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AEP Chairman & CEO Mike Morris: Future Power

CEOs ranked energy costs as one of the most pressing challenges affecting their business, second only to health care costs. …

CEOs ranked energy costs as one of the most pressing challenges affecting their business, second only to health care costs. Michael Morris, chairman, president and CEO of Columbus, Ohio-based American Electric Power, a $12.6 billion utility that sells 214 million megawatt hours of electricity, also leads the Business Roundtable’s Energy Task Force. (The Business Roundtable represents 160 CEOs of leading U.S. companies with more than $4.5 trillion in annual revenues and more than 10 million employees.) The Roundtable recently issued its own blueprint for the U.S.‘s energy future in anticipation of various legislative proposals being considered by Congress. Before joining AEP in 2004, Morris was CEO of Northeast Utilities from 1997 to 2003 and was previously CEO of Consumers Energy. A past president of the Edison Electric Institute, he also serves on the U.S. Energy Department’s Electricity Advisory Board and the Institute of Nuclear Power Operations among others. CE’s J.P. Donlon recently spoke to him about national energy options.

In your task force’s report you urge business leaders to accelerate energy efficiency-energy consumed per unit of economic output. How is this best achieved, and who wins and who loses?

Energy efficiency is the least expensive energy answer to rising costs. As an industry or as a nation we have never taken conservation or efficiency to the level that it should be. So we concluded that’s the first thing we should all do, because we’re headed toward a tighter supply/demand equation on energy supply. The U.S. is a net importer of oil. We are ultimately heading to be a net importer of natural gas. Some states are net importers of electricity. 

To the second half of your question, the biggest single bang for the buck is in the envelope where you work and where you live. There are substantial savings, particularly in the Northeast, for upgrading the ability for buildings to hold heat in the winter and keep heat out in the summer. Clearly, window and insulation manufacturers would win. But so do tenants, homeowners and building owners. One might argue that once energy demand levels off or goes down, a utility or an oil heating company might “lose.” But those industries are growing at such exponential rates in different areas-New York City being one of them-that they would rather see a dampening of demand, because it would help them in the near and midterm.

How best can we expand access to domestic oil and gas?

There are two subsets to that question. Notwithstanding your politics, the political statement of becoming energy independent is unaccomplishable, unless you and I revert to the buggy whip and the horse. So, let’s be honest with one another rather than continue with a political fantasy that has no real meaning.

We need more access to our own supply base, which today is constrained. At the same time, we don’t want citizens to see this and say, “Oh, there they go again. They [energy industry] just want to drill everywhere in the U.S.-offshore, every national forest, every pristine lake.” That isn’t the case at all. 

Having said that, we need to adjust CAFE standards, allow competition on liquid transportation fuel, and expand use of biodiesel, coal to liquids, and plug-in hybrid electric vehicles. This won’t by itself achieve energy independence, nor will it allow us to stop buying oil from people who end up attacking our country because that oil will be absorbed by the market with or without us. We are fortunate to be blessed with coal well above the rest of the world, and we need to take full access of all our resource opportunities.

Commenting on the views of majority leaders Steny Hoyer, Ed Markey and Nancy Pelosi, Texas Congressman Ralph Hall said, “There is a war going on against energy from fossil fuels,” and added, “I can’t understand the pure venom felt against the oil and gas industry.” He could have added coal. In such an environment how does one overcome political resistance of leaders that energy from all sources is still needed?

We spend an inordinate amount of time with the very people you mention. In fact, I’ll be testifying in front of Congressman Markey’s panel next month. If you are anti-fossil fuel, coal, oil and natural gas, then you are anti-U.S. economy because without these fuels playing the substantial role that they need to play, you will not have adequate energy to satisfy the economic demands of this country. You will lead us into an energy-driven economic brown-out, which will be worse than the disaster triggered by the Smoot-Hawley Tariff in the ��30s.  The Senate Majority Leader said that you could build a 100-square-mile solar panel in Nevada and handle the energy demands of the western U.S. for the foreseeable future. Such a notion is a political statement and does not withstand engineering scrutiny. We need to be respectful of politics, yet in the end American jobs will trump the notion that we need to take fossil fuels out of the energy mix.

The U.S. Department of Energy projects that the nation will need 45 percent electricity by the year 2030. Where will it come from?

That number is incredibly high. Nonetheless, I see a time where the cost of energy, electricity in particular, will rise to a point where we will see price elasticity temper demand. Many advocate a wider use of “smart meters,” so that customers can begin to see what it is that they’re consuming, not only volumetrically, but on a price per unit of consumption. This will dampen demand growth of electricity. Renewables will assume a greater role in supply side generation, but remember renewables don’t generate 24 hours a day, 7 days a week. The wind doesn’t constantly blow, except in areas where no one lives, and the sun doesn’t constantly shine anywhere. So electric generation depends on two sources: what we call 24/7 power plants, which will be fueled by clean coal, and new nuclear stations.

With 20 percent of the nation’s electricity being generated by nuclear, and with nuclear being free of greenhouse gas emissions, why isn’t this source preferred over others?

People who oppose it emotionally have deeply held convictions. Yet, we need to go that way, and the country is beginning to lean in that direction. The timeline, however, will be mid to late next decade and between now and then the supply/demand equation will get tight enough that something will need to be built to satisfy energy demand. So I don’t see nuclear stations coming online by 2015, more like the 2020 timeline. 

One of the impediments to nuclear is Wall Street’s skittishness. Even though some 28 companies have applied for nuclear permits, and a more streamlined permit regulation process is in place, having a permit is not the same thing as actually building a plant. What will it take to reduce the risks to attract backers?

The new streamlined process has not been tested legally yet. Those who would rather not see new nuclear stations built, will test that legally, and this will add to the timeline I mentioned. The court of appeals for an NRC License is the U.S. District. The loser will have to appeal, whether it’s the potential builder or those who don’t want it built, and that’s the U.S. Supreme Court. You can add whatever time you’d like to that equation. That’s how I arrived at the math I got to earlier.

For Wall Street to get comfortable, two elements are needed. There are loan guarantees now being potentially offered by the Department of Energy for the first number of stations that get through the wicket on a timeline that was provided for in the Energy Act of 2005. That may not be enough. Many don’t appreciate this, but the ultimate safety valve for the debt or equity investor is the recovery authority granted by the State Financial Utility Regulator. If I were going to lend $3 billion to company ��X’, I would want to make sure that they had a relatively clear state path to recover that $3 billion from the customers that would ultimately receive the benefit of the energy that flowed from that plant.

What role does nuclear energy play today in AEP, and how will this change in the future?

Today, we have two nuclear units at a single site, Donald C. Cook station, which represents about 9 percent of our overall supply. This will change as we join in the new nuclear builds, not in the first cycle but probably in the second cycle. The reason is that there are many bumps in that highway. We are bumping along the clean coal highway, and that’s enough bumps on one head.

What contribution of your electricity output might nuclear power make in the future?

If we were to build a new nuclear station, which we probably will sometime after 2020, it would generate 1,000 to 2,000 megawatts. We’re a 40,000 megawatt player today, so it would represent an additional 5 percent of capacity.

Each year the electricity industry emits 2.5 billion tons of CO2, about a third of the U.S. total, which plays a key role in climate change. Since AEP relies principally on coal fired plants for three-fourths of its electricity output, what do you plan to do to reduce emissions and remain competitive?

We will soon implement two very important validation projects that demonstrate that you can capture carbon on the post-combustion flue gas cycle and then either store that captured carbon underground as we store natural gas or the strategic petroleum reserve, and other liquids and gaseous materials, or as we take that validation study to one of our facilities in Oklahoma, utilize the CO2 for enhanced oil recovery in the production fields in Oklahoma.

These are important validation projects, because the technology is beyond research and development. It just simply needs to be stepped up volumetrically, and that’s what we will do with our projects. The first one is at our Mountaineer Station in West Virginia, which we hope to have online by 2008 or 2009, and the larger demonstration validation project in Oklahoma will be ready by 2010-11. If those two projects prove to be successful, which I think that they will, we will begin deploying on our larger coal fleets that capture technology in the 2015 to 2020 timeline.

What really makes the most sense, carbon capture or a carbon tax?

We like the cap and trade approach. A carbon tax would probably cost us less and therefore cost our customers less, but the result wouldn’t achieve much carbon curtailment. More revenues would simply flow into the federal coffer. A cap and trade approach is more likely to benefit air quality.

The report appears to support ethanol and related biofuels, which have come under attack because of the extent of subsidies involved. For example, the International Institute for a Sustainable Development estimates that federal and state subsidies in 2006 were somewhere between 5.1 billion and 6.8 billion for ethanol, and that these will soon increase to 8.7 billion in 2008. Without these subsidies, there would be no corn-based ethanol production at all.

The economics of ethanol don’t appear to make sense.

They don’t. Cellulosic ethanol has more more logic to it. Keep in mind all renewables are immensely subsidized. This is a political reality in the U.S. today. I’m sure that if Henry Ford needed subsidization to create the Model T, you and I would still be on horseback. But in today’s world, getting a subsidy from the federal government is like having the ability to breathe.

What we tried to support was a more realistic blend, and this was really an amazing eye opener for those of us who aren’t in that space. The E-10, which is really what the report calls for rather than E-85, is an approach that triples the amount of ethanol in the marketplace, puts less pressure on the corn grower where much of the subsidy is, and was therefore agreed to by the ADMs and ethanol fuel suppliers.

What is the one fact about our energy situation that is most misperceived?

There is no silver bullet. There is no 100-square-mile solar panel in the middle of Nevada that will satisfy the western U.S.‘s electricity demand. If we were, as a people, to become considerably more energy frugal, that would take tremendous pressure off prices. Price elasticity is the ultimate conserver. SUVs sold like hotcakes until gasoline got to $3.00. We really didn’t start driving less. We just stopped buying SUVs, and now that gasoline is $2.80, $2.90, SUVs are selling again. It may need to get worse before it gets better because Americans react more to crises than we do to planning, and that’s unfortunate. Everyone wants more electricity but no one wants more power plants. Everyone wants wind energy but no one wants windmills in their backyard or transmission lines to deliver the energy to their wall socket. We are a spoiled generation. I long for the spirit evidenced in Tom Brokaw’s book The Greatest Generation. We need folks to say, “Hey, here are the kinds of things that will lead us to a better place.”

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