Managing The Risks of Climate Legislation Bruce Braine, Vice President June 3, 2008 MACRUC Conference Williamsburg, Virginia Mountaineer Plant - New Haven, WVNortheastern Plant - Oologah, OK

2 Overview  Background  Managing Climate Risks  Legislative and Regulatory Risks  Market and Compliance Risks  Technology Risks

3 Coal/Lignite 67% Nat. Gas/Oil 24% Nuclear 6% Pumped Storage/ Hydro/Wind 3% AEP’s Generation Fleet 38,388 MW Capacity Company Overview 5.1 million customers in 11 states Industry-leading size and scale of assets :

4 AEP’s Climate Strategy  Being proactive and engaged in the development of climate policy  Investing in science/technology R&D  Taking Voluntary action now, making real reductions thru CCX ( : 40 MM Tons reductions); 2011 Voluntary Commitment (additional 5 MM Tons/year reductions).  Investing in long term technology (e.g., IGCC, Ultra- supercritical PC and Carbon Capture and Storage) AEP must be a leader in addressing climate change

5 AEP Position: A “Reasonable” Approach to Climate Legislation Reductions and Timing--Moderate with Adequate Lead Times Scope of Program-- Economy Wide Flexibility of the Program—Trading, Banking, Unrestricted Offsets, Early Action Credits Allowance Allocation And Other Cost Issues— Emissions Based and ”Low” auctions Technology Development/Deployment—Bonus allowances for carbon capture and storage International Linkage—e.g. AEP-IBEW Proposal AEP Supports Reasonable Legislation on GHG: Bingaman-Specter “Low Carbon Economy Act of 2007”

6 EIA Base Case 2007 EPRI CO 2 Reduction “Prism” TechnologyEIA 2007 ReferenceTarget EfficiencyLoad Growth ~ +1.5%/yrLoad Growth ~ +1.1%/yr Renewables30 GWe by GWe by 2030 Nuclear Generation12.5 GWe by GWe by 2030 Advanced Coal Generation No Existing Plant Upgrades 40% New Plant Efficiency by 2020– GWe Plant Upgrades 46% New Plant Efficiency by 2020; 49% in 2030 CCSNoneWidely Deployed After 2020 PHEVNone 10% of New Vehicle Sales by 2017; +2%/yr Thereafter DER < 0.1% of Base Load in % of Base Load in 2030 Achieving all targets is aggressive, but potentially feasible

7 Most states are “cost-regulated” today, with 80% of US coal-fired generation in these states. Note: Based on “current” state status of regulation/deregulation. States that have continued cost-based POLR rates or transition rates are considered to have kept generation “regulated”. Most Coal Generation is Cost-Regulated

8 Cost of Electricity from a Typical Regulated Coal-Fired Generating Unit Allowances purchased from auction account for a 84% increase in the cost of electricity produced! *Approximate Calculation based on a 30% reduction in electric sector GHG emissions with CO 2e reductions/allowances costing $40/ton

9 Increase in Customer Electricity Costs/Rates due to Auctions Approximate Calculation based on a 30% reduction in electric sector GHG emissions with CO 2e reductions/allowances costing $40/ton

10 AEP’s Long-Term GHG Reduction Portfolio Renewables (Biomass Co-firing, Wind) Off-System Reductions and Market Credits (forestry, methane, etc.) Commercial Solutions of New Generation and Carbon Capture & Storage Technology Supply and Demand Side Efficiency AEP is investing in a portfolio of GHG reduction alternatives

11 A Portfolio Approach: AEP’s Long-Term CO 2 Reduction Commitment Existing Programs  Existing plant efficiency improvements  Renewable Energy  800 MWs of Wind  300 MWs of Hydro  Domestic Offsets  Forestry – 0.35MM tons/yr  Over 63MM trees planted through 2006  1.2MM tons of carbon sequestered  International Offsets  Forestry projects have resulted in 1MM tons of carbon sequestered through 2006  Chicago Climate Exchange AEP’s reductions/offsets of CO 2 : : 46 MMT New Program Additions (by 2011)  1000 MWs of Wind PPAs: 2MM tons/yr  Domestic Offsets (methane, forestry): 2.5 MM tons/yr  Fleet Vehicle/Aviation Offsets: 0.2MM tons/yr  Additional actions-efficiency and biomass: 0.3MM tons/yr New Technology Additions  New Generation – IGCC and USC  Carbon Capture and Storage (CCS) for existing fleet  Chilled Ammonia  Oxy-Coal AEP’s reductions/offsets of CO 2 : 2011+: 5 MMT/YEAR Longer Term—New Technology

12 Offsets/Off-System Reductions New AEP Offset Commitment by 2011: 2.5 MM tons/year additional CO 2 offsets Latest Announcement: Methane Capture Deal with Environmental Credit Corp. 0.6 MM Tons CO2e per year 2010 through % of credits sourced from “AEP States” Source: Wall Street Journal June 14, 2007

13 AEP Leadership in New Technology: Chilled Ammonia CCS 1300 MW Mountaineer Plant (WV) 450 MW Plant (AEP- West) 2009 Initial Operation2012 Commercial Operation Chilled Ammonia 20MWe scale Chilled Ammonia ~300MWe scale CO 2 Storage ( Battelle ) MOU (Alstom) EOR CO 2 Storage Captures and Stores 1.5 Million metric tons of CO 2 /yr. Phase 1Phase 2 Captures and Stores ~100,000 metric tons of CO 2 /yr.

14 The Challenge: CCS is Expensive  Carbon Capture w/ Geologic Sequestration  Other renewable, advanced geothermal and/or solar  Carbon Capture for Enhanced Oil Recovery  New Biomass Generation  Dispatch of additional gas vs. inefficient coal  Biomass Co-firing  Biological Sequestration (e.g. Forestry)  New Wind  Energy Efficiency  Methane Offsets $/ton CO 2 e $0 $50+ Nuclear?