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Transition Risk. |
Policy/Legal • Increased pricing of carbon emissions or adoption of a carbon tax • Enhanced or mandated emissions reporting requirements (new regulations) • Exposure to litigation. |
Technology • Advanced technologies not mature or commercially available • Costs associated with transition to new technologies • Phase-in of more stringent lighting efficiency and appliance standards, and building codes. |
Market • Changing consumer behaviors • Uncertainty in market signals • Distributed energy resources growth (e.g., installed solar or storage costs decline) |
Reputation • Shifts in consumer preferences • Increased negative stakeholder reaction/feedback • Increased operating costs (e.g., higher compliance costs, insurance premiums, etc.) • Increased cost to customers • Asset impairment • Erosion of brand, reputation • Accelerated early retirements of existing assets • Reduced demand for products, services • Ability to recover costs • Costs to adopt/deploy new technologies • Higher standards that could have pronounced effect on energy consumption, affecting revenue • Reduced demand due to changing consumer preferences • Increased production costs • Fuel prices that affect the economic dispatchability of units • Net-metering constructs that provide customers excess monetary credit for self-generation and don’t account for grid use • Reduced revenue from decreased demand for products/services • Reduced revenue from decreased production capacity • Availability of cost-effective capital • Erosion of brand, image • Erosion of customer satisfaction • Negative effect on new business development. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
19 AEP’s Climate Impact Analysis. |
Potential Financial and Business Impacts from Climate Change. |
Risks and Opportunities Potential/ Business Impacts. |
Physical Risk • Increased severity and/or frequency of extreme weather events such as hurricanes and floods • Changes in precipitation patterns and extreme variability of weather patterns • Rising sea levels • Extreme changes in temperatures • Water temperatures in lakes and cooling ponds increase. |
Opportunities • Fleet electrification • EV adoption • Reduced water usage/consumption with coal retirements, particularly in high-stress regions • Use of more efficient production and distribution processes, technologies • Use of low-to-no carbon emitting generation resources • Development and/or expansion of low-emission goods and services • New climate adaptation solutions • New energy and data platforms • Broadband (middle mile) • Smart City applications • Increased capital costs from loss of or damage to facilities (substations, office buildings, service centers, poles, etc.) • Loss of productivity in extreme weather that could cause loss of revenues (absenteeism, reduced work hours, etc.) • Reduced revenue from lower production capacity • Increased operating costs (e.g., inadequate water or too much water for hydro facilities; replacement parts for equipment) • Supply chain disruptions • If incoming water temperature gets too high, it can result in reduced cooling water efficiency and reductions in steam-electric generation • Increased demand and revenues • Customer satisfaction • Reduced operating costs • Increased value of fixed assets • Increased production capacity • Reduced operational costs • Reduced exposure to fuel market pricing • Reduced exposure to GHG emissions and less sensitivity to cost of carbon • Increased capital availability • Enhanced reputation, brand • New revenue opportunities • Better competitive positioning to reflect changing customer preferences, resulting in new/increased revenues • Increased market valuation through resilience planning (e.g., infrastructure, buildings, etc.) • Increased diversification of financial assets (e.g., green bonds) • Supply chain reliability and ability to operate under various conditions. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
20 AEP’s Climate Impact Analysis. |
METRICS AND TARGETS. |
Metrics used to assess climate- related risks and opportunities are in line with AEP’s strategy. |
INCENTIVE COMPENSATION TIED TO CARBON-FREE CAPACITY. |
Long-term incentive plans (LTIP) are designed to promote the interests of the company and its shareholders by strengthening AEP’s ability to attract, motivate and retain employees and directors; to align the interests of AEP’s management and directors with those of shareholders; and to provide additional incentive for employees and directors to contribute to the financial success and growth of AEP. |
In 2020, AEP adopted a new long-term incentive plan for the company (excluding the Board of Directors) that supports the company’s clean energy transition and is aligned with increasing carbon-free generation capacity in the AEP fleet. The plan is measured in a three-year cycle, with the expectation that future targets will improve substantially as we execute on our clean energy strategy. |
Carbon-free Generation Capacity (10% weight): the percentage of total AEP-owned generating capacity and capacity acquired through power purchase agreement (PPA) at the end of the performance period. |
Carbon-free capacity includes nuclear, hydro, wind, solar, demand-side management (energy efficiency and demand response) and energy storage. |
Performance will be measured as a percent of total AEP-owned and PPA generation capacity. At the time the goal was set, carbon-free generation capacity was 26.5% of total capacity. Awards are measured according to the achievement of performance milestones: • Threshold: 30.15% of total non-emitting capacity. This includes all known plant retirements, sales and PPA expirations plus all regulator-approved items as of. |
February 2020 and 156 MW of competitive renewables under construction. |
• Target: 31.67% of total non-emitting capacity. Includes all threshold items plus 675 MW of additional nonemitting generation capacity, assuming no additional plant retirements. |
• Maximum: 33.89% non-emitting capacity. This includes all threshold items plus 1,044 MW of additional nonemitting generation capacity, assuming no additional plant retirements. |
CARBON PRICING IN INTEGRATED RESOURCE PLANS. |
Integrated Resource Plans (IRPs) are planning documents that allow utilities to plan for future needs to meet peak loads and energy obligations for a period of time, such as 15 years, and they are based on the best information available at the time they are prepared. They are planning documents and are not intended to represent firm commitments or financial decisions about specific future generation resources. |
New Carbon Emissions Reduction Goals 80% reduction by 2030 Net-Zero by 2050. |
Goals are from a 2000 baseline. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
21 AEP’s Climate Impact Analysis. |
Total AEP System — Annual CO2 Emissions 200 150 100 50 0 |
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020. |
Million Metric Tons 167 153 154 158 146 146 145 151 151 132 135 136 122 115 123 102 93 72 69 58 44. |
AEP has integrated a carbon price in its commodity forecasting as a proxy for future climate regulation. The carbon price begins in 2028 at approximately $15/metric ton of CO2 emissions, escalating at 3.5% per year on a nominal basis. In the Fast Transition scenario for this report, we used a carbon price beginning at $30/metric ton, which escalated 3.5% per year on a nominal basis. |
DISCLOSURE OF GREENHOUSE GAS (GHG) EMISSIONS. |
AEP discloses greenhouse gas emissions in absolute and intensity-based form on an annual basis. Our baseline year is 2000. We measure and report our year-overyear progress toward reducing carbon emissions. For a comprehensive view of AEP’s emissions profile, please visit the ESG Data Center for the most current data. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
22 AEP’s Climate Impact Analysis. |
CLIMATE TRANSITION ANALYSIS. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
AEP developed three different scenarios to assess potential climate change transition impacts: |
Business As Usual (BAU) • Our current generation plans, as informed by our Integrated Resource Plans (IRPs) with a $15/ton + 3.5%/year carbon price beginning in 2028. |
Fast Transition (accelerated CO2 reduction) • BAU plus accelerated AEP coal retirements with a $30/ton + 3.5%/year carbon price beginning in 2028. |
100% Clean Energy (aggressive CO2 reduction) • Fast Transition case plus additional coal retirements, restrictions on natural gas build and 100% Clean Energy by 2050. |
Note: As described later, modeling of the 100% Clean Energy scenario was not fully completed due to challenges with the models and input constraints. The Fast Transition scenario resulted in de minimis emissions for AEP and is the most plausible clean energy scenario at this time. Both the BAU and Fast Transition scenarios would require offsets for the remaining carbon emissions to get to net-zero. |
The process identified significant modeling and input constraints that will be addressed in future work. This is our first attempt at this type of modeling and we expect future efforts will provide greater clarity. |
TRANSITION SCENARIO ANALYSIS. |
INTRODUCTION. |
As we transform our generation portfolio to support a clean energy economy, we are mindful of the impacts this has on our customers, communities, employees, and environment. To be successful, the transition to a lowercarbon economy needs to include significant changes to public policies and regulations; research, development and deployment of new technologies; market shifts; and energy conservation. These may pose varying degrees of financial, operational and reputational risks for AEP and its stakeholders. |
Because AEP has made significant progress toward achieving this transition, we have accelerated our carbon reduction goals to achieve an 80% reduction by 2030 (from a 2000 baseline) and net-zero emissions by 2050. To understand what it would take to get there, AEP conducted scenario modeling and analysis in line with the Task Force for Climate-related Financial Disclosure (TCFD) recommendations. The results we share in this report provide insights into the cost, pace, and scale of actions that would be required to achieve these goals. |
SCENARIO PLANNING. |
Scenario modeling is a process by which alternative futures or assumptions are considered to provide insights on strategic directions in the face of uncertainty. In developing our transition scenarios and our approach to analysis, we evaluated potential pathways for greenhouse gas mitigation through potential changes in AEP’s generating fleet, which represent the bulk of AEP’s emissions. We also considered existing and future technologies and resources that would enable the transition to net-zero. We used a carbon price as a proxy for regulations, as we do in our IRPs, and developed market assumptions, such as the price of wholesale power. |
AEP evaluated potential climate transition scenarios that could be indicative of possible future GHG emission reduction strategies and the associated electric generation profiles for each. Following is a description of the scenarios, inputs to the models, outcomes and associated implications for customers, the role of technology, new fuel sources, public policy and regulatory considerations, and potential costs. |
The scenarios were modeled through 2050. AEP did not consider changes to the distribution or transmission grid that might be needed due to changing customer load and resource mix. Those changes will be examined in future modeling, in conjunction with entities responsible for reliability of the bulk electric system (e.g., Regional Transmission Operators), as generation resource changes become more clear. Our focus for this exercise was on AEP’s generation fleet. |
23 AEP’s Climate Impact Analysis. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
24 AEP’s Climate Impact Analysis. |
The use of scenarios helps us to better understand the medium- and long-term challenges of the lowcarbon transition. Transition scenarios consider possible changes in socio-economic systems that could cut GHG emissions and limit temperature rise to 2°C or 1.5°C. The scenarios AEP developed are consistent with the Paris Agreement. In addition to modeling plausible pathways to a low-carbon future, AEP also examined the potential physical impacts (see Physical Risks & Opportunities) and social aspects related to retiring coal units (see Just Transition). |
These scenarios may be indicative of AEP’s future generation profile. However, they are not meant to predict the future; rather, they are simply “plausible representations of uncertain future states.” The output from our scenario modeling provides a future snapshot of what may occur given different variables, such as changes in support for more aggressive emission reduction goals and what is plausible for others, not necessarily those futures likely to occur. AEP is not drawing conclusions about the likelihood of any of the scenarios. The intent is to capture the relationships between human choices, emissions and the availability of electricity supply alternatives to ensure a reliable, secure and resilient power grid that meets society’s needs. |
In each of the three scenarios, there are specific assumptions around constraints on emissions or clean energy requirements. However, there may be multiple policy mechanisms to reach these scenario outcomes. Our analysis was guided by the TCFD framework, setting specific parameters related to geography and macro-economic variables. Also in accordance with TCFD, we developed assumptions related to technology development/deployment, energy mix, price of key commodities or inputs, timing of potential impacts, and potential policy changes. Finally, we considered which scenarios to use as a guide, time horizons, and supporting data and models. |
In addition to the assumptions above, for the Fast Transition scenario AEP assumed that the Donald C. Cook Nuclear Plant would extend its operating license for a third time. |
METHODOLOGY. |
AEP focused its transition scenario modeling on its vertically integrated utilities, which have an obligation to serve customers either through owned generation or power purchased on their behalf. Fossil-fueled generation represents the majority of AEP’s carbon footprint, and thus it is the most exposed to climate transition impacts. Other parts of AEP’s business, including its competitive subsidiaries, and transmission-only business units. |
Scenario Assumptions Table Parameter Business As Usual (BAU) Fast Transition 100% Clean. |
CO2 Price $15 /ton + 3.5% /yr, starting in 2028 $30 + 3.5% /yr, starting in 2028 100% Clean Energy Mandate. |
Energy Efficiency Embedded in Load More Aggressive Most Aggressive. |
Electrification Some More Most. |
EV Penetration BAU Mid-Point 100% by 2050. |
AEP Coal Retirements Book Life Book Life Less 5 yrs or 2040 N/A. |
Technology Costs EIA (see table) EIA (see table) EIA (see table) |
The table shows the three scenarios AEP developed for this exercise. The third scenario — 100% Clean Energy — was tabled after several attempts to model it failed to produce credible or realistic results. For the purposes of being transparent, we are showing the assumptions that were used in that scenario. We intend to pursue this in future scenario analysis work. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
25 AEP’s Climate Impact Analysis were not included in this scenario analysis. While these businesses stand to benefit from new opportunities in a clean energy economy, it would be highly speculative to quantify what those opportunities might be. In addition, AEP has already announced the retirement of its last remaining coal-fueled unregulated generating asset in 2030 and has no future plans to add grid-scale fossilfueled resources to its competitive portfolio. By 2040, all of AEP’s regulated coal-fueled power plants would be retired under the Fast Transition scenario. |
AEP relied on its internal resource planning experts to examine possible climate transition scenarios. We have extensive experience planning to meet the resource and capacity needs of our customers in the future through our IRP process. The IRP process seeks to develop a utility-specific plan that balances customer electricity demand with the required generation resources that represent the least-cost option for customers. In many cases, these plans present more than one scenario (similar to this analysis) to inform regulators and stakeholders about the costs, impacts and tradeoffs of alternatives. While IRPs are meant to seek to match customer activity with resource needs, they are not prescriptive. Rather, they provide a framework for determining energy and capacity needs and identifying cost-effective options while leaving final selection and approval to state utility regulators. The IRPs are reevaluated periodically to ensure they continue to meet customers’ needs. |
In developing our transition scenario analysis, AEP took an enterprise-wide view of our vertically integrated operations. Aggregation of AEP’s footprint was necessary because of the complexity of the scenarios, significant uncertainties in assumptions, and computational constraints. This is an important distinction as the scenario results should not be viewed as directly applicable to an individual utility subsidiary’s integrated resource plan. |
We did rely on the same models, resources and staff who normally develop IRPs for our operating companies to develop these scenarios. We believe this work will inform future IRPs, opening new dialogue about AEP’s future generating resource mix with regulators and other stakeholders. |
AEP has retired or sold nearly 13,500 MW of coal-fueled generation in the past decade. We recently announced plans to retire an additional 4,264 MW of coal generation between 2021 through 2030, which includes the Rockport Plant Unit 1, pictured above. |
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition. |
Physical Risks and Opportunities |
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