HomeMy WebLinkAbout05. (Continued) Authorize the purchase of Natural Gas through an existing agreement with Shell Energy North America Page 1 of 3
Item 5.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
MEETING DATE: DECEMBER 2, 2021
SUBJECT: AUTHORIZE THE GENERAL MANAGER TO PURCHASE NATURAL GAS
THROUGH AN EXISTING SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2022 THROUGH
DECEMBER 31, 2024, UP TO 1,200 DEKATHERMS PER DAYATA PRICE
NOT TO EXCEED $7.00 PER DEKATHERM, EXCLUDING
TRANSPORTATION SERVICE COSTS [CONTINUED FROMNOVEMBER
18, 2021 MEETING]
SUBMITTED BY: INITIATING DEPARTMENT:
CLI NTSHIMA, SENIOR ENGINEER OPERATIONS-RELIABILITYENG INEERING
REVIEWED BY: NEIL MEYER, PLANT MAINTENANCE DIVISION MANAGER
STEVE MCDONALD, DIRECTOR OF OPERATIONS
Roger S. Bailey
General Manager
ISSUE
Board authorization is requested for the General Manager to agree to purchase natural gas (NG).
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 decatherms (dth) of NG annually (or roughly 1,200 dth per day)
for the Treatment Plant's Cogeneration System and as backup 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, and is operated to stay below the 25,000 metric tons carbon dioxide equivalent
greenhouse gas threshold to avoid mandatory offsets. This is accomplished by monitoring fuel use and
adjusting the input of Pacific Gas and Electric's imported electrical power.
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For 2021 when NG prices stay below about$8.90/dth, which includes transportation, continuing to
generate electrical power for the Treatment Plant is a cost benefit to Central San. The breakeven cost
constantly fluctuates based on plant load and utility rate schedules. The monthly average breakeven cost is
posted in the quarterly energy usage reports. Staff targets NG purchases to remain below the breakeven
cost.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. For 2021,
staff had purchased 666 dth per day at an average Citygate price of$3.06/dth. The remaining amount is
purchased during the month, or at the end of the month at market price.
In 2019 and 2020, the Board authorized the General Manager to agree to purchase NG through 2021 and
2022 at a price not to exceed $4.00/dth. However, during 2021 forward NG strip prices have been just
over$4.00/dth and has 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 exports and prices as the world economies begin to emerge from the pandemic.
If the spot market price of NG remains at current levels, Central San's average burner tip price for NG for
Fiscal Year(FY) 2021-22 will be approximately$7.94/dth for a total expenditure of approximately
$3,500,000, including the added cost of transportation (estimated using 666 dth/day average at Citygate
prices of$3.06 for 2021, with the remainder being purchased on the spot market). This compares to the
current year budget for natural gas purchases of$2,500,000, or a potential adverse variance of
$1,000,000. However, staff is not forecasting an adverse variance at this time. Spot prices are likely to
fluctuate; staff is not anticipating purchasing all of the District's needs on the forward market and it is
premature to make a firm cost projection for the fiscal year. If elevated prices continue, Operations
expects to be able to offset adverse variances from this expenditure with reductions elsewhere.
Pre-purchasing 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 risk if prices go down, but staff
believes the down side benefit 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 January 1, 2022
through December 31, 2024 at a price not-to-exceed $7.00/dth. By authorizing gas purchases through
2024, 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 apprised of NG
purchases.
ALTERNATIVES/CONSIDERATIONS
1. Central San could purchase all NG at market price on the spot market. (Not recommended)
2. Central San could pre-purchase up to three years in advance and save costs as long as the pre-
purchase price is less than the breakeven price for electricity using Co-Generation. (Recommended)
FINANCIAL IMPACTS
Purchasing NG each month at the spot market price presents a risk of market price volatility and excessive
Central San expenditures. Based on past experience, pre-purchasing NG can result in significant cost
savings.
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COMMITTEE RECOMMENDATION
The Engineering and Operations Committee reviewed this item at its November 9, 2021 meeting and
recommended Board approval.
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 January 1, 2022 through December 31, 2024, up to 1,200
dekatherms per day at a price not to exceed $7.00 per dekatherm, excluding transportation service costs.
Strategic Plan Tie-In
GOAL THREE:Fiscal Responsibility
Strategy 1—Maintain financial stability and sustainability
December 2, 2021 Regular Board Meeting Agenda Packet- Page 58 of 176