New Analytic Tool - Understanding & Managing Fuel Procurement Risks for Natural Gas Fired Power Plants
For the first time in 2015 natural gas fired power generation equaled that from coal fired power plants. Natural gas fired generation accounted for electric sales of approximately 135 million mWh per month. In 2016 gas fired power plants have been consuming about 25 billion cubic feet of gas per day. Gas generation is significant in all regions of the country.
Companies with gas fired combined cycle plants face fuel management challenges that are very different than those associated with oil and coal fired generation. These challenges are because of three uncertainties - fuel burn at the plant, natural gas prices and deliverability of the gas pipeline system.
The Analytic Tool
We have developed a transparent and easily modified analytic framework that companies can use to:
- understand the importance of uncertain demand, price and pipeline deliverability in the context of their specific supply and demand situation
- manage the risks associated with the uncertainties through fuel and pipeline contract arrangements, spot purchases and fuel inventories.
The framework allows explicit characterization of potential demand, price and deliverability variation. It has flexibility to structure detailed contract terms, inventory levels and spot purchase options.
The benefits of using the framework are:
- lower long run average fuel procurement cost through execution of a quantified, transparent and justifiable gas supply strategy,
- greater ability to anticipate and mitigate fuel and electricity markets risks, and
- insights into the costs, risks and benefits of gas supply and generation decisions, including hedging activities, investments in storage, and long term fixed price contracts
The framework is a tool for making better gas supply decisions. The system is designed to help identify a set of planning / procurement decisions that include gas contracts, nominations, and pipe line firm capacity in the context of and that respond to uncertain demand and NG prices.
The objective is to minimize costs and/or maximize net operating revenue but also to shed light on levels of risk - e.g., some may prefer a slightly higher cost but with less risk.
Summary Technical Details
We have a working analytic framework that is implemented in DPL (Decision Programming Language) Integrated with an Excel spreadsheet for ease of data entry. The tool can be easily and inexpensively modified to meet the needs of individual situations.
The current implementation includes uncertain Demand, Natural Gas Prices and Pipeline Deliverability. It allows Contract Nominations, firm pipeline capacity, Spot Purchases and Fuel inventory. It produces probability distributions on operating costs and operating revenues.
Below is a summary diagram that illustrates the elements of the approach as implemented in DPL:
If you are interested in learning more about the tool and perhaps leaning how you might apply it to your gas procurement decision making, you can contact either of us