For more than a decade, AEP has engaged various stakeholders on the impacts, risks and opportunities associated with climate change. Today, AEP’s transition to a clean energy economy is making great progress as the path forward begins to come into sharper focus. We are reducing carbon dioxide (CO2) emissions at a faster pace than our 2030 goal anticipated and remain on track for at least an 80 percent reduction in 2050, from a 2000 baseline.
In 2018, AEP’s CO2 emissions were approximately 59 percent lower from a 2000 baseline, compared with a 2030 goal to reduce emissions 60 percent. We will likely exceed our goal a decade ahead of schedule because carbon emission reductions are occurring at a faster pace than anticipated. As a result, we committed to our stakeholders that we would revisit this goal in 2019. Consequently, we are raising our 2030 goal to 70 percent from a 2000 baseline.
A number of factors give us confidence in our ability to achieve this new level of carbon emission reductions:
Regarding our 2050 goal, we are now confident that we will exceed our 80 percent targeted reduction and, furthermore, our aspiration is zero emissions. Simply put, carbon emissions are an unwanted by-product of providing our customers the energy they need and we will continue to look for ways to reduce emissions. While other utilities have set zero or net-zero carbon goals, before taking that step, we need greater clarity of the path to zero between 2030 and 2050. There remain large uncertainties in technology and the cost associated with such emission reductions. We are continuously evaluating technologies and resources needed to reliably and cost-effectively serve our customers. As we manage this transition, we will continue to go at an appropriate pace while engaging our regulators to ensure our actions are in the public interest.
We have been consistently candid about this. We are confident that additional reductions in emissions are probable, as the electric power grid becomes a more efficient optimizer of all resources and advanced technologies. We remain committed to our current decarbonization path, and we will continue to review these targets annually as we view them as a work in progress. Through this report, stakeholders can follow our progress.
- Managing Climate Risk
In our 2018 report, “American Electric Power: Strategic Vision for a Clean Energy Future,” we outlined our risk management process, which includes executive management and board oversight for climate risk. We agree that climate change is a significant issue facing AEP and other companies, and it is one of many material issues for which we manage and plan. We have a robust enterprise risk management process to do this, and in 2019, climate change was formally added to AEP’s enterprise risk “watch” list.
As part of our ongoing dialogue with stakeholders, particularly investors, we often get asked about climate risk and oversight. AEP’s 2018 clean energy report has helped guide stakeholders on our overall process, but subsequent conversations have identified additional opportunities for disclosure. For instance, we have received questions about AEP’s board expertise in climate change.
Our board is elected based on providing a diverse mix of viewpoints, skills and experiences relevant to managing a large corporation. Relevant experience to the board in addressing climate impacts comes from managing long-term changes in investment strategy, operations and technology use, in which our board has considerable expertise.
The Board’s Committee on Directors and Corporate Governance receives updates at every regular meeting about AEP’s environmental performance. In addition, the Board’s Policy Committee (which comprises the entire Board) invites speakers to share varying viewpoints on a wide variety of topics. In 2019, the Board heard from an outside climate change expert.
Each year, the board’s lead director conducts outreach to AEP’s largest institutional investors. In 2018, about a dozen shareholders requested meetings. Environmental, social and governance (ESG) issues, including climate risk, were discussed with nearly all of them.
At AEP, employee incentive compensation is tied to our environmental performance and our clean energy transition. For example, 9 percent of annual incentive compensation is tied to performance related to investing in infrastructure for the benefits of our customers, including transmission investments and increasing renewables in our portfolio.
We have new renewable options we are pursuing in 2019, including wind projects with Public Service Company of Oklahoma and Southwestern Electric Power Company and solar projects in AEP Ohio and Appalachian Power. In addition, we are investing $2.2 billion in contracted renewables by 2023, which was accelerated in 2019 with the acquisition of Sempra Renewables.
Significant environmental, social, and governance issues, including climate change impacts are identified and assessed, and mitigation plans are developed through AEP’s enterprise risk management process.
- Climate Opportunities
While climate change is often framed as a risk for electric utilities, there are distinct opportunities provided by the potential pathways for carbon reductions. Many sectors of the economy face potentially higher costs to achieve emissions reductions. Electrification can provide a pathway for carbon reductions that is more cost-effective and achieves the significant emission reductions our customers and society want.
Beneficial electrification allows AEP to invest capital in assets to serve the incremental load on the system. This investment provides a return for AEP shareholders while giving customers access to environmentally beneficial technology, as well as clean sources of energy. Additionally, when customer usage grows, we can spread the cost of fixed investments over a broader base of customers. This helps reduce customer charges per kilowatt-hour (kWh), providing an economic benefit to all customers.
Electric transportation is the biggest opportunity for electrification. Today, transportation is the largest contributor to U.S. carbon emissions. However, transportation is becoming increasingly electrified as more consumers purchase electric vehicles (EVs), helping to reduce CO2 emissions from this sector. AEP will continue to support electric vehicle adoption through investments in charging infrastructure, offering charging options that lower customer costs and optimize the efficiency of the grid, as well as advocating for sensible public policy in this space. We have deployed a network of vehicle charging stations at our own facilities, and our network now represents one of the few large corporate workplace EV infrastructure deployments in the U.S. AEP has also been marketing other electrification opportunities, with the potential to make emission reductions in other sectors.
Opportunities to invest in low-emission technologies and earn a return on equity for our shareholders is another potential avenue of growth as we address climate risk. Renewable technologies such as wind and solar are especially attractive to investors and customers because they are mainly capital investments. Most of the cost of electricity is tied to the capital investment, which provides universal access to clean energy for all customers while enhancing earning opportunity for shareholders. For example, coal and natural gas plants have fuel costs that are passed through to customers. Investing in renewables benefits customers in that they become insulated from unpredictable fuel costs over time because there is no direct fuel cost associated with renewables. This has a positive impact on customers in the form of more stable bills.
- Scenario Analysis
Stakeholders are increasingly asking companies to analyze potential risks associated with climate change consistent with international goals to limit global warming to 2 degrees Celsius (and potentially 1.5 degrees Celsius). AEP has also received requests to conduct scenario analyses consistent with these global targets. This is a complex process, especially when there are so many differing recommendations, methodologies and tools for doing it. In 2018, AEP joined a research study with the Electric Power Research Institute (EPRI) to better understand current scientific knowledge of climate policy scenario analysis and how it might apply to our own analysis.
The EPRI study evaluated the relationship between global temperature goals and a company to identify pathways for reducing emissions. The findings provided clarity of the fact that this is a process laden with many different pathways to choose from. AEP has not conducted a 2-degree analysis because we believe the uncertainties – from new and unknown technologies and other externalities – are so significant that they would make AEP’s analysis of many of the proposed recommendations misguided. It would also undermine our credibility and be costly for customers and shareholders if the wrong pathway were to be unknowingly chosen.
AEP is a large and diversified energy provider that faces a multitude of potential challenges, risks and opportunities that could have implications on our business model. Our current business model includes electric distribution, transmission and generation. Generation has increasingly become a smaller share of our capital investment and asset base over time due to unit retirements and asset divestitures. Therefore, modeling scenarios relating solely to climate policy objectives (and the associated effect on generation choices) do little to inform our overall business strategy.
Changes in regulation, technology, economic growth and customer preferences have been present throughout AEP’s history and will continue to provide uncertainty in business planning and strategy going forward. To explore different outcomes, AEP does review and test planning assumptions through the use of informative scenarios that encompass all relevant factors that may influence our operations in the future, including technology, public policy, regulation, market shifts and customer preferences.
AEP’s generation portfolio is modeled through the Integrated Resource Planning (IRP) process, which looks at portfolios of energy and capacity that can be used to serve customer demands in the future. These are evaluated under a range of assumptions, most notably changes in potential carbon regulation and fuel costs. The current IRPs show an increased reliance on renewable energy and decreased reliance on coal. While we did not conduct a specific 2-degree analysis, these plans led AEP to establish a 2050 goal for carbon reduction, which we believe is consistent with plausible emission pathways toward achieving a 2-degree climate future.
- Environmental Public Policy and Regulation
Several significant developments occurred in 2018 relating to carbon regulation of the electric sector. In August 2018, the U.S. Environmental Protection Agency (EPA) proposed the Affordable Clean Energy (ACE) rule to replace the Clean Power Plan with new emission guidelines for regulating CO2 from existing sources. ACE would establish a framework for states to adopt standards of performance for utility boilers based on heat rate improvements for those boilers. In December 2018, the EPA filed a proposed rule revising the standards for new sources and determined that partial carbon capture and storage is not the best system of emissions reduction because it is not available throughout the U.S. and is not cost-effective.
We actively monitor these rulemakings and generally support both rules, as we believe they are more consistent with the language of the Clean Air Act than what was proposed in previous rulemakings. As the rules are both still in the proposal stage, it is unclear what the final rules may dictate or what may be the ultimate impact on AEP, its emissions or customer costs.
AEP believes that the existing Clean Air Act is an ineffective vehicle to regulate carbon emissions. We have long maintained an economy-wide legislative approach to address carbon is the preferred route for climate action. A legislative approach would allow for proper consideration of costs, benefits, rate of emissions reductions, incentives for technology development and all associated economic impacts with input from all stakeholders. With a new Congress in 2019, a variety of legislative solutions are likely to be discussed and debated, including, but not limited to, renewable mandates and carbon taxes. AEP will remain engaged in the climate policy debate to address the interests of customers, investors and policymakers.