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Facing Change, Utilities Change Course

Richard Martin — June 16, 2014

Minutes after details of the proposed new U.S. Environmental Protection Agency (EPA) regulations on emissions from power plants were released, the coal industry made its reaction clear.

“If these rules are allowed to go into effect, the [Obama] administration for all intents and purposes is creating America’s next energy crisis,” declared Mike Duncan, the CEO of the American Coalition for Clean Coal Electricity, a trade group that represents suppliers, such as Caterpillar; mining companies like Peabody Energy and Arch Coal; and big operators of coal-fired plants, including American Electric Power (AEP) and Southern Company.

The responses echoed what some utility officials have been saying for years: limiting emissions of greenhouse gases from existing power plants will unravel the already beleaguered utility industry, send electricity rates soaring, and kill the shaky economic recovery.

“Under Attack”

“Electricity is under attack in our country,” said Tony Alexander, CEO of Ohio-based utility FirstEnergy, in a speech last April at the U.S. Chamber of Commerce, “and this battle is being waged through largely untested policies that will ultimately impact the reliability and affordability of electric service, and the choices customers now enjoy.”

Utilities and industry associations have spent millions trying, with limited success, to influence the EPA’s rulemaking decisions.  Utilities’ tactics, however, do not always match their rhetoric.  The umbrage of officials like Duncan and Alexander masks the industry’s more nuanced and responsive adaptations – not only to the EPA’s aggressive regulations, but also to the market forces that are driving power generation away from coal and toward cleaner sources like renewables and natural gas.  In fact, the EPA is only giving a shove to a battleship that’s already turning, however gradually, toward uncharted waters.

“The rule is going to speed the transition away from coal into natural gas and renewables and potentially increase the role nuclear electricity plays in the U.S.,” Christopher Knittel, director of the Center for Energy & Environmental Policy Research at MIT, told Bloomberg News.

Diversify, Already

AEP, for example, is the biggest owner of coal-fired power plants in the United States, and the Columbus, Ohio-based utility “could be among the most affected by the new rules,” according to Columbus Business First.  CEO Nick Akins has warned of plant shutdowns and the associated job losses because of the proposed regulations.  AEP is also, however, among the utilities that have already taken dramatic steps to reduce its carbon emissions and shift its generation fleet off of coal.  According to AEP’s 2014 Corporate Sustainability Report, the company’s generation fleet is “increasingly diverse,” and the company already had plans to retire 6,600 MW of coal-fired capacity before the new regulations were announced.

AEP’s 2013 environmental performance was “the best in company history,” a release summarizing the Sustainability Report said.  “AEP has invested about $10 billion in environmental controls and new generation over the past decade. Between 2005 and 2013, AEP reduced its carbon dioxide emissions by 21 percent.”

These reductions have hardly ruined AEP’s financial performance: the company earned $3.23 per share in 2013, comfortably within analysts’ projections, and its share price has nearly doubled since 2009.  “AEP’s total shareholder return for [2013] was 14.2%, compared with an average of 7.8% for the S&P 500 Electric Utilities Index,” the release noted.

Like newspaper publishers a decade ago, industry executives are watching a business that has persisted in more or less its current form for a century or so transform, virtually overnight.  Some of them are proving to be surprisingly nimble.

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