric grid starts with a system that is designed and built to withstand high winds, powerful storms, cybersecurity threats and other disruptions that could cause customer outages. AEP has a long history of investing in the grid to make it more reliable, resilient and secure. We also have more than a century of experience operating and maintaining a system that is vulnerable to weather extremes. Throughout this time, we have updated design and operational standards, increased our situational awareness of threats to the grid, deployed new technologies to give us real-time views of system operations, and focused our resources to strengthen the grid’s resilience and enhance reliability for customers.
AEP is a founder of Grid Assurance, an industry-led initiative to enable quicker recovery of the transmission grid in the event of a catastrophic natural or man-made event. Grid Assurance’s framework plans and models for high-impact, low-frequency events. It includes maintaining an inventory of critical, long-lead-time replacement parts, such as transformers and breakers that can be quickly deployed.
AEP seeks innovative ways to serve the needs of specific customers who require a higher level of resilience.
In July 2020, PSO signed a 30-year lease with the U.S. Army for the siting of a proposed energy resilience project at Fort Sill. The project involves construction.
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15 AEP’s Climate Impact Analysis.
PUBLIC POLICY AND CLIMATE.
AEP has long maintained that domestic climate policy can be best implemented through comprehensive Federal legislation that covers all sectors of the economy. This will ensure that emission reductions are appropriately scaled for cost-effectiveness and that everyone has a collective role in reducing emissions.
AEP looks forward to working closely with U.S. President Joe Biden and his administration on climate policy. AEP urges President Biden and his team to carefully evaluate what might be required for moving from an economy that is powered by greater than 60% fossil-based electricity to one that is 100% clean energy — and for doing so in only 15 years. We are concerned that the costs would be extremely high and that the new sources of power that would be needed simply cannot be developed and integrated in such a short period of time. Nevertheless, we believe that a path to a 100% clean energy future is within our grasp. It will take a major national commitment of the magnitude rarely seen in our modern history, and we will work with the Biden administration to develop practical and effective solutions.
Comprehensively addressing climate change will require fundamental structural changes in how we use energy and materials. Since carbon emission objectives will require development of new technologies or accelerated deployment of specific technologies at a new scale, climate policy also should provide significant and appropriate financial and regulatory incentives to ensure that technologies can be cost-effectively deployed when needed.
In terms of program design, AEP prefers a cap-and-trade system or a clean energy standard (CES). A CES offers clear advantages and lower costs for our customers. A CES requires customers to pay only for the cost of compliance, which would be achieved by either building clean energy resources or purchasing power from nonemitting generation. Conversely, a carbon tax requires customers to pay for the cost of cutting emissions and pay a tax on remaining emissions.
It is important that a CES provide partial credit for natural gas in the near-term as well as full credit for nuclear. In the first decades of such a program, natural gas and nuclear are critical to providing “firm” energy sources to support intermittent renewable energy. For example, the system must be robust and able to fully power the economy in the most severe winter storms. In the later stages of a CES, when the percentage of clean power approaches 70% or more, the nation will depend on sources of power that are now not fully developed and cost-effective. These include carbon capture, utilization and storage (CCUS) for natural gas, advanced energy storage, and new power sources that are today more conceptual than reality, such as the use of hydrogen. It will take decades to develop those new technologies to support a clean energy economy and require a federal research and development program and coordination with the energy sector that would be unprecedented in scope and scale.
Additional policy considerations should include the removal or replacement of duplicative or overlapping GHG regulatory requirements currently existing under the Clean Air Act (CAA) with passage of comprehensive federal climate legislation. Specifically, the legislation should contain provisions that exempt all stationary sources from GHG regulation under the CAA, including any existing and future rules. Duplicative and overlapping regulations increase the costs of developing clean energy without commensurate environmental benefits.
MANAGING AND MITIGATING RISK.
Enterprise Risk Oversight (ERO) defines and oversees the consistent application of AEP’s risk management process in coordination with our business units and.
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operating companies. The risk management process helps us identify strategic, financial, operational and regulatory risks, assess the threats and controls, evaluate the risk, plan mitigation strategies and monitor risks for changing conditions.
Risks are reported by business units or operating companies to the Enterprise Risk Oversight group. The Chief Risk Officer reports a summary of risks to the Risk Executive Committee, which consists of senior leaders, to illustrate risk ranking and planned mitigations. This summary of risks is then discussed and reviewed by the Audit Committee of the Board of Directors.
In evaluating risk, AEP considers potential events that could affect our business. In 2019, climate change was assessed using AEP’s risk management framework and added to the summary view of risks reported to the Risk Executive Committee and Audit Committee. The physical impact assessment of climate change and the climate change transition scenario analysis will provide additional detailed insights into future risk assessments for our assets and facilities.
16 AEP’s Climate Impact Analysis.
For purposes of this report, climate change was examined through two separate lenses — physical risk and transition risk with unique causes, controls, and recovery measures examined within the broader climate risk categories.
While we can’t predict exactly what will occur or when, our experience and risk management activities across the organization will enable us to make sustainable and strategic decisions to prevent, prepare and recover.
INSURANCE RISK.
AEP’s Risk and Insurance Management team uses a combination of purchased insurance and self-insurance to mitigate the adverse financial impact of accidental losses such as floods and wildfires. We purchase several types of coverage to mitigate different loss exposures. For example, AEP recovered $18 million from its property insurance carriers due to ensured losses caused by Hurricane Harvey.
We also maintain liability insurance, which has become a significant concern due to increased frequency of wildfire losses allegedly caused by utility operations. Should climate change result in increased frequency or intensity of insurable losses, our insurance products will play a role in mitigating the financial impact of these events.
AEP’s Structured Risk Framework.
Strategic These are risks that affect our long-term or overall business goals and ability to achieve them.
Financial Potential risks that affect our financing needs, financial standing, and/or reporting requirements.
Operational Those risks that affect our ability to operate the power grid.
Regulatory Risks that can affect our legal and compliance requirements.
Risk Identification Find, recognize and describe the risk.
Risk Monitoring Continuous review Risk Evaluation in consideration and Scoring of Determine changing likelihood conditions. and impact.
Risk Mitigation Identification of Escalation Process options to lessen the severity. (if necessary) Significant risks are escalated.
Risk Impact Assessment.
Risk Analysis Understand the nature of the risk.
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Insurance companies are beginning to restrict the coverage available to companies with coal-fueled generation exposure and setting restrictive thresholds for their portfolios. The insurance companies that provide our coverage are increasingly weighing climate change risks and evaluating AEP’s exposure to more frequent hurricanes, floods, storm surges and wildfires. Losses that are insurable today may become uninsurable in the future. For example, many insurance carriers now exclude liability coverage for California wildfires due to their recent frequency and severity.
ENTERPRISE RESILIENCE.
Identifying and managing risk is only one part of the equation. It is equally as important to be prepared in the event a worst-case scenario — such as the loss of a data center — occurs. AEP’s Enterprise Resilience team is charged with sustaining the enterprise’s emergency management and business continuity capabilities. Our Emergency Management Core Plan aligns with the National Incident Management System and adopts the principles of the incident command system, which government agencies across the U.S. use to respond to local emergencies and large disasters. AEP’s emergency management framework is an integral part of how we efficiently respond to and manage events to keep critical operations functioning.
The Enterprise Resilience team works closely with ERO to identify the drivers that could trigger an event; the controls for preventing it or reducing the frequency of it occurring; and mitigation strategies if it does happen. We try to anticipate high-impact, high-probability events to prepare for and to limit the negative consequences. We’ve established business-unit-based and hazardspecific plans aligned to our emergency management framework to manage response and prioritized recovery plans to maintain business continuity.
Building resilience into the power grid helps to mitigate physical damage and customer outages, and protects business operations and infrastructure. AEP’s transmission and distribution systems are building system redundancies to reroute power in the event portions of the grid are temporarily disabled. AEP’s 17 AEP’s Climate Impact Analysis modern underground monitoring system is one of the nation’s most robust monitoring systems for urban underground distribution networks. The advanced network monitoring provides real-time visibility and control of AEP’s underground distribution network assets in 15 cities and is enabling us to perform risk-based decision-making to ensure resilience.
AEP’s Enterprise Resilience program ensures that processes and workarounds are in place to minimize the impacts of losing facilities, technology, critical skill sets and internal/external dependencies. For example, if we lose access to one of our Distribution Dispatch Centers, we can transfer operations to another facility and have some employees perform work from home. Our Emergency Management Core Plan, response plans and business continuity plans help to bolster our resilience, and we routinely practice our response and recovery capabilities through a culture of preparedness.
AEP’s Underground Network enables AEP to collect, communicate and use information and data to support operation of the distribution grid. It provides real-time monitoring to help discover network issues before they cause costly systemwide problems, adding a dimension of operational resilience to the system.
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18 AEP’s Climate Impact Analysis.
Potential Financial and Business Impacts from Climate Change.
Potential Climate-Related Risks and Opportunities Potential Financial / Business Impacts.