Optimizing Your Competitivness with Fuel Switching

Utilization of your facilities’ capacity at the lowest possible cost for energy is obviously an important economic tool. The focus of fuel switching is the relationship between selecting your optimal energy source and not adding to the cost of production. It requires converting fuels priced in different units into energy expressed by a common unit of measure — the British Thermal Unit (Btu).

The main reasons for fuel switching are energy prices, loss of service from an operational flow order, and to reduce your carbon footprint by switching to a cleaner burning fuel such as natural gas. Fuel switching can also help maintain competitiveness. Your ability to switch fuels will work in your favor only when the conversion value between sources of energy is economically viable.

For example, let’s assume a facility manager can use electricity, natural gas, or heating oil to produce a product. As per the data below, Btu equivalent values are shown for electricity, heating oil, and natural gas. Low natural gas prices will place a ceiling on prices for other commodities, due to the ability for some to switch their energy source.

  • Natural gas last quoted @ $3.71 per MMBtu on 10/22/10 is the basis for comparison.
  • Electricity, last quoted @ $35.59 per MWh, has an equivalent Btu value of $10.40 per MMBtu (assuming average operating heat rate for Northeast region).
  • Heating Oil (HO), last quoted @ $2.27 per gallon, has an energy equivalent Btu value of $16.40 per MMBtu.

Responding to rising prices from one energy source by switching to another is most likely well rehearsed and determined by the fuel type at your facility. The current equivalent Btu value for gas is attractive and would influence the facility’s manager decision to switch, after consideration of all factors. In addition to price, your ability to switch may be limited by technical & practical considerations, such as:

  • Federal, state, and local environmental restrictions
  • Available supply and transportation of the alternate fuel
  • Prior commitments from your primary fuel source including gas-in-storage, transportation, capacity, transmission, etc.
  • Heat Rates associated with equipment efficiency in converting fuels to electricity

Manufacturers in the paper pulp or food industry with an alternative energy source may utilize low cost, non-fossil capacity. For example, the black liquor by-product from making paper is used as fuel to generate electricity, as is the heat needed to remove the water from pulp when making paper.

Newer waste-to-energy methods have the potential to achieve higher overall energy efficiency, while generating an energy-rich synthetic gas, or syngas from the liquor. Other manufacturers are developing facilities that will produce commercial-scale, syngas-to-ethanol/methanol as energy outputs. With these alternatives at the facility, managers would have the ability to further optimize their energy value, should an arbitrage opportunity present itself.

In previous articles, we addressed the ability to optimize and capture arbitrage opportunities with resources such as demand response and monitoring forward price curves for gas storage, basis, and electricity. Switching fuels when producing your products can be another important tool, as long as the price differentials between fuels is justifiable.