HomeMy WebLinkAbout03.b. Purchase Natural Gas through (E) agreement with Shell Energy North America, LP - 1/1/25 to 12/31/25Page 1 of 2
Item 3.b.
DCENTRALSAN
MEETINGDATE: JULY10,2023
BOARD OF DIRECTORS
POSITION PAPER
DRAFT
SUBJECT: REVIEW DRAFT POSITION PAPER AND 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, 2025 THROUGH DECEMBER 31, 2025, UP TO
1,200 DEKATHERMS PER DAYATA PRICE NOT TO EXCEED $7.00 PER
DEKATHERM, EXCLUDING TRANSPORTATION SERVICE COSTS
SUBMITTED BY: INITIATING DEPARTMENT:
CLINT SHI MA, SENIOR ENGINEER OPERATIONS -PLANT OPERATIONS
REVIEWED BY: NEIL MEYER, PROVISIONAL DIRECTOR OF OPERATIONS
GREG NORBY, DEPUTY GENERAL MANAGER
ISSUE
Board of Directors' (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 Central San's Strategic Plan, specifically Goal No. 4, for governance
and fiscal responsibility, Strategy 3 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 (PG&E) imported electrical power.
I n 2022 when NG prices remained below about $11.47/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.
July 10, 2023 EOPS Regular Committee Meeting Agenda Packet - Page 10 of 45
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Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. For 2023,
staff purchased 999 dth per day at an average Citygate price of $6.43/dth. The remaining amount is
purchased during the month or at the end of the month at market price.
NG prices increased dramatically after Russia invaded Ukraine in February 2022 and has not decreased
significantly. The Nymex price for NG is at notably low levels, however PG&E Citygate rates have
remained elevated.
If the average spot market price of NG remains at or near $7.00/dth, Central San's average burner tip
price for NG for Fiscal Year 2022-23 will be approximately $9.70/dth for a total expenditure, including the
added cost of transportation ($2.72/dth) of approximately $4,000,000. This compares to the current year
budget for NG purchases of $3,000,000 or a potential adverse variance of $1,000,000. 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 ensure Central San against an upside cost; there is a market risk if prices go down, but staff
believes the downside 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, 2025
through December 31, 2025 at a price not -to -exceed $7.00/dth. By authorizing gas purchases through
2025, 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 Cogeneration (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.
COMMITTEE RECOMMENDATION
The Engineering and Operations Committee reviewed this item at its July 10, 2023 meeting and
recommended
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, 2025 through December 31, 2025, up to 1,200/dth
per day at a price not to exceed $7.00/dth, excluding transportation service costs.
Strategic Plan Tie -In
GOAL FOUR: Governance and Fiscal Responsibility
Strategy 3 - Maintain financial stability and sustainability
July 10, 2023 EOPS Regular Committee Meeting Agenda Packet - Page 11 of 45