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Fuel optimization based on the market cost and contracts arranged
MULTIPLE FUEL COSTS OPTIMIZATION STRATEGIES
IN RESPONSE TO SKYROCKETING GAS COSTS
by Henry Manczyk, CPE, CEM
Director of Facilities Management, Monroe County, New York
Natural gas has become the fuel of choice for convenience, favorable price, and clean and efficient operation. On July 17, 2000, the average spot market prices of this key fuel were $4.63 per 1000 cubic feet, nearly double the price from a year before. By December 27th the price had risen to a record high of $10.10 per 1000 cubic feet, approximately four times the price of a year before. The current spot market price is $5.41 (February 20, 2001), illustrating the continuing volatility of natural gas prices. What has happened to cause these skyrocketing prices? How can a strategy of using multiple fuels help facility operators?
Natural Gas Price Increases
A variety of events have happened in our economy at large and in the energy sector itself that contributed to these price increases. For example:
Production has declined since 1997 because relatively low gas prices have provided little incentive for producers to drill;
Concern has grown nationwide over low gas storage levels, down 14% from the five-year average.
Many industries are using more natural gas as a result of higher fuel oil prices.
More natural gas-fired electric generation plants are being built, 3% over 1999.
The weather has been unusually cold in comparison to the last three years.
The strong United States economy of the past 7-8 years has increased the demand for all forms of energy, particularly in the industrial sector, which consumes about 40% of natural gas used in the US.
The rising US demand for natural gas, lower-than-normal gasoline and heating fuel oil inventories, OPEC production policies, volatile world oil markets, and other recent events have combined to push up current fuel prices and make predictions of future prices more uncertain.
Multiple Fuel Optimization
In the face of fluctuating fuel prices and uncertain supply, a strategy of using multiple fuels such as natural gas, fuel oil, and coal can help a facility operator ensure the ability of the facility to meet its users’ needs.
Multiple fuel users are plants that can switch their operations from natural gas to fuel oil or coal for a certain number of days per year. A multiple fuel plant can minimize its costs by constantly monitoring the gas and oil markets and the prices it pays to see when to switch to a less expensive fuel or when to lock in the lowest available fuel cost.
The accompanying chart show cost curves for different fuels based on a range of prices. Given a specific price for natural gas, one can determine whether the price of coal or fuel oil would make one of these fuels a less expensive choice. The Fuel Optimization Chart was constructed based on the cost of producing a thousand pounds of steam with different fuels during the month of February 2001 in the northeast region of the US. It was based on a price of $12.28 per thousand pounds of steam for natural gas; $11.32/M-lbs for fuel oil #2; $9.07/M-lbs for fuel oil #6; and $3.82/M-lbs for coal.
Coal continues to be a viable fuel option, providing that its heating value content is high and the SO2 is low. It is commonly available and can be friendly to the environment if utilized properly. In Central and Eastern Europe "clean coal" technologies have permitted upgrades and environmentally sound use of existing facilities. These include coal desulphurization, flue gas scrubbers, atmospheric and pressurized fluidized bed combustion boilers, low NOx emission burners, and electrostatic precipitators
Environmental regulations and operating permit requirements must be considered in the fuel optimization strategy. The costs and penalties of exceeding permit thresholds can offset fuel price savings. Use of coal, for instance, might be practical during high boiler load periods when the system works at highest efficiency, but undesirable when low loads result in excessive particulate emissions. Likewise, the choice of which boiler to operate might depend on the size of the boiler and its efficiency given the load at a particular time of day.
Strategies to contain overall costs
"Tried and true" cost management methods remain appropriate and valuable. We cannot control the weather or the cost of fuels, but we can take steps to stop heat loss and use energy wisely.
Energy Conservation
Facility users can turn off lights and office equipment during unoccupied periods; discontinue the use of personal or room electric heaters whenever practical; and keep maintenance staff advised of any energy inefficiencies.
Facility operators and maintenance staff should maintain all building systems, HVAC equipment and lighting systems at maximum efficiency; cycle off systems during non-operational hours; and replace older equipment with energy-efficient equipment.
Supply and storage strategies
The facility operator should secure long range contracts for various fuels. This helps avoid spikes in spot market prices when demand is high and supply is scarce. On-site storage for fuel oil or coal should be sufficient to avoid the need for re-supply during extended cold spells or unforeseen interruptions.
Plant management should also secure a reliable contractor that delivers fuels on time and at the quantity and quality specified in the contract. The natural gas supply contract should guarantee an uninterruptible supply for the facility’s base demand for natural gas; the balance of demand would be filled by an interruptible supply that is supplemented by the facility’s multiple fuel capability.
Capital improvements
When an operator has the opportunity to upgrade or replace facilities, multiple fuel optimization should be included in the planning. Primary boilers should be sized to meet seasonal base loads, with supplemental boilers sized to meet variable loads. Each should have multiple fuel capability. On-site storage of fuel oil and coal should be sized to reduce the facility’s vulnerability to spot market price fluctuations of natural gas and fuel oil.
Conclusion
Energy competition brings price volatility. If you depend on a single fuel for heating or power generation, you risk losing competitive advantage. The ability to use multiple fuels gives the facility operator greater flexibility to contain costs. Multiple fuel optimization is a strategic tool to maintain your competitive edge.
References:
Rising Fuel Costs Impact U.S. Households, Alliance to Save Energy. www.ase.org/energyprices/risingfuelcosts.htm
"Iola Powerhouse: Monroe County Optimizes Fuel-Use Strategies," Henry Manczyk and Michael Leach. District Heating and Cooling Magazine, 2nd Quarter 1991. www.energy.rochester.edu/idea/de/1991/iola.htm
The Cost of Natural Gas:What to Expect,Yankeegas, The Northeast Utilities System. www.yankeegas.com/ygas/pricesupplyfaq.html
Central Plant Optimization: Are the Keys to Success inside your own Facilities? ConEdison Solutions. www.ConEdSolutions.com
Update on Natural Gas Prices, TXU Electric and Gas. www.txu.com/e&g/natgasupdate.asp
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