July 12, 2007

DOW JONES REPRINTS

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:
http://www.djreprints.com/.

• See a sample reprint in PDF format.
• Order a reprint of this article now.

BURNING PROBLEM
Inside Messy Reality
Of Cutting CO2 Output

(See Corrections & Amplifications item below.)

NEW HAVEN, W.Va. -- The panoramic view from the roof of American Electric Power Co.'s Mountaineer power plant here sends a vivid message: Coal is king. Conveyor belts pull coal from a nearby mine, coal barges bob on the shimmering Ohio River and earth-moving equipment buries coal ash in a landfill.

With 25 big plants that burn coal, it's no wonder AEP is the No. 1 industrial emitter of the greenhouse gas carbon dioxide in the U.S. in some years. The company acknowledges the problem, but says it faces a bind in solving it: New technologies to reduce CO2 emissions will cost billions and may take many years to develop. What's more, the company isn't sure it can recover its investment through higher electricity rates.

Places like Mountaineer are where reality collides with rhetoric about fighting global warming. Lacking any clear guidance from regulators, AEP is hedging its bets. It's working on some innovative technologies, but has yet to tackle the kind of top-to-bottom overhaul that many say will be required to make a serious dent in greenhouse gases.

Michael Morris, chairman and chief executive of the Columbus, Ohio-based utility, warns that strict emission curbs won't be cheap. "I think power prices could go up 50%, maybe more," he says. He doesn't think AEP can deliver significant carbon-dioxide reductions much before 2020.

AEP is particularly interested in two technologies, one that would turn coal into cleaner-burning gas and another that would capture carbon dioxide so it can be buried deep below the earth's surface. An initial gasification power plant in West Virginia will cost at least $2.4 billion, says the company, enough to single-handedly raise electricity rates in the state by 12% if it goes online five years from now.

Environmental groups agree that experimental technology shouldn't be rushed into service, but say power companies and the government should be putting more effort into conservation and energy efficiency. U.S. electricity demand is growing 2% a year. In most of the 11 states where AEP operates, it's under no obligation to hold down demand. On the contrary, it makes more money the more electricity people use.

Each year the U.S. electricity industry collectively emits 2.5 billion tons of CO2, which plays a starring role in climate change. That's about a third of the U.S. total.

Like most other utilities, AEP wasn't spending much on carbon-dioxide reduction until recently. Utilities were too busy dealing with federal restrictions on nitrogen oxides, sulfur dioxide and mercury. AEP, which produces three-quarters of its electricity from coal-fired plants, has earmarked $4.2 billion between 2004 and 2009 to control these other pollutants.

Congress has yet to mandate any reductions in CO2, although it's mulling global-warming legislation. Some proposals seek to reduce emissions by 50% to 80% compared with 1990 levels by 2050. State regulators, awaiting federal action, have generally left it vague whether spending on CO2 cuts could be recouped via rate increases. Rather than focus on the science, Mr. Morris, the CEO, says executives like him now focus on the "political science" of what Congress intends to do.

In a recent study, the Electric Power Research Institute in Palo Alto, Calif., found that even if the U.S. power industry boosted nuclear-power production by 60%, doubled wind and solar power, and developed viable carbon-capturing technology, it would still take until 2025 or 2030 to get the industry back to the 1990 emissions level. Although some congressional proposals call for reducing emissions by half or more over the next few decades, the institute concluded "much of the technology needed isn't available yet." The institute is independent but receives some funds from the power industry.

"You have to throw up your hands a little bit because there's so much that needs to be done," laments Bruce Braine, vice president of strategic policy analysis at AEP. Curbing emissions requires "completely remaking the electric industry," says Jim Dooley, senior staff scientist at the Department of Energy's Pacific Northwest National Laboratory in Richland, Wash.

At the 600-acre Mountaineer plant in West Virginia, work is just beginning on partial answers to the problem. On a scorching afternoon, general plant manager Charlie Powell, almost as an afterthought, pointed out a yellow building, barely bigger than a garden shed, ringed by a chain-link fence. "That," he said, "is the well to hell."

Inside is an experimental 9,172-foot well drilled three years ago, down which, it is hoped, carbon dioxide can be pumped one day and stored for thousands of years. Beginning next year, AEP engineers intend to divert a small stream of waste emissions from Mountaineer and run it through an experimental process to tease out the carbon dioxide. Once the gas is injected into the well, porous rock and a capstone should hold it in place.

Scrubbing carbon dioxide out of exhaust gases isn't easy. If companies aren't careful, they'll end up burning a lot of extra coal just to run the cleanup process. AEP engineers say some of the existing methods would effectively wipe out a century of efficiency gains at power plants. Finding that unacceptable, AEP will test a novel process at Mountaineer that it hopes will use less than half as much energy.

Exhaust Gas

If all goes well, AEP will take what it learns in West Virginia to a sister plant in Oklahoma by 2011 and scale up the technology to handle more exhaust gas. The carbon dioxide extracted can be used to loosen petroleum in oil wells, and AEP has arranged to sell carbon dioxide to an oil-services company that operates in Oklahoma. By 2020, if AEP's investment of up to $380 million in the two pilot projects pans out, the process could be used by still more of its plants.

In addition to the carbon-capture project, AEP plans to build a new kind of power plant at Mountaineer, one that takes coal and converts it into a gas. The process makes it easier to separate out carbon dioxide and other pollutants. AEP hopes to open the gasification power plant by 2012 and produce 629 megawatts of electricity, if it can get permission from utility regulators in West Virginia and Virginia. It wants the regulators to let it recover the expense of the plant in its rates.

Someday, all the CO2 output could be captured and stored, although that isn't part of AEP's initial plans. Separately, several power companies including AEP and the Department of Energy are working on a $1.5 billion project called FutureGen Industrial Alliance Inc., which seeks to develop a zero-emission power plant during the next decade using coal.

AEP has about 7,000 rail cars and 2,300 river barges that move coal, representing an immense investment. With only one nuclear-power plant and no plans to build more, executives say the company's fate is tied to coal.

AEP had hoped to build a second gasification power plant in Ohio, another big coal state, but has run into uncertainty. The company wants assurance that it will be able to recover what it spends through electricity rates. The state's Office of Consumers' Counsel, which represents rate payers, says the state should let other companies compete for the job of building new power plants. AEP says it may drop Ohio and try Kentucky instead.

For an electric utility, building a gasification power plant is no simple matter. AEP managers say the proposed West Virginia plant resembles an oil refinery as much as a conventional power plant. Power plants are "a mechanical engineer's playground," says Dan Duellman, head of an AEP team exploring advanced technologies. "We know that when you burn coal it gets hot and makes steam. As mechanical engineers, we don't usually care about the chemical process."

But chemistry lies at the heart of the process that converts solid lumps of coal into a gas that can be burned. To understand that process -- and create gas with a predictable heat value -- AEP reached out to chemical engineers in the petrochemical industry. Mike Hammond, a chemical engineer who worked at a Delaware refinery now owned by Valero Energy Corp., was a prize recruit.

When he arrived at AEP 18 months ago, Mr. Hammond quickly saw a problem. In the oil industry, refineries run consistently at full blast, and store the refined product in tanks. At power plants, however, operations fluctuate in response to electricity demand. Gas storage isn't an option because the gas that comes from coal would be too voluminous. Thus the unit that turns coal into gas must be able to fine-tune its output to produce just what the power plant needs.

"The first time this was explained to me, I freaked out," says Mr. Hammond. Equipment used for gasification "doesn't like to be jerked around that way, turned up and down." His team thinks it has solved that problem, but won't really know until it builds a plant.

Spectacular Flame

Messrs. Hammond and Duellman also worry about what the plant's neighbors will think. In the early stages, while they're getting the gasifier up and running, it won't furnish fuel to the generating plant. Instead, gas will be "flared" or burned off. That could result in a spectacular, 100-foot flame on top of a 200-foot stack, visible for miles around.

Mr. Morris, the CEO, says he's confident the technology will work out. "I'm worried about the cost, though," he says.

Evaluating the cost of action requires knowing the cost of inaction -- and that's hard to guess in the absence of federal legislation on curtailing carbon-dioxide emissions.

Currently, the concentration of carbon dioxide in the atmosphere is about 380 parts per million, up 80% since 1970, according to the United Nations Intergovernmental Panel on Climate Change. A business-as-usual approach by utilities would ensure steady escalation and accelerated warming, scientists say.

Restraining the growth of CO2 concentration will be expensive, according to the U.N. panel. In a May report, it said that stabilizing the concentration over the long term at 445 parts per million would require shuttering dozens of older power plants, to be replaced by expensive, cleaner plants.

Congress is expected to create a "cap and trade" market in which allowances -- permits to pollute -- would be bought and sold. The number of allowances would decline over time. The question is how low Congress sets the target for total emissions. The lower the target, the fewer the permits -- causing the price of them rise. That in turn could raise electricity bills for consumers.

If reductions are required quickly, utilities will have to "slam on the brakes" to comply, says Richard Richels, an economist at the Electric Power Research Institute. Companies would have to shut down still-viable plants prematurely and spend billions on new ones with expensive emissions-reduction technologies, or they would have to buy emissions allowances, he says.

Such a prospect makes power companies nervous, but environmentalists say the industry should support strict federal limits on emissions based on the best global-warming science. "If AEP becomes a serious supporter of limits, it will make a palpable difference," says Ralph Cavanagh, co-director of the energy program at the Natural Resources Defense Council in San Francisco.

Yesterday, AEP endorsed climate-change legislation introduced by Sen. Jeff Bingaman, Democrat of New Mexico, and Republican Sen. Arlen Specter of Pennsylvania. It calls for a reduction to 1990 emission levels by 2030. Environmentalists say the bill doesn't go far enough and would allow coal burners to buy their way out, at nominal cost, if compliance proved difficult.

Researchers at the Massachusetts Institute of Technology recently examined what would happen if Congress mandated that emissions in 2050 be 50% to 80% below 1990 levels. Initially, the polluting allowances might sell for $30 to $50 per ton of carbon-dioxide equivalents, which could lift wholesale power costs by two to four cents per kilowatt-hour, the study found. That would lift consumer bills by some 25% to 50% in coal-burning regions. The study was conducted by MIT's Joint Program on the Science and Policy of Global Change.

Electricity Bills

The longer Congress delays, the more plants will get built with no plan for the carbon-dioxide waste. None of the 11 states in which AEP operates requires utilities to include an estimate of the cost of dealing with carbon dioxide when proposing new plants. This gives an edge to conventional coal plants, since the future costs of its carbon-dioxide pollution needn't be tabulated. Regulators generally want utilities to build plants with the lowest projected cost, to keep electricity bills in check.

Slowly, however, states are beginning to recognize that dumping CO2 into the air isn't likely to be free forever and is bad for the planet. In Florida, utility commissioners in early June rejected a new coal plant proposal by Florida Power & Light Co., citing the uncertain cost of greenhouse-gas regulation, among other factors.

Mr. Morris says he wishes Congress would act sooner rather than later. "We're in position to change," he says, "but we're not in this alone."

Write to Rebecca Smith at rebecca.smith@wsj.com¹

Corrections & Amplifications:

Carbon dioxide emissions are up 80% since 1970. This article. incorrectly says the concentration of carbon dioxide in the atmosphere is up 80% since 1970.