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PPL Climate Assessment 11-30-17
PPL Climate Assessment 11-30-17
Climate Assessment
Assessing the Long-term Impact of Climate Policies on PPL
November 2017
ABOUT OUR COMPANY
Headquartered in Allentown, Pa., PPL Corporation (NYSE: PPL) is one of the largest
companies in the U.S. utility sector. The company serves more than 10 million customers
in the United States and United Kingdom and employs nearly 13,000 people.
Our mission is to provide reliable, safe energy at a reasonable cost to our customers and
best-in-sector returns to our shareowners. We believe our competitive earnings, growing
dividend, solid management and high-quality assets represent an attractive low-risk
opportunity for those looking to invest in the utility sector.
Our vision is to empower economic vitality and quality of life, and to be a positive force in
the communities where we do business. We support human services, education, arts and
culture, and environmental stewardship. In addition, our companies work closely with
local and state officials to foster economic development that creates jobs throughout the
territories we serve.
As we move forward, PPLs strategy for growth is simple: Deliver industry-leading customer
service and reliability. Invest responsibly in a sustainable energy future. Execute our business
plans well. Maintain a strong financial foundation. And engage and develop our people.
EXECUTIVE SUMMARY
In August 2017, PPL Corporation committed to shareowners that it would publish an assessment of the potential impacts on PPL
resulting from future requirements and technological advances aimed at limiting global warming to 2 Celsius over pre-industrial levels.
In keeping with that commitment, this report presents the results of PPLs scenario-based climate assessment. In addition, it describes
PPLs approach to climate change and steps the company is taking to manage climate-related risks and to capitalize on
new opportunities.
Our approach to climate change
PPL regularly assesses risks and opportunities associated with climate change as part of our overall strategic business planning and
enterprise risk management. The company is committed to advancing a cleaner energy future. Our actions include using innovative
approaches to integrate more distributed energy resources, investing in lower-emitting generation in Kentucky consistent with Kentuckys
lowest reasonable cost requirements and investing in a more dynamic, resilient grid. As a result of PPLs strategic restructuring and
investments in recent years, PPLs carbon dioxide (CO2) emissions dropped about 50 percent from 2010 to 2016.
Our analysis
PPLs portfolio is heavily focused on electricity delivery with more than 80 percent of 2016 earnings driven by our delivery operations.
Our Kentucky utilities own and operate generation facilities. For this assessment, the company analyzed the potential impacts on its
Kentucky generation assets of three possible long-term policy scenarios. We considered potential variations in commodity prices,
technology adoption rates and other factors across these scenarios.
Potential impact
Under each policy scenario considered, including a scenario consistent with limiting the global temperature increase to 2 Celsius, carbon
dioxide emissions from PPLs Kentucky generation assets are expected to decline 45-90 percent from 2005 levels by 2050. Moreover, we
anticipate that the financial risk of continuing to operate the existing coal units will be minimal so long as they are operated consistent
with approved regulatory frameworks and are economically justifiable to Kentucky regulators. We have made, and continue to make,
major investments across our transmission and distribution operations to mitigate weather-related climate risks and make the grid more
reliable and resilient. We are also leveraging smart grid technologies to actively manage our system and integrate distributed energy
resources. In addition, we are actively engaging with regulators on these issues.
Moving forward
PPL will continue to assess risks and opportunities associated with climate change. In addition, we will continue to engage on related
public policy matters to ensure we can respond effectively to future changes in policy and regulation as we look to preserve and grow
shareowner value.
2,500,000
and has established aggressive CO2 targets that have translated into 1,500,000
public policy initiatives. The U.K.s Climate Change Act 2008 requires
1,000,000
a mandatory 80 percent reduction in CO2 emissions by 2050,
compared with 1990 levels. It establishes an intermediate reduction 500,000
Neither Pennsylvania nor Kentucky has enacted legislation or Nuclear Hydro Petroleum Coal Natural Gas Other Renewables
regulations to specifically regulate CO2 emissions. Pennsylvania Source: U.S. Energy Information Administration Electric Power Monthly
30
A Pennsylvania segment that consists of the regulated 20
distribution and transmission operations of PPL Electric 10
Utilities Corporation (PPL Electric), serving 1.4 million 0
customers in eastern and central Pennsylvania. 2010 2011 2012 2013 2014 2015 2016
EPA Electronic Greenhouse Gas Reporting Tool (e-GGRT) Scope 1 emissions for PPLs Kentucky
segment and PPL Energy Supply. Data excludes PPL Energy Supply emissions beginning in 2015,
as PPL spun off PPL Energy Supply on June 1, 2015.
IRP
RENEWABLES
impact achievement of PPLs business strategy (see Figure 5). This
DEMAND SUPPLY
includes risks associated with climate change. $
FUEL &
As part of the ERM process, representatives from PPLs operating ELECTRIC ENVIRONMENTAL
VEHICLES COST
companies and service groups identify, assess, monitor and report
on both ongoing and emerging risks. PPLs Risk Management group BATTERY
PRIVATE
STORAGE
oversees this process and reports quarterly to the Audit Committee SOLAR
of PPL Corporations Board of Directors.
energy resources and private solar and wind could reduce demand 40
increase could make it more difficult to monitor and adequately Source: National Renewable Energy Laboratory 2017 Annual Technology Baseline
provide necessary 24/7 generation and manage volatility in demand
for power. Opportunities
Legislative limitations on electric distribution companies in Just as there are risks associated with climate change, the drive for
Pennsylvania and license limitations on distribution network a cleaner energy future presents opportunities, as well.
operators in the U.K. currently prohibit PPL Electric and WPD,
New transmission will be needed to connect more renewable
respectively, from owning and generating power for customers.
and low-carbon generation sources, particularly as these sources
This may continue to limit the extent of activities the companies
are often located far from population centers. Such projects support
may engage in to support the transition to a cleaner energy future.
long-term earnings growth and have typically offered favorable
These limitations restrict utilities from owning solar and wind power
returns.
to serve customers.
Additional investments in smart grid technology and more flexible
In Kentucky, meanwhile, cost recovery and returns on investments
delivery networks will be needed to adjust to changes in customer
may be disallowed if they are not considered prudent or lowest
usage patterns and support more widespread adoption of distribut-
reasonable cost by regulators. Kentucky regulations and policies
ed energy resources, including intermittent renewable energy, energy
require that investments driven by environmental regulations must
storage technology and microgrids. Such investments would
be part of a lowest reasonable cost environmental compliance plan.
support continued rate base growth.
Currently, LG&E and KU have adequate generation to meet customer
The transition to a cleaner energy future and increased
demand for the foreseeable future. Therefore, to justify adding new
deployment of distributed energy resources also offers PPLs
renewable generation to reduce CO2 emissions, the cost of energy
U.K. and Pennsylvania companies the potential to take on an
from new renewable generation must be less than the marginal cost
expanded role in actively managing distribution networks through
of energy from existing generation. Absent a regulation that imposes
both network and non-network solutions, products and services.
a price on CO2 emissions, the marginal cost of energy from coal-fired
This includes services that control and balance two-way electricity
generation is expected to be lower than the levelized cost of energy
flows across local networks.
from constructing new solar or wind generation (see Figure 9).
In Kentucky, future increased demand for renewable energy could
LG&E and KU consider the uncertainty around future CO2 regulations
enhance customer interest in new solar subscription and onsite
and costs as part of their IRP process. In the last IRP filed with the
solar development options offered by LG&E and KU. In addition, our
KPSC in 2014, in order to reflect the impact of potential CO2
Kentucky utilities will have opportunities to invest in more renew-
regulations, LG&E and KU assessed portfolio implications using two
ables and natural gas as coal-fired power plants retire, electricity
scenarios: the first of which assumed a price of carbon both at $0
demand increases or future environmental regulations accelerate a
and in the range of $17 to $48 from 2020 to 2029 and the second of
transition to less carbon-intense power generation.
which used mass reduction targets under the CPP.
Improving power plant efficiency In Pennsylvania, PPL Electric is engaging with policymakers and
other stakeholders to support regulatory policies that foster greater
Over the past three years, PPL has achieved a steady reduction innovation and support a more dynamic network. PPL Electric is
in carbon emissions intensity through technology investments, leading an effort to better align policies to advance energy efficiency
facility upgrades, renovations and new construction projects. and distributed energy resources deployment with utility ratemaking
As a result, our carbon intensity (measured in tonnes per MWh and investments through the use of alternative ratemaking
of generation) has decreased 10 percent from 2012 to 2016 mechanisms. PPL Electric is also supporting efforts to advance
(see Figure 10). electric vehicle deployment and allow limited utility ownership of
We have also reduced our energy consumption by significantly microgrids and energy storage.
increasing the efficiency of our power plant operations in Kentucky. WPD regularly reports to regulators around climate adaptation and
In 2015 our plant energy consumption decreased by about progress towards reducing its business carbon footprint. WPD is
10 percent from the previous year, and in 2016 we reduced plant also engaging with stakeholders on the potential impacts of climate
consumption by nearly 6 percent. change. Through the Resilient Electricity Networks for Great Britain
ON INTENSITY
Carbon Intensity of Kentucky Generation (Figure 10) project, WPD is working with Newcastle University on a project to
1.0 develop predictions for the impact of climate change on PPLs
U.K. assets.
CO2 Emissions (Metric Tonnes)/MWh Generation
0.95 0.95
0.94
0.88
0.84
0.8
2012 2013 2014 2015 2016
Source: LG&E and KU EPA CAMD emission rates
The 2 C Scenario
10
electric utility service. These policies and regulations require
regulated utility generation investments to be prudent and meet the 0
1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
KPSCs lowest reasonable cost standard.
Based on International Energy Agencys World Energy Outlook 2016
Customer demand 36
TWh
scenarios, referred to as the Base, High and Low demand forecasts. 33
variables that contribute to uncertainty in the Base forecast include High Base Low
electric vehicles and private solar generation. Optimism regarding
electric vehicles has existed since the 1970s, and penetration levels
have largely been the result of government subsidies. The Base
LG&E/KU
Electric VehiclesElectric Vehicle
in the LG&E Penetration
and KU
Service Territories,
forecast assumes limited electric vehicle growth in Kentucky. The
High Load Forecast (Figure 13)
2020-2050
growth in private solar nationally has historically been driven by net 3.0
energy rate. Given Kentuckys low energy rates, private solar 2.5
penetration has been low. The Base forecast assumes that private
The High and Low forecast assumptions vary from the Base 300,000
1.5
assumptions in the adoption of electric vehicles (high penetration of
electric vehicles in the High forecast) and private solar generation 200,000
1.0
(high penetration of private solar generation in the Low forecast)
(see Figure 12). 100,000 0.5
1,000 1.2
1
Carbon pricing 750
0.8
This analysis does not explicitly use carbon price as an input to the 500 0.6
modeling, but rather assesses impacts to the Current Policies
0.4
scenario of achieving the CPP target and a 2 Celsius goal. 250
the implied cost of CO2 emissions may be greater than zero in the 0 0
2020 2030 2040 2050
CPP scenario.
By 2040, emissions are reduced by 15 to 85 percent in the Current for coal units. However, should coal units operate longer than
Policies scenario, depending on operating life assumptions. By 2050, 55-years and a regulation like the CPP is enacted with compliance
this range increases to 45 to 90 percent as virtually all existing coal by 2030, then some coal units that would naturally have retired after
units will have been retired per the operating life assumptions. 2030 would likely need to be retired in the 2020s. While the genera-
Prior to 2040, the CO2 reductions under the Current Policies scenario tion mix by 2050 is largely the same regardless of assumed
may not be in compliance with the CPP target. To comply with CO2 operating life, a 65-year operating life assumption does lead to more
targets in the CPP scenario, some portion of coal retirements coal generation in the 2040s as compared to the 55-year operating
otherwise expected in the 2030s would have to be accelerated to the life assumption, regardless of the climate scenario.
late 2020s. For the 2 Celsius scenario, absent regulations like the The Current Policies scenario shows that CO2 emissions would
CPP, the same level of reductions would occur as under the Current decline dramatically by 2050 as aging coal units are retired.
Policies scenario, but with an assumed goal to achieve a 50 percent It is not a matter of if emissions will decline, but when the
reduction by 2050. Achieving this goal is slightly more challenging reductions will occur and by how much. Only minor changes to PPLs
with a 65-year operating life for the existing coal units, absent a Current Policies generation portfolio are required to meet the CPP
greater share of renewables (private or universal) relative to gas and emission reductions by 2030 with further reductions occurring
lower electric vehicle penetration. consistent with the Current Policies scenario. The assumed goal
Figure 18 summarizes PPLs potential Kentucky segment generation contemplated in the 2 Celsius scenario of a 50 percent reduction in
mix by decade under the three climate scenarios analyzed. It shows CO2 emissions from 2005 levels by 2050 would not cause a material
that there will be little difference in the future energy generation mix change in PPLs future generation investments.
among the three climate scenarios assuming a 55-year operating life
As demonstrated by PPLs scenario analysis, meeting a 2 Celsius Further, under current conditions and without a regulatory
reduction scenario by 2050 would not cause a material change in requirement to reduce CO2 emissions, PPL believes adding
PPLs Kentucky generation capital plans. Public policy engagement renewable energy simply to replace existing coal would not
and continued long-range planning will enable us to respond meet the KPSCs lowest reasonable cost standard and could risk
effectively to changes in policy, regulation and technology adoption. disallowance of cost recovery and returns, because the marginal
cost of LG&Es and KUs existing generation portfolio is much lower
We expect that PPL will have minimal financial risk associated than the current levelized cost of building new wind or solar
with continuing to operate its existing coal units so long as those generation (see Figure 9 on page 7). This limits the potential
operations are consistent with approved regulatory frameworks near-term reduction of CO2 emissions.
and are economically justifiable to Kentucky regulators.
PPL regularly assesses risks and opportunities associated with
The scenario analysis shows that CO2 emissions in Kentucky are climate change through enterprise risk management and long-range
expected to decline dramatically by 2050 as aging coal units are planning activities. The company is effectively managing the risks of
retired due to economics or government policies and replaced with a climate change across its operations and will remain proactive in
mix of renewable and natural gas generation. This is true even identifying and seizing prudent opportunities.
without new climate policies. Ultimately, the future generation mix
will depend upon customers energy needs while at the same time Finally, PPL will continue to take steps to advance a cleaner energy
meeting regulatory requirements. future and build tomorrows energy infrastructure. This includes
using innovative ways to connect more private solar or other
CO2 reductions by 2030, meanwhile, are expected to be limited renewable generation to delivery networks; exploring emerging
absent new carbon regulations, coal economics or other regulations technologies; building a stronger, smarter, more resilient grid;
impacting the cost of existing coal-fired generation. Under the Base improving power plant efficiency; and helping customers save
and Low forecasts, absent coal unit retirements, PPLs Kentucky energy. Details are included in PPLs Sustainability Report at
segment does not envision a need to add new generating capacity www.pplsustainability.com.
for the foreseeable future. Additional climate policies may
accelerate reductions.
PPL Corporation believes that the forward-looking statements in this assessment reflect reasonable expectations and assumptions. However, it is important to
understand that forward-looking statements, and their underlying assumptions, are subject to a wide range of risks and uncertainties, both known and unknown. Any
number of factors could cause actual results to be materially different from those discussed in the statements, including: market demand for energy in our service
territories; weather or other conditions affecting customer energy usage and operating costs; the effect of any business or industry restructuring; the profitability and
liquidity of PPL Corporation and its subsidiaries; operating performance of its facilities; environmental, legal and regulatory requirements and the related costs of
compliance; development of new projects, markets and technologies for the generation and delivery of electricity; performance of new ventures; asset or business
acquisitions and dispositions; receipt of necessary government permits, approvals, rate relief and regulatory cost recovery; capital market conditions and decisions
regarding capital structure; the outcome of litigation against PPL Corporation and its subsidiaries; the securities and credit ratings of PPL Corporation and its
subsidiaries; political, regulatory or economic conditions in states, regions or countries where PPL Corporation or its subsidiaries conduct business; new state, federal
or foreign legislation; commitments and liabilities of PPL Corporation and its subsidiaries; and catastrophic events such as fires, earthquakes, explosions, floods,
hurricanes and other storms, droughts or other similar occurrences as well as cyber intrusion or other terrorist incidents and their direct or indirect effect on PPL
Corporations businesses and the U.S. or U.K. electricity grids. All forward-looking statements in this assessment should be considered in light of these important
factors. Further information on these and other risks and uncertainties is available in PPL Corporations Form 10-K and other reports on file with the Securities and
Exchange Commission.