Transmission champ

It owns and operates America’s largest electricity transmission system and is one of the biggest power generators in the country, but no one can accuse American Electric Power – or its evangelical Chairman, Michael Morris – of switching off to the challenges ahead. New plants, better networks, a diversified portfolio: there’s much on the horizon, as Senior Editor Ben Thompson discovers.

If Michael Morris is concerned by recent power industry developments, he’s not showing it. The media claim the energy sector is at a crossroads; soaring domestic demand, coupled with an uncertain regulatory environment, heightened awareness as to the environmental effects of power production and the increasingly large capital investments needed to address these challenges, are all heaping pressure on America’s power producers. The IPCC’s latest report into the effects of climate change has also added further fuel to the debate over the direction the industry should take next. But ask the AEP Chairman, President and CEO whether such concerns keep him awake at night and he’s pragmatic in his response. “They certainly are challenges,” he says, matter-of-factly. “But we’ve overcome some pretty big challenges over the years and will overcome them again in the future.”

Perhaps he’s right to be so confident: his company remains one of the largest electric utilities in the US, delivering electricity to more than five million customers in 11 states. AEP has more than 38,000 megawatts of generating capacity – placing it amongst the nation’s largest generators of electricity – and also owns the nation’s largest electricity transmission system, a nearly 39,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other US transmission systems combined. In pure business terms, AEP’s performance is just as impressive, with last year’s revenues exceeding $12.6 billion. Energy crisis? Not at AEP.

Nevertheless, the challenges are out there, even for a company with such significant reach. “Probably the biggest challenge is the need to expand our transmission footprint – and, as you can imagine, that can sometimes be a very difficult task,” he acknowledges. “We try to meet with landowners and folks nearby to explain the necessity for what we’re doing. At the end of the day, however, pushing these projects through can take an incredible period of time once federal and state rate-of-return issues are factored in as well.” Morris explains how it can take anywhere from three to six years, sometimes more, from date-of-announcement to the date when the project actually moves megawatt-hours – AEP’s most recent project, for example, took 16 years to work its way through the labyrinthine stakeholder approval process. “It’s a real issue; everyone knows we need to improve the infrastructure, but no one wants anything built in their backyard or near their house or anywhere that would inconvenience them in any way,” he says.

Developing the right infrastructure
Despite the bureaucratic impasse and public resistance, however, some progress is being made in terms of infrastructure improvement. The company’s I-765 project aims to construct a transmission network along the lines of the interstate highway system in order to move bulk power from the resource-rich, coal-based regions of the country to the high-demand, low-resource regions of the east coast. Morris hopes that I-765 will ease transmission congestion and enhance power flows and reliability. “Projects such as this really do save customers a tremendous amount of money,” he says. “There’s no point using power plants that are very costly to run (and maybe high-polluting) when other plants that are lower-cost and have a lower environmental impact would be much better. And of course, the bulk of our system shows a huge reliability advantage and a huge economic advantage, so we see this as a very important project.”

Morris estimates that AEP is now approximately halfway through the analytical work that needs to be done by the regulators in order for I-765 to be granted approval. “We have been talking with environmental folks and permitting folks,” he says. “We always believed that the front-end of the project would take four or five years, and the actual construction would take two or three years. What we really need to do in this country is change those cycles so that the upfront approval is a much shorter cycle. The project you mentioned earlier that took us 16 years to push through only actually took us about 18 months to build.”

And it’s not just the transmission infrastructure that AEP is busy expanding; as domestic demand for energy continues to rise, additional power plant construction also features high on the list of priorities. As Morris points out, integrated gas combined cycle (IGCC) technology, ultra-supercritical generation and renewable energy all have a role to play. “We have four power plants on the drawing board, all in various stages of regulatory evaluation. Two IGCC plants in what we consider to be our eastern footprint; and two ultra-supercritical plants out west in Arkansas and Oklahoma,” he says.

I ask why the company has decided to go down a different technology route in each region. “We couldn’t find a vendor who would stand behind the gassifier performance for the lower grade coals that would burn out west,” he replies, simply. “In the east, the IGCC equipment will be developed by General Electric, and they will stand behind its performance because the type of coal found in the east lends itself to that technology. Out west, although there are a handful of vendors who make gassifiers that accommodate the type of coal found there, they just aren’t willing to stand behind the performance. And I don’t think it’s fair – either to our shareholders or our customers – to put down a large investment on a piece of machinery that a vendor won’t stand behind.”

This isn’t to say that he is any less confident in the ultra-supercritical technology. “Because of the efficiencies that you can get out of an ultra-supercritical plant, the technology compares quite well to IGCC from an environmental impact standpoint,” he asserts. “The big difference, of course, is that with integrated gas you clean the pollutants from the fuel before you put it into the power block, and with ultra-supercritical you are cleaning the pollutants out of the flue gas rather than the fuel stream.”

Cleaning up
Of course, this idea of cleaner production is an industry-wide challenge. So how is the industry as a whole moving towards this idea of the need for cleaner production? “I don’t think there’s any question that the industry here in the United States is moving in this direction almost lock step,” he says. He cites the example of a utility in Texas that announced a few years back that they were going to build some traditional pulverized coal facilities. “They ran into an incredible buzzsaw and had to abandon their plans. They are now exploring higher efficiency technologies – supercritical and ultra-supercritical – and recently announced a couple of integrated gas combined cycle plants, which just shows you where the industry is headed. AEP was the first to announce the need to go to integrated gas; we were the first to announce ultra-supercritical here and, quite honestly, the pulverized coal plants that people are trying to build today are plants that we built 50 years ago. In this respect, we have been and will continue to be a leader in this space.”

And this is surely the point – someone needs to take up the gauntlet and be a champion for issues such as cleaner production and emissions reduction. “This is an industry event – but it isn’t just a US industry event, it’s a worldwide event,” Morris says. “I was in Spain recently for an international utility meeting and everyone there was talking in terms of high efficiency, environmentally responsible power production with coal. It’s essential that coal play in the mix in the worldwide event.”

Which leads us, inevitably, into what many consider to be the biggest challenge currently facing the industry – getting China, India and other developing nations with huge projected demands for power to buy into the idea of cleaner production too. Once again, Morris is confident that real progress is being made. “They’re heading in the right direction for all of the new facilities that they are intending to build,” he says, speaking of India and China. “As long as they’ve got a reasonable timeline, I expect they’ll employ the most advanced technologies out there. We had about 100 Chinese and Indian engineers here toward the fourth quarter of 2006, many of them intrigued by the high efficiency of our existing fleet. They were kicking the tires on the new integrated gas plants that we are designing and taking a look at the existing facilities that Tampa Electric has down in the State of Florida. So I think they’re heading in that direction.”

For Morris, one of the critical concerns is the post-combustion greenhouse gas issue and developing the technology to address it. “We can’t afford to get to a place where, through governmental actions – either at the EU, or here in the States, or in any of the other countries that would come forward with a plan – we end up with environmental legislation passed that calls for the unaccomplishable (both in timeline and in technology) such that we would have to take a considerable amount of the existing coal fleet off of the grids,” he says. “Around the world, that would put us in a really awkward position. So the next phase of what people need to do is to begin to address the notion of global warming gases on a post-combustion technological development phase. And I think as an industry, we’re just waiting for a leader to step forward in that space.”

Alternative approaches
Morris has no doubt that AEP can be that leader. For instance, the company is set to install carbon capture on two coal-fired power plants, the first commercial use of technologies to significantly reduce carbon dioxide emissions from existing plants. The first project is expected to complete its product validation phase in 2008 and begin commercial operation in 2011. “We’re very comfortable taking action on carbon emissions and accelerating advancement of the technology,” says Morris. “Technology development needs are often cited as an excuse for inaction. We see these needs as an opportunity for action. With Congress expected to take action on greenhouse gas issues in climate legislation, it’s time to advance this technology for commercial use.”

Both pre- and post-combustion technologies will be important for companies facing decisions on CO2 reduction from the wide variety of coal-fired boiler designs currently in use. “We recognize that these projects represent a significant commitment of resources for AEP, but they are projects that will pay important dividends in the future for our customers and shareholders,” Morris said. “Coal is the fuel used to generate half of the nation’s electricity; it fuels about 75 percent of AEP’s generating fleet. By advancing carbon capture technologies into commercial use, we are taking an important step to ensure the continued and long-term viability of our existing generation, just as we did when we were the first to begin a comprehensive, system-wide retrofit program for sulfur dioxide and nitrogen oxide emissions controls. We have completed the sulfur dioxide and nitrogen oxide retrofits on more than two-thirds of the capacity included in the program, and we are on schedule to complete all retrofits by shortly after the end of the decade.

“By being the first to advance carbon capture technology, we will be well-positioned to quickly and efficiently retrofit additional plants in our fleet with carbon capture systems while avoiding a potentially significant learning curve,” he adds.

AEP is achieving its greenhouse gas reductions through a broad portfolio of actions, including power plant efficiency improvements, renewable generation such as wind and biomass co-firing, off-system greenhouse gas reduction projects, reforestation projects and the potential purchase of emission credits through the Chicago Climate Exchange. Indeed, the company has invested heavily in expanding its renewable energy portfolio – a crucial part of any modern energy firm. “We’ve done a great deal of work on the wind front,” he says. “We own a considerable number of wind megawatts, probably getting near the 1000+ megawatt range – which is small by way of comparison with our other generation plants, but nonetheless important as we go forward. We do some biofuel work, and we have looked at solar, although most of where we serve doesn’t really lend itself to that technology. We’re big believers in renewable energy, but we’re also big believers in the honesty of what the capacity factors and the real availability factors are. Wind is great as a power source, but it’s not always located where the people are.”

To this end, transmission projects need to be built – bread and butter to a firm such as AEP. The company has announced a series of projects in Texas with Warren Buffett’s MidAmerican to bring wind power found in the western parts of Texas to the load centers in the greater Dallas-Houston area (“You’ve got to get that renewable energy from Point A where it is to Point B where it needs to be put to good use,” says Morris). In addition to this, the company’s power plant site battery technology is really helping develop the concept of energy storage, which lends itself to wind in particular. “Where capacity factors are low, you need to take the wind when it’s blowing – most typically at night – and then find a way to keep that energy available for the time that it’s needed – most typically during the day. We’ve done a great deal of work on advance storage technology in that sense with batteries.”

Like others in the power generation industry, Morris and AEP see huge potential for renewable technologies – but recognize that they need to be taken as part of the greater energy mix. He believes it is critical that the industry work together on issues surrounding transmission and distribution to help bring these alternative energy sources further into the mainstream, but that they shouldn’t necessarily be viewed as a panacea – if for no other reason than that the costs are still too prohibitive to generate widespread uptake. “That shouldn’t cause anyone to run from it; we just need to be honest about the fact that this is extremely expensive power, not cost-competitive in any way, shape or form,” he says. “If you dedicate yourself to the notion that part of your generation portfolio needs to be renewable, then you need to build in the cost of those renewable technologies and pass those along to your customers elsewhere. You can still do the right thing for the environment, but you simply need to be realistic about what the costs are.”

Finding better solutions
So looking forward, where does Morris see opportunities to gain an edge in terms of delivery? One of the things influencing every industry segment is the way that information technology is enabling companies to get better information as well as quicker, cheaper access to that information, and Morris has no doubt that this has had a big impact at AEP in terms of driving things like energy efficiency and better productivity. “Like every other industry, we’ve employed information technology to the highest degree that we can,” he enthuses. “It helps us to more appropriately dispatch our grid; it helps us to more quickly design our production facilities and run them through the what-if cycles to make certain that they’re as efficient as they can be; it helps us in managing the whole project flow and project cost for environmental retrofits, new power plants and those kinds of undertakings. Like everyone else, we are highly encouraged by that.”

Where he believes it will really make a huge difference, however, is at the customer end through technologies such as automated meters and real time metering. “Customers can ultimately have a bit more of a say in the way that they consume electricity,” he says. “They don’t typically have any concept of block power, and have no idea that if they’re using energy at 2pm in the afternoon it is considerably more expensive than if they use it at 2am in the morning. Now, I don’t expect a cultural shift in this country so that people will be up all hours of the night doing their laundry and other kinds of activities. But technology will allow all of us to see how much energy we’re consuming during any given hour of the day, and it might well lead many of us to do what my dad always encouraged me to do when I was a kid: turn things off if we don’t need them. There’s much to be done with information technology, and the more we can put in the hands of our customers and the more we employ to make us more productive, the better off we’ll all be.”

For Morris, the challenges and the opportunities ahead are inextricably linked. “The biggest challenge is to make sure that we come through this very important timeframe with a realistic, worldwide, industry-wide approach for addressing the global warming issue,” he says. “That then leads to the tremendous opportunity for a company like American Electric Power to deploy its engineering prowess and it’s leadership over 100-plus years to bring technology to the fore in the quickest and most cost-effective manner for our shareholders and our customers.”