Washington (Platts)--25Feb2013/341 pm EST/2041 GMT

American Electric Power has agreed to stop burning coal at two power plants in Indiana and Ohio by 2015, and either retrofit, retire or refuel with natural gas another in Kentucky, under an agreement reached Monday with the US Environmental Protection Agency, eight states and 13 environmental groups.

AEP also committed to stronger sulfur dioxide emissions limits at 16 of its coal-fired power plants east of the Mississippi River, the development of 50 MW of wind or solar power this year and payment of millions of dollars to states and citizens groups for pollution mitigation efforts.

In exchange, AEP will be allowed to install cheaper sulfur dioxide control equipment at its power plant in Rockport, Indiana, under the agreement, which is an amendment of a settlement reached in 2007.

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While that will allow that plant to initially emit more SO2 than the 2007 settlement had prescribed, EPA, the states and environmental groups said the additional measures AEP has agreed to in Monday's deal would provide greater overall benefits.

"This agreement will not only cut pollution, it will fund the long term benefits of mitigation efforts that further clean our air and environment," said Faith Bugel, senior clean air attorney with the Environmental Law & Policy Center, which advised 11 of the environmental groups.

AEP, the nation's largest electricity provider, said it was pleased with the agreement, which it began negotiating last year. The utility generates about 66% of its electricity from coal, according to its website.

"AEP is pleased to have reached an agreement with all parties that modifies [the 2007] consent decree in a way that provides environmental improvements at several AEP plants at a lower cost for our customers," spokeswoman Melissa McHenry said in an email.

The agreement must still be approved by the US District Court for the Southern District of Ohio, after a 30-day public comment period.

Under the deal, AEP will retire or refuel with natural gas its Tanners Creek Unit 4 in Indiana and Muskingum River Unit 5 in Ohio, instead of retrofitting them with flue gas desulfurization to continue burning coal.

The company will also retrofit, retire, repower or refuel with natural gas its Big Sandy Unit 2 in Kentucky. It had sought approval in December 2012 from the Kentucky Public Service Commission to retire that unit.

Environmental groups, which included the Sierra Club and Natural Resources Defense Council, said those three coal-fired plants account for 2,011 MW of generation, and their retirements would remove almost 12 million tons of carbon emissions and 84,000 tons of SO2 annually.

AEP SEES DEAL TRACKING MERCURY AND AIR TOXICS RULE

Meanwhile, AEP will save more than $1 billion from installing dry sorbent injection technology on its Rockport plant, instead of the previously required flue gas desulfurization technology, which the company said would cost five times as much.

AEP will be required to either retire the two units at Rockport in 2025 and 2028, respectively, or install additional pollution controls that will remove at least 98% of the SO2 at those units.

As for the other 16 coal-fired units covered in the agreement, AEP and its subsidiaries must reduce their total SO2 emissions by 90% by 2029, a far more aggressive pace than in the original settlement. By 2029, SEP will be allowed to emit only 94,000 tons of SO2 per year from its eastern power plants, down from 828,000 tons annually before 2007.

AEP said the SO2 reductions track what it expected to achieve with its compliance plan for EPA's Mercury and Air Toxics rule, which is scheduled to go into effect in 2015.

AEP will commit to developing 50 MW of wind or solar power in Indiana or Michigan this year, and 150 MW by 2015. And it will provide a total of $6 million to Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont for additional air pollution mitigation efforts, and $2.5 million to environmental groups in Indiana for other clean-energy and energy-efficiency projects.

"Coal-fired power plants make the largest contribution to air pollution in New York's skies," New York Attorney General Eric Schneiderman said in a statement. "Updating our settlement with the nation's largest power company will allow us to gain quicker and deeper cuts in their air pollution emissions, while providing more than $700,000 in additional funding to combat pollution in our state."

The original 2007 settlement came after eight years of litigation, in which the EPA, states and environmental groups alleged that AEP had violated New Source Review provisions of the Clean Air Act.

In the settlement, AEP agreed to lower SO2 emissions to 450,000 tons annually by 2010 for its 16 coal-fired power plants in Indiana, Kentucky, Ohio, Virginia and West Virginia, and install selective catalytic reduction and flue gas desulfurization emissions control equipment on its two units in Rockport.

AEP also agreed to pay $24 million to states and $36 million to the federal government for environmental mitigation, and pay a civil penalty of $15 million.

--Herman Wang, herman_wang@platts.com
--Edited by Katharine Fraser, katharine_fraser@platts.com

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