The Future of Power Generation: A Q&A with Charles Patton
By Kensie Hamilton
A tide is constantly changing, and the same is true for the energy industry in West Virginia.
As new regulations in the coal and natural gas sectors continue to evolve, power generation must also make changes to keep pace. As each of us relies on the power that is provided to our homes and businesses, it is important to understand the changes taking place in this industry. Charles Patton, the president and COO of Appalachian Power, gives some insight into how Appalachian Power, a subsidiary of American Electric Power (AEP), keeps the power flowing in West Virginia.
WVE: Can you give us a broad overview of the coverage area of Appalachian Power?
CP: At Appalachian Power, we serve about a million customers in West Virginia, Virginia and Tennessee. To give you an idea of how much electricity those customers use, we sold 36.5 megawatt hours of electricity in 2010. We’re part of the AEP system, which serves more than 5 million customers in 11 states. In Appalachian Power territory, we operate two coal-fired power plants in Virginia and four in West Virginia. We also operate the Smith Mountain Project, a pumped storage hydro plant in Virginia, and several run-of-the-river hydro plants in Virginia and West Virginia.
WVE: How has Appalachian Power evolved to adapt to changes in the industry?
CP: You know, we used to be an industry that people thought of as pretty static and predictable. That is no longer the case. The generation part of our business is where most of the cost is—in fact, approximately 70 percent of a customer’s bill goes to generation costs. And that’s the part that’s been changing. Appalachian Power’s generation fleet is 75 percent coal. Until recently, that coal allowed Appalachian Power to be one of the lowest cost providers in the nation. Global competition and the cost of mining have caused a significant increase in coal costs. Our coal costs at Appalachian Power were $720 million in 2007 and have risen to $1.2 billion in 2011.
Additionally, we have spent more than $2 billion on the Environmental Protection Agency (EPA) compliance, an amount that exceeded the original cost of all the plants’ generating units that were retrofitted.
On the other hand, the development of horizontal drilling and the discovery of trillions of cubic feet of shale gas have ushered in a new era in the electric utility industry. Gas is cheap now and is expected to stay reasonably priced for decades, so we’re beginning to make some changes in our generation mix to take advantage of inexpensive gas. Couple these facts with new rules issued by the EPA that are forcing closure of some of our older plants several years earlier than they otherwise would have shut down, and you have an industry in the midst of a major transformation.
WVE: What do you see as the greatest challenge as it pertains to Appalachian Power and the electric utility industry as a whole?
CP: Regulation is clearly the biggest driver in our industry. EPA regulations, specifically the Mercury and Air Toxics Standards (MATS) Rule and the Cross-State Air Pollution Rule (CSAPR), will accelerate the closure of our Phillip Sporn, Kanawha River, Clinch River and Glen Lyn plants, a total capacity of 1,735 megawatts.
Interestingly, Ohio regulators are also influencing Appalachian Power in a big way right now. The Ohio Public Utilities Commission is moving that state to a competitive generation market. This affects Appalachian Power because we purchase power from several of those Ohio generating units.
All this points out the need for a federal energy policy. With an energy policy, we would have clearer direction and could better plan for the future.
WVE: Appalachian Power’s customers have witnessed rapidly rising prices for electricity. What has been the driving force behind these rising costs?
CP: There are two reasons for the rising costs we’ve seen. First and foremost, the cause has been the rising cost of coal. Coal costs have escalated, mostly due to the increasing worldwide market and mining regulations. It’s important to point out that fuel costs are passed on to customers dollar for dollar with no profit for the company. Second, the company spent more than $2 billion on mandatory environmental improvements—mainly scrubbers—to meet federal environmental regulations.
WVE: How will Appalachian Power evolve in order to continue to offer service at an affordable price?
CP: There’s good news for our customers in West Virginia when it comes to future costs. First, our major environmental retrofit costs are behind us. The coal-fired plants that will remain open and that are competitively priced have already installed the necessary environmental controls to meet current and anticipated environmental regulations. The costs of those controls are already in customer rates. Earlier this year we also opened a natural gas-fired combined cycle plant that will help us take advantage of low gas prices and diversify our fuel mix.
WVE: Does Appalachian Power have a strategy for transforming any coal-based plants to natural gas?
CP: Right now, Clinch River in Carbo, VA, is the only plant we plan to convert from coal to natural gas, and we believe that can be done in the next couple of years. We studied the possibility of conversion at other plants, but this is the one that made sense because there is a natural gas transmission line not far from the plant, making the refueling economically feasible.
WVE: How does the EPA and its regulations drive the business strategies of Appalachian Power?
CP: At our parent company, AEP, 65 percent of the power we provide comes from coal. Significant shifts in the cost associated with the extraction or consumption of coal have a significant impact on the cost of electricity. For decades, the relative cost of coal to other types of generation was so tilted in coal’s favor that Appalachian was able to maintain rates significantly below national and regional rates for electricity. As the cost of mining coal has increased, partly resulting from the EPA’s permitting process, and as we have invested billions of dollars in environmental compliance, the relative advantage that coal has historically enjoyed has diminished greatly. The result is that smaller, less efficient units will not be retrofitted to comply with new EPA requirements because the costs are not justifiable.
WVE: One result of the EPA’s regulations is the closure of several older coal-fired generating units. What regulations are they violating and is there any way to prevent the closure?
CP: These plants are in compliance now but will have to close in early 2015 as more stringent air quality standards come into effect to meet the Clean Air Act. The MATS Rule and the CSAPR are the two key regulations that are at issue. We do not question the need for the regulations; however, we would like additional time to close these plants gradually rather than all at once, which will reduce the impact on customers, employees and communities and allow us to ensure the stability of the electric grid.
WVE: What will the closure of these plants mean not only for Appalachian Power but for its customers and the economy of the West Virginia towns in which they exist?
CP: The closure of these three plants is significant because each is an important part of their communities. Kammer, located in Moundsville, will mean 60 jobs lost in the area; Sporn, in New Haven, will mean 120 jobs and Kanawha River, in Glasgow, will have another 60 jobs lost—a total of 240 jobs lost in the state. That means $17 million in lost wages in the state and another $13 million in lost state and local taxes the plants pay.
WVE: In addition to the closure of these plants, what other changes are underway that will affect the amount of power available to Appalachian Power customers?
CP: There are three major changes that will affect the amount of generating capacity we have available for our customers.
First, there are changes proposed to a power pool arrangement that’s been in existence for more than 50 years. While it served us well for decades, in its current form it has outlived its usefulness.
Second, the West Virginia Public Service Commission has directed Appalachian Power and sister company Wheeling Power, which serves Ohio and Marshall counties, to merge. Wheeling Power has the same rates as Appalachian Power in West Virginia and follows the same regulations. Wheeling Power requires approximately 500 megawatts to serve its customers. While it brings no generation to the merger, all customers benefit because fixed costs are spread out among a larger customer base.
Finally, the Ohio Public Utilities Commission has ordered AEP Ohio to corporately separate its power generation assets from its wires business as part of a transition to a competitive generation market. This creates a unique opportunity for Appalachian to purchase some of those assets at favorable terms.
WVE: Can you tell us about the new power-sharing pool currently being proposed and how it can reduce expenses?
CP: For decades Appalachian Power customers have used more power than is generated here. To provide enough power for customers, the company purchased power from its sister AEP companies in a pool arrangement where the companies share generating capacity across state and company lines. Today, changing environmental and regulatory requirements have made continuation of the pool impractical. A new power-sharing pool is being proposed that will help stabilize Appalachian’s expenses in this area and give us a greater span of control over our generation.
WVE: Appalachian Power is adding new generating capacity. How will this be accomplished?
CP: There are three major steps to our plan to replace the generation we’re losing because of plant closures and to increase generation capacity. While this plan is subject to regulatory approvals and, therefore, could change, with this plan in place we will have enough generation to meet all current and near-term needs.
First, in early 2012, the company added Dresden Plant, a 580-megawatt natural gas combined-cycle plant. Second, two units at the Clinch River Plant will be converted from coal-fired to natural gas-fired units. Third, Appalachian plans to purchase from Ohio Power 80 percent of the capacity of Mitchell Plant, located in Moundsville, and the remaining two-thirds of one unit at the Amos Plant in Winfield, which is the only portion of that plant not already owned by Appalachian. Both of these are coal-fired plants.
This plan is a cost-effective solution that will have little or no effect on customer rates. Basically, we will move from being a renter, buying electricity from others, to an owner.
WVE: Is there a plan for alternative energy sources like solar- or wind-generated power within Appalachian Power?
CP: Right now, we have targets for renewable energy in West Virginia, and we’re meeting those targets. Appalachian has a substantial amount of renewable energy—825 megawatts of hydro and 376 megawatts of wind generation. We’ll consider additional renewable generation only as it becomes more competitive or if we need it to meet requirements.
WVE: As an electric utility provider working with coal and natural gas, how do you view the future of coal in
West Virginia and in the U.S.?
CP: There’s no doubt that shale gas is a game changer for the energy industry. However, coal is going to be a primary fuel source for electric generation for decades to come. For example, right now Appalachian is approximately 74 percent coal-fired generation. In 2015, after we’ve closed several coal-fired plants, we will still be 71 percent coal-fired. The U.S. as a whole uses less coal, and that percentage will gradually fall, but very slowly. The Energy Information Administration reports that power generation is currently about 45 percent coal-fired, and in 2035 that percent is expected to fall to 43 percent. Plus, the market for coal has dramatically changed. It is clearly a worldwide market today, and coal mined in the U.S. is regularly and profitably exported.
WVE: What additional steps could be taken in the future to further diversify Appalachian Power’s fuel portfolio while staying in balance with EPA expectations?
CP: Of course our newest plant, Dresden, is a gas-fired plant, and we do expect that any additional generation we might build or purchase in the near future would be gas. We are very heavily invested in coal-fired generation, so adding gas is a way to gradually help rebalance our generation fleet. The company is also aggressively pursuing demand side management and energy efficiency as ways to offset or delay the need for new generation.
Photography by Tracy Toler