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Potential Cost Savings from Active Management of Fuel Inventories

Research during the late 1980’s found that significant fuel inventory cost savings could be realized from active management of fuel inventories -- "Applications to date have saved from 0.5 percent to 2.0 percent of a utility's fuel bill" (EPRI Reduces Fuel Inventory Costs In the Electric Utility Industry, INTERFACES, Vol. 19, Jan. – Feb. 1989, page 64).

My recent calculations indicate that potential savings are still in the range of 0.5 to 2 percent. Based on EIA data coal inventories at US power plants are currently approximately 68 days on average:

Electric Power Sector Data - from EIA

  1. US Coal Consumption 2012 (short tons) = 825,000,000
  2. US Coal Inventories end of Aug 2013 (short tons) = 156,000,000
  3. Avg. Consumption per Day (A/360) = 2,291,667
  4. Days of Inventory (B/C) = 68.07

Suppose, through active management of fuel inventories, the risks associated with variations in fuel burn and fuel delivery could be managed with a reduction in inventories to 30 days.

  • This would result in a one-time saving equal to about 10 ½ percent of annual fuel costs (68 – 30) / 360.
  • This one-time savings is on the order of four plus billion dollars.

However A more accurate reflection of savings is a comparison of the annual savings in inventory holding costs versus the annual cost for fuel consumption.

  • The holding cost savings due to reducing fuel inventories by 38 days is the percent savings in the cost of the fuel held in inventories (about 10 ½ percent of annual fuel consumption) times the annual percent holding costs.
  • If fuel holding costs are about 12 percent, the estimated annual savings relative to fuel consumption costs would be 1.25 percent (.105 x .12 x 100), or about $480 million per year.

This is not a big savings in comparison to the annual cost of fuel. However for merchant plant operations, the savings would flow directly to the bottom line and would provide a significant increase in ROI. For example if a company is earning 7 percent above variable costs, the ROI would increase from 7 to 8 percent due to a reduction of 1 percent in operating costs.

A final comment on the value of using UFIM to actively manage fuel inventories: it is straightforward to estimate the saving in holding costs from reducing fuel held in inventories. The real benefit of UFIM is, for a given inventory level, it allows explicit analysis of the (1) risks associated with specific variations in fuel burn (2) the risks associated with specific potential disruptions in fuel deliveries and (3) the risks associated with changing system and market conditions that impact the dispatch of power plants.

UFIM is a tool for identifying, analyzing and quantifying the risks power companies face under various fuel inventory policies.