The New Clean Fuel: Coal Producer Goes Green

American Electric Power, once the nemesis of greens, may show the way

Among environmentalists, American Electric Power Co. (AEP ) has long been the enemy. With two dozen coal-fired power plants from Appalachia to the Pineywoods of northeast Texas, the utility burns more fossil fuels than any other U.S. company, consuming an average of 2,000 train-car loads of coal every day. Despite new smokestack scrubbers, it also coughs out the most pollutants, including compounds that form acid rain and smog, toxins such as mercury, and gases thought to hasten global warming. "They are a very dirty company," says Bruce E. Nilles, Midwest representative of the Sierra Club.

Now, AEP Chairman and Chief Executive Michael G. Morris wants to construct at least two more coal-hungry plants along the Ohio River -- but this time environmentalists are wishing him Godspeed. Morris is breaking with other utilities, and with AEP's past, to embrace an eco-friendly way of producing electricity from coal. These facilities would be as clean as gas-fired generators from the get-go, no matter how impure or sulfurous the coal is. And they could be retrofitted easily to eliminate emissions of carbon dioxide, the chief greenhouse gas. "Let's take this to the next level -- that's what we're doing here," says Morris.


That next level comes at a price. AEP figures the plants, which would transform coal into a nonpolluting synthetic gas, would cost nearly $1.2 billion apiece to build. That's 20% more than a conventional coal-fired facility with the same capacity and almost four times as much as a similar-size generator fueled by natural gas. The energy bill that President George W. Bush signed in August could cover some of that by providing tax credits and subsidies for clean-coal projects. The Columbus (Ohio) utility wants to collect the rest from consumers through higher rates and is awaiting action by Ohio regulators. Approval is no sure thing, though. In late 2003, Wisconsin's Public Service Commission rejected plans by Wisconsin Energy Corp. (WEC ) for a coal-gasification plant because of its higher price tag and untested technology. As a backup, AEP has picked out sites in West Virginia and Kentucky.

If regulators side with AEP, it could lead other power companies to make the switch. That could boost clean-coal technology from the pilot-project stage, where it has been stuck for more than a decade, to full commercialization. Since these plants wring out pollutants instead of sending them up the chimney, their wider use could reignite demand for high-sulfur coal, which has been in decline since the Clean Air Act of 1970, and thus return jobs to the coal basin in the rural Midwest. Indeed, AEP's impact may reach all the way to China, which is facing global pressure to clean up its growing fleet of coal-burning generators.

To environmentalists, the biggest plus relates to climate change. Instead of blowing CO2 into the atmosphere, where it traps heat. The new design could one day extract the gas from the chemical reactor and then "sequester" it deep underground. That would allow power generators to stick with coal even if the U.S. joins other industrialized nations in cutting carbon emissions, notes Jana Milford, a senior scientist at advocacy group Environmental Defense. Daniel A. Lashof, science director for the Natural Resources Defense Council's climate center, agrees: "Gasification is the future for coal-fired power plants."

The building project is only part of Morris' cleanup plan. Since taking over as AEP's chief in January, 2004, he has pledged to reduce the $14 billion utility's CO2 emissions by 6% by 2010, in part by upgrading old, inefficient plants and by substituting wind power. A biologist whose first job was preparing environmental impact statements, Morris, 58, also has promised to spend $3.5 billion to lower emissions of other pollutants, such as sulfur dioxide.

Utility analyst Justin C. McCann of Standard & Poor's (MHP ) says Morris' environmental emphasis helps investors in two ways. Because coal-gas plants are more efficient, they should lift earnings by $175 million when they're online in 2010. These efforts also might keep greens from pushing for more costly investments. Morris says he has little choice if AEP wants to get a full 40 years of output from its new plants. Carbon-emission mandates are inevitable, he says, noting: "We are a coal-based utility."

If the alliance between AEP and environmentalists is surprising, so is the comeback of King Coal. As cheap and abundant as dirt, coal was always the power industry's favorite combustible. Electricity generators burned a record 1 billion tons of it last year, accounting for 50% of the nation's power supply. And after 2005's scorching summer, they're on track to top that handily this year. But while the Energy Dept. was dishing out more than $100 million a year on clean-coal projects, utilities began turning their backs on coal in the 1990s, opting instead for natural gas, which was almost as cheap and didn't require huge capital investments for emission controls. From 1999 to 2003, the nation added 133,600 megawatts of gas-fired generating capacity, vs. 500 megawatts for coal.

But that collective rush boomeranged on power producers as gas prices doubled, and then doubled again. All of a sudden, with electricity consumption climbing and most utilities still afraid of the nuclear option, coal looked like a bargain again. The Bush Administration fanned the trend by adopting less stringent requirements on mercury emissions -- power plants are far and away the No. 1 source of the airborne contaminant -- and by repudiating the Kyoto Protocol, which binds signatory nations to reduce emissions of CO2 and other greenhouse gases. The latest tallies show that at least 115 coal-fueled plants are at some stage of construction in the U.S.


Morris wants to make sure that at least a few of those use the new gasification techniques, which begin by breaking coal's hydrocarbon molecules apart in an industrial-size pressure cooker, and then burn the gas to run a series of generators. The new plants still produce CO2, which would go out the smokestack. But if the government imposes greenhouse gas caps, this, too, could be siphoned off and contained.

The U.S. has two small-scale coal-gasification plants now: a 265-megawatt generator outside Terre Haute, Ind., owned by Cinergy Corp. (CIN ), and a 260-megawatt generator in Tampa owned by TECO Energy Inc. Both opened in the mid-1990s and were heavily subsidized by the Energy Dept. under its clean-coal program. Now, Cincinnati-based Cinergy has announced plans for another coal-gasification facility in Edwardsville, Ind., that would be more than twice as big. Southern Co. (SO ) and startup Excelsior Energy in Minnetonka, Minn. are lining up funding for full-scale plants, too.

Before Morris came over from Northeast Utilities (NU ), AEP might have been content to let others play pioneer. "If you look at power companies that were environmental leaders over the last 10 or 20 years, AEP would not be toward the top of the list," says David G. Hawkins, director of the NRDC's climate center. Morris credits his environmental streak to his college days as a biology major and to his first job -- at a landscape-scarring coal mine in Indiana. Today mines like that often are reclaimed, he says, pointing to the Wilds, a 10,000-acre refuge in Ohio for African animals on what had been an AEP mine. "We aren't your father's coal burners or coal miners anymore," says Morris. Indeed, it may be dirty old AEP that proves that clean coal isn't an oxymoron.

By Michael Arndt in Chicago

    Before it's here, it's on the Bloomberg Terminal.