Paul W.

Thompson Remarks Panel Discussion: Greenhouse Gas Regulation and the Impact on Kentuckys Power Supply Kentucky Energy Management Conference 12/17/13

Good afternoon. As chief operations officer for Kentuckys two largest utilities, much of whose generation is coal-fired, I am concerned about the substantial risks that the proposed greenhouse gas regulations create for our customers and Kentuckys economy. As always, our goal is to provide safe and reliable energy in an environmentally responsible manner at the lowest cost. However, the more stringent, federal environmental regulations under the Clean Air Act that begin taking effect in 2015 are already placing financial pressures on our consumers and impacting Kentuckys key economic advantage for bringing industry and jobs to the commonwealth. As a result of those stricter regulations, we are retiring 13 percent of our coal-fired units, investing $3 billion in upgrades to the remaining coal-fired generating units and building Kentuckys first natural gas combined-cycle generating unit. This investment in cleaner generation and emission control exceeds any other construction phase in our companys history. The important thing to note with these investments, though, is there were proven technology options available to consider. For example, it was economical to retrofit some plants with newer emission controls and retire three coal-fired plants in lieu of retrofitting. We were able to study our options and take a least-cost approach that also helped diversify our fuel mix. That is not the situation with the upcoming proposal for greenhouse gas regulations on existing units. Today there are no emission control options because there simply is no viable technology to costeffectively capture and store carbon emissions. Not by a long shot. Critics will argue that carbon capture and storage technology is available. As a past chairman of the FutureGen Alliance, a carbon capture and storage project, I am very familiar with the research in this area. Technology is not available. While small-scale individual components involved in capturing and storing carbon do exist, they have not been deployed on any coal-fired plant like those we operate in Kentucky. Technology is developing, but very slowly. For example, integrated gasification combined-cycle units, better known as IGCCs, gasify coal so carbon can be captured more economically. One such unit with partial carbon capture and partial storage is under construction in Mississippi; but typical of these types of experimental projects, it is substantially over-budget. And we dont know yet how well it will work. 1

LG&E and KU are supporting capture research for potential application at existing units. In fact, we have long partnered with the University of Kentuckys Center for Applied Energy Research and are currently working jointly on a very small-scale project to test post-combustion capture technologies at our Brown Generating Station. But, remember, if captured it has to be stored somewhere, and storing carbon dioxide underground has simply not been proven feasible in much of the U.S. And the volumes would boggle your mind. So, despite telling you clearly there are no GHG technology options for coal, LG&E and KU still do not oppose thoughtful and achievable carbon regulations. Some of you may recall, from four years ago, during the carbon legislation debate in Washington D.C., that we provided policymakers a set of tenets for responsible legislation. Why are thoughtful regulations critical? Start with economics. Kentucky has been fortunate with our proximity to affordable coal that helps us provide low-cost energy. As a result, manufacturing businesses like Toyota, North American Stainless, Ford and UPS have located and expanded in Kentucky. Manufacturing is the lifeblood of the commonwealths economy and, if high energy costs drive those businesses elsewhere, Kentucky stands to lose thousands of manufacturing jobs, a multitude more support jobs and businesses, and millions of tax dollars. The small mom-and-pop shops will find it increasingly difficult to survive, and yet another strain will be placed on the wallets of the residential customers. This is why it is crucial that EPA gets this regulation right. LG&E and KU have a long history of environmental stewardship. We understand the need for environmental improvements. But let me say here today, the regulations must be reasonable; allow time for proven commercially available technology to develop; have fact-based achievable targets; and must consider the financial burden placed on the consumer. In todays global economy, Kentucky and the U.S. are competing internationally for jobs. If utilities must meet these targets without a measured approach, the cost pressures are going to force manufacturers to move their businesses to other countries, and those jobs may never return. Maintaining a diverse fuel mix helps ensure long-term reliability and lowers costs and risks to the consumer. Eliminating coal from the mix would drive the industry to depend primarily on natural gas for future baseload generation needs. If policymakers and regulators establish unreasonable regulations, it will lead industry toward over-dependence on a single fuel source. Its a risky approach that could have serious consequences for electricity prices and reliability. We wholeheartedly agree with Dr. Peters that the proposed carbon regulations are going to have a disproportionate impact on Kentucky and other manufacturing states. We also agree that states must have the flexibility to develop a plan to meet the regulations, while tailored to the specific state needs. Kentuckys natural resource is coal its not blessed with an abundance of sun or wind that can meet 2

energy demands reliably around the clock. The proposed regulations should allow Kentucky to appropriately capitalize on our resources. Nuclearfueled power generation is an electricity supply option that produces no greenhouse gas, but it is currently not allowed in Kentucky. If state law were to change, we would consider the costs, benefits and other customer impacts of nuclear generation in our fleet. However, nuclear is expensive to develop and maintain, and it takes at least 20 years to license, permit and build a new nuclear site. The upcoming carbon regulations could take effect in less than seven years. Again, thoughtful regulation is a must. Becoming more energy efficient, when it is economical, is a mother-and-apple-pie goal everyone should be doing. But the issue with energy efficiency relative to GHG regulations is that its challenging to measure and quantify. It will be difficult to apply under regulations yet to be seen for existing generating units. So with energy efficiency, I would point out that regulations need to be thoughtful with intended consequences, not structured so as to create a game with serious unintended consequences. Okay, lets see where we are today in Kentucky with the impacts of regulations put into effect during the last several years. Given the current air regulations on new generating facilities, its impossible to permit and build new coal-fired generation. Coal mines across Kentucky have started to evaporate. At the recent SOAR conference in Pikeville, Ky., Congressman Hal Rogers and Governor Steve Beshear addressed the challenges that the permanent loss of mining jobs is already having on eastern Kentucky. Unfortunately, I review this for you to emphasize that regulations in the energy and environmental sector do have substantive economic impact. To the detriment of coal but to comply with regulations, we have recently announced plans to seek approval to build a second NGCC at our Green River site in western Kentucky to meet the energy needs of our customers. To recap my thoughts for you, we are already spending $3 billion in environmental upgrades on existing coal-fired units, but once greenhouse gas regulations are proposed and finalized for existing generating units, electric rates will likely increase again. LG&E and KU have more than 5,000 megawatts of coal-fired energy at risk. That coal-fired generation fleet has a life expectancy of 20 to 40 more years20 to 40 more years of reliable, affordable generation assuming the EPA decides to regulate reasonably. Whatever the outcome, we will comply in the best least-cost manner we can find. But remember, compliance may come at a substantial cost to the nation and Kentuckians. I urge the EPA to consider the additional financial burdens on consumers; the economic impacts on much of the U.S., particularly manufacturing states; and the potential of forced reliance on a single fuel source. Furthermore, the EPA must give the states and utilities time to develop and implement compliance plans to reduce greenhouse gas emissions; and afford the individual states the flexibility to develop plans that will meet their specific circumstances. Thank you. 3