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As we learn more about mitigation and adaptation to a changing climate, the uncertainty around timing and the magnitude of impacts make it challenging to identify a single solution. This analysis of climate-related physical risk takes into account a range of issues, including climate variables, aging infrastructure, capital 48 AEP’s Climate Impact Analysis investments to modernize and harden the grid, public policy, regulatory oversight, technology development and resilience. We examined the potential impacts to physical assets, such as buildings, substations, poles and generating units, as well as what we’ve learned through experience of more than a century of severe weather events.
Our analysis of physical risk revealed some vulnerabilities that we are addressing. It also showed us that our efforts to harden and build resilience into the system are essential. Our capital investment strategy, changes to design standards for vulnerable infrastructure, increased automation and digitalization, and efforts to have critical spare parts at the ready are all part of our grid modernization plan to enable the clean energy transition.
The analysis also pointed to business opportunities. For example, our regulated utilities stand to gain from increased load due to electrification of other sectors. This would have positive effects on the environment as well as the revenues of our utilities.
The severe winter weather in February 2021 that affected Texas and surrounding states serves as a cautionary tale of the effects extreme weather can have on energy facilities and supplies.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities Physical Risks and Opportunities
49 AEP’s Climate Impact Analysis.
CLIMATE IMPACT EVALUATION PROCESS.
To identify and understand the most relevant physical climate-related risks and associated variables for AEP, we consulted with internal experts from business units across AEP’s system (engineers, system operators, meteorologists, modeling experts, regulatory affairs, and operations experts, among others). Some business units conducted their own risk analyses, which we used to inform this broader analysis. We reviewed the Fourth National Climate Assessment and other climate studies, and conducted research on physical risk concerns being raised by stakeholders. We also conducted numerous interviews with internal subject matter experts, peers and industry experts. Our review of physical risk encompassed our regulated businesses (seven utilities) and our competitive businesses.
Our work reflects the changing environmental conditions that impact our operations today and for which we routinely plan. Business units are managing these risks and opportunities as they exist today while planning to manage variations in the future.
There is recognition that although changes in climate variables may not support major shifts in how we conduct business today, when extreme weather strikes, it is increasingly more powerful, particularly with heavy rainfall events, heat waves and tropical cyclones. This is supported by several sources reviewed for this report, including analysis by insurance underwriters, lenders and investors. As we plan for and invest in a modern, cleaner and more interconnected grid, these issues will inform our capital investment, growth and regulatory strategies.
CONSIDERATIONS IN AEP’S CLIMATE IMPACT ASSESSMENT.
In a review of climate science literature, many projections of likely climate impacts are focused on 2050 and beyond. AEP’s business model and infrastructure will look much different at that time; as a result, we believe that overlaying a 2050 physical climate impact assessment on today’s business and infrastructure can be misleading and potentially lead to inappropriate or inaccurate conclusions.
For example, AEP invests significant capital annually to replace and modernize aging infrastructure, often to higher design standards, taking into account experience and observed changes over decades. Over time, this enables us to harden the power grid cost-effectively and more efficiently so that the infrastructure can better withstand severe weather that may occur and improve reliability for our customers.
The evaluation of climate-related risks and opportunities should consider when risks are likely to manifest themselves, and the assets that may or may not be present at that time. For example, water availability is critical to operating steam generating units today. But in 2050, most, if not all, of the steam generating units currently operated by AEP will have long been retired. In addition, the replacement generation for those steam electric units will mostly be wind and solar, which does not rely on water availability to operate. Thus, this specific risk is mitigated through the resource transition already underway.
Changes in extreme weather, such as hurricanes and thunderstorms, are the main way that most people experience climate change.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
Climate-related risks and opportunities should be weighed in relative terms. AEP has an enormous asset base of $76 billion. While a single climate-related impact may sound meaningful in the abstract, actual implications for the business might be much different. For example, severe storms have been a significant physical risk to AEP’s system for more than a century. Severe weather includes thunderstorms, wind storms, ice storms, wet snow storms and hurricanes. Severe weather causes damage to the physical system, disrupts service to customers and is costly to repair.
Texas experienced its second coldest week on record in February 2021 — in a state that normally is a summer peaking region of the country. Fuel shortages and frozen equipment that resulted in massive power outages 50 AEP’s Climate Impact Analysis.
T-line Age Profile (line mile age based on oldest conductor age)
Area of Focus: Conductor: ~ 30 Years of.
Age > Life Expectancy of 70 Years Average Age of Low Line Investment 47 Years 1,200 1,000 800 600 400 200 0
1912 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008 2016.
Line Miles.
AEP Transmission Transformer Age Profile.
Area of Focus: Conductor: ~ 20 Years of Low.
Age > Life Expectancy of 60 Years Average Age of Transformer Investment 34.1 Years 60 50 40 30 20 10 0
1903 1911 1919 1927 1935 1953 1951 1959 1967 1975 1983 1991 1999 2007 2015.
The histogram on the bottom shows the age profile of AEP’s transmission line system, based on conductor age, including those exceeding the average life expectancy of 70 years. The histogram on the top shows the age profile of AEP’s transmission transformers, which have an expected life of up to 60 years. Some assets have a shorter lifespan while others last longer. These are important data points as AEP invests to replace aging infrastructure and modernize the grid.
Number of Transformers.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
51 AEP’s Climate Impact Analysis provide a sober reminder of how essential it is that the electric power system is resilient and reliable in a netzero carbon future.
Although not all weather events are a product of climate change, weather extremes are becoming noticeably more severe and vary by location. This is a defining feature of climate-related physical risks — the landscape where it is occurring is so dynamic. Hurricane Harvey in 2017 dumped record amounts of rainfall on southeast Texas, causing massive flooding and high winds that left more than 220,000 AEP Texas customers without power. It was one of the costliest natural disasters in U.S. history. (See Hurricane Harvey Case Study)
Some climate impacts can be self-balancing. For example, warmer winter weather could lead to decreased sales from lower heating demand. However, this could be offset by higher sales from cooling demand during the summer. In addition, AEP’s geographic diversity provides a hedge against physical extremes in many climate-related variables because, more often than not, the impacts are local or regional and can vary greatly depending on location.
CLIMATE ASSESSMENT AND SCIENCE.
AEP has expert capabilities to readily assess how climate-driven physical variables might affect our infrastructure, operations, business model and people. We conducted a literature review of climate science — mainly the Fourth National Climate Assessment prepared by the U.S. Global Change Research Program — to inform our view of potential climate change impacts and develop the substance of this report. We also relied on recent research initiatives AEP participated in with the Electric Power Research Institute (EPRI), including a two-year study to understand climate scenarios, transition risk and goal-setting.
Unlike climate transition impacts, which can be more easily quantified based on the required rate of change in emissions and associated changes in operations and cost, 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. For this exercise, we viewed climate change as a continuum of physical impacts that are subject to change. We focused on certain areas where changes in climate could have an impact, albeit with significant uncertainty in probability of occurrence, severity and timing. For purposes of this report, we have not examined specific scenarios relating to possible temperature outcomes, given the broad range of operations and assets covered. However, we intend to do additional analysis of specific risks and assets in the future, as informed by this initial assessment.
There are tradeoffs in assessing potential physical and transition climate impacts. Chiefly, coordinated efforts to decrease greenhouse gas emissions and limit increases in global temperature will reduce the risk of physical impacts posed by climate change. Conversely, in a business-as-usual scenario, transition risks can be minimized but the threat of physical impacts is likely to increase. Aligning this with our climate transition scenarios, and assuming similar action from other companies and sectors, the 100% clean energy scenario presents the least amount of exposure to physical climate risk.
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.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
52 AEP’s Climate Impact Analysis.
CLIMATE-RELATED VARIABLES IMPACTING AEP.
AEP’s assets and operations are subject to a number of factors that could be impacted by physical climate change. The degree of vulnerability from these risks depends on the probability of it happening, the geographic location, and the magnitude of the impact when it occurs. While the Fourth National Climate Assessment presents a range of possible interactions of climate change with the physical environment and society, some are more directly meaningful for AEP, given our assets, operations and geography. Specifically, exposure of physical assets (towers, poles, wires, substations, etc.) to extreme weather and the environment are likely to be the most material for AEP and our stakeholders.
In undertaking this assessment, we focused on the most probable climate-related physical impacts to the AEP system, including: • Ambient Temperature (extreme heat or cold) • Precipitation Amount and Type (drought/flood/water level and ice/snow/rain) • Severe Weather (lightning, hurricanes, tornados, damaging winds) • Sea Level Rise • Wind Speed • Solar Irradiance (measurement of solar radiation that reaches a point of the earth’s surface.
EXTREMES REQUIRE A RESILIENT ELECTRIC POWER SYSTEM.
The extreme cold weather that plunged millions of Texas electric customers into the dark for days in February demonstrates the need to invest in energy choices that meet climate goals while building a resilient, reliable and sustainable energy system that can withstand the extremes that could come from climate change. The planning for the transition to a clean energy future must account for how the nation will power its future and treat the electric power system as critical infrastructure. The investments made to modernize the electric power system will be expected to deliver clean, affordable and reliable energy to customers. The lessons we learned from Texas further demonstrate the need for caution and pragmatism as climate policies are developed. If policies don’t provide a firm account of changes needed to make the system resilient to extremes and afford enough time to implement them, the risk to societal well-being and prosperity will be high.
Other climate impacts could potentially be material to AEP through less direct pathways. As a provider of an essential service, electricity, the strength of AEP’s business is highly correlated with economic output. To the extent that climate change presents impacts to areas such as agriculture, transportation, infrastructure, and/or recreation and tourism, there could be positive or negative implications for AEP’s business.
The extreme cold weather in Texas in February 2021 caused record electricity demand. Normally, the state’s peak demand for electricity comes in the heat of summer.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
53 AEP’s Climate Impact Analysis.
T&D Risk Increased sea level will damage sub- stations, lines and poles near coast Potential for circuits to be taken out of service storm restoration staging areas could be affected.
Upgrade Drop-in Control Modules to coastal specifications, consider in siting.
T&D Risk Increased hurricane activity could lead to increased flooding and wind-related damage to AEP Texas facilities.
Outages, storm related costs Siting facilities at higher elevations, storm surge hardening Severe Weather Increased Hurricane Activity.
Physical Climate Risks, Opportunities, and Impacts At-A-Glance.
Climate Potential Risk/ Potential Risk Parameter Change Assets Opportunity Physical Impact Operational Impact Mitigation Measures.
Increased Precipitation Hydro Opportunity Increased precipitation can increase hydropower production Increased renewable power N/A.
Precipitation Decreased Precipitation Hydro Risk Less precipitation will reduce hydropower production Need for more costly replacement generation None.
T&D Risk Increased wildfire threat in drought conditions Loss of infrastructure and potential lives due to wildfires, reputation risks.
Increased inspections to AEP infrastructure; vegetation management.
Facilities Risk Drought conditions increase damage to facilities (cracks, foundation, damage pipes, uneven surfaces)
Damage to facilities increases O&M costs and impacts safety Incorporate cooling landscape designs and siting for new facilities.
Fossil Risk Less precipitation will change intake water quality and create challenges for water usage (service water, boiler make-up water, cooling water, FGD make-up, etc.); algal blooms.
Need for more costly water pre-treatment; potential impact on ability to run.
Water balance reviews to identify new approaches to water intake and usage.
Risk Excessive precipitation can reduce hydropower production with increases in debris and sediment, increased safety risks.
Reduced power output, need for more costly replacement generation.
None.
Risk Flooding causes increased need for water releases and potential equipment failure.
Increased risk for upstream flooding, property damage to nearby residents, unable to maintain FERC required water levels.
More active water management (limited mitigation)
T&D Risk Increased heavy rainfall can lead to flooding which can reduce access to facilities, potential changes or increases in 100-year flood plain.
More frequent power outages Siting facilities at higher elevations, outside 100-year flood plain, relocating high risk facilities, flood barriers.
All Risk Damaged and/or loss of facilities and access roads Financial impact to repair roads, increased O&M for repairs Potential changes to siting and design.
Fossil Risk Increased heavy rainfall can lead to flooding of cooling ponds Increased discharges that exceed permit requirements for effluent limits, reputation.
Active pond management, decreased use of ponds for water management.
Risk Wet coal piles and fuel delivery disruptions Coverage for coal transport and storage units Disruptions in normal operations of the plant.
Sea Level Sea Level Rise Facilities Risk Flooding and expansion of storm surge zones could severely damages facilities.
Loss of and/or need to relocate facilities Siting of facilities outside expected sea level rise and storm surge predictions.
Technology Chairman’s Message Introduction and TCFD Framework Transition Analysis Just Transition.
Physical Risks and Opportunities
54 AEP’s Climate Impact Analysis.
Extreme Wind Activity All Risk Extreme winds could damage infrastructure and increase debris Increased power outages and cost to repair/replace infrastructure Increase inspections, hardening.
Wind Opportunity Increase in renewable resource Increased power output N/A Increased Wind Speeds.