HomeMy WebLinkAbout04.a. Review draft Position Paper to authorize the General Manager to purchase natural gas through an existing service agreement with Shell Energy North America, LP, for the period of December 1, 2021, through December 31, 2023, up to 1,000 decatherms pePage 1 of 3
Item 4.a.
DCENTRALSAN
MEETING DATE: NOVEMBER 9, 2021
BOARD OF DIRECTORS
POSITION PAPER
DRAFT
SUBJECT: REVIEW DRAFT POSITION PAPER TO AUTHORIZE THE GENERAL
MANAGER TO PURCHASE NATURAL GAS THROUGH AN EXISTING
SERVICE AGREEMENT WITH SHELL ENERGY NORTH AMERICA, LP, FOR
THE PERIOD OF DECEMBER 1, 2021, THROUGH DECEMBER 31, 2023, UP
TO 1,000 DECATHERMS PER DAYATA PRICE NOT TO EXCEED $8.00 PER
DECATHERM, EXCLUDING TRANSPORTATION SERVICE COSTS
SUBMITTED BY: INITIATING DEPARTMENT:
CLINTSHIMA, SENIOR ENGINEER OPERATIONS-RELIABILITYENGINEERING
REVIEWED BY: NEIL MEYER, PLANT MAINTENANCE SUPERINTENDENT
STEVE MCDONALD, DIRECTOR OF OPERATIONS
ISSUE
Board authorization is requested for the General Manager authority to purchase natural gas (NG) futures
contracts to hedge against excessive future NG price increases.
BACKGROUND
This recommended action aligns with the Central San's Strategic Plan, specifically Goal No. 3, to be
fiscally responsible, and Strategy 1 to maintain financial stability and sustainability.
Central San uses approximately 430,000 dekatherms (dth) of NG annually (or roughly 1,200 dth per day)
for the Treatment Plant's Cogeneration System and as supplemental fuel to landfill gas in the multiple -
hearth furnaces and auxiliary steam boilers. The Cogeneration System consumes approximately 80
percent of Central San's NG usage.
The Cogeneration System is operated to stay under the 25,000 metric tons carbon dioxide equivalent
greenhouse gas threshold to avoid mandatory offsets and associated costs. This is accomplished by
monitoring Cogeneration System emissions and increasing the use of Pacific Gas and Electric's imported
electrical power as needed.
Based on todays' costs, the breakeven for using NG in the Cogeneration System to make electricity
compared to purchase of electricity from PGE is $8.90/dth. Therefore, at a NG price under $8.90/dth it is
less expensive to run the Cogeneration System to make electricity than to purchase electricity from PGE.
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If prices keep increasing, staff will evaluate whether operating the cogeneration system remains a benefit
to Central San. The steam produced by Cogeneration System is also needed to drive the aeration blower
system, so replacement steam would need to be generated by the auxiliary boilers.
Typically, Central San agrees to purchase in advance (to buy futures contracts) for approximately 1,000 dth
per day of NG. For 2021, staff purchased 666 dth per day at an average Citygate (spot) price of $3.06/dth.
The remaining amount of NG needed is purchased during the month, or at the end of the month at the spot
market price.
In 2019 and 2020, the Board authorized the General Manager to purchase NG future contracts through
2021 and 2022 at a price not to exceed $4.00/dth. During 2021 the NG Futures Strip (12 months average)
prices have averaged just over $4.00/dth, but have recently risen to over $7.00/dth.
Nationally, NG prices have increased due to inventory levels below the five-year average and strong
demand despite higher costs. Other factors include decreased NG production, Hurricane Ida disrupting
NG in the Gulf of Mexico, and record liquefied natural gas (LNG) exports and prices as the world
economies begin to emerge from the pandemic.
If the spot market price of NG remains at or near $7.00/dth, Central San's average Burner Tip price for
NG for Fiscal Year (FY) 2021-22 is estimated to be approximately $8.00/dth including the wheeling cost of
($2.16/dth), for a total cost of approximately $3,500,000. The FY 2021-22 budget for NG is $2,200,000.
Forward NG prices normally include a premium and are not as greatly affected by short-term price
changes. Current pricing for one-year strips of NG for 2022 is approximately $5.95/dth and for 2023 is
approximately $4.86/dth. Central San has not yet made nominations for calendar year 2022. NG prices
tend to be lower during the shoulder seasons of spring and fall, but generally increase in winter.
Pre -purchasing using Natural Gas Futures contracts allows staff the flexibility to continue to respond to
market changes. Locking in a fixed price for NG can insure Central San against an upside cost. There is a
market opportunity cost if prices go down, but staff believes the down side cost is less than the upside risk.
Accordingly, staff recommends Board authorization to allow the General Manager to agree to purchase
NG for the period of December 1, 2021 through December 31, 2023 at a price not -to -exceed $8.00/dth.
By authorizing gas purchases through 2023, Central San will be able to take advantage of future favorable
pricing changes, thus stabilizing the energy budget for the next three fiscal years. The General Manager
will keep the Board appraised of NG purchases.
ALTERNATIVES/CONSIDERATIONS
1. Central San proceeds to purchase all NG at market spot prices each month (or other frequency).
2. Central San pre -purchases NG using Natural Gas Futures contracts for up to —80% of NG consumption
at a price not -to -exceed $8.00/dth.
FINANCIAL IMPACTS
Purchasing NG each month at spot market prices presents a risk of market price volatility and excessive
Central San expenditures for NG. Based on past experience, pre -purchasing NG can result in significant
cost savings.
COMMITTEE RECOMMENDATION
The Engineering and Operations Committee reviewed this matter at its November 9, 2021 meeting and
recommended
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RECOMMENDED BOARD ACTION
Authorize the General Manager to purchase natural gas through an existing service agreement with Shell
Energy North America, LP, for the period of December 1, 2021, through December 31, 2023, up to 1,000
decatherms per day at a price not to exceed $8.00 per decatherm, excluding transportation service costs.
Strategic Plan re -In
GOAL THREE: Fiscal Responsibility
Strategy 1— Maintain financial stability and sustainability
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