Black & Veatch: Integrated Fuel Source Modelling for Constellation Energy

By April Anderson
Black & Veatch Corporation

In today's competitive and dynamic energy marketplace, the ability to efficiently construct and apply plans for fuel supply, environmental compliance and capital expenditure is particularly challenging. Plant capital expenditure must be carefully weighed considering downstream financial benefits: including capacity, reliability, and life expectancy. In addition, increasing environmental pressures and recently passed legislation (at federal, state, or local levels) to address clean air, water and public health are further stressing plant capital budgets as Selective Catalytic Reduction (SCR), Flue Gas Desulfurization (FGD), and other improvement projects will be required for many coal plants to remain viable. Fuel and power markets continue to be dynamic, allowing new supply sources to enter into the mix and change the relative economics of existing sources.

Since early 2004, Constellation Energy (Constellation) has recognized their need for a long-term strategy that would address a variety of potential future challenges, including:

The dynamic nature of power, fuel, and allowance markets.
Opportunities presented by non-traditional fuel sources.
Current federal and state legislation demanding stringent emissions reductions.
Impact of current SCR and FGD build-out on future coal and allowance markets.
Future regulations potentially requiring further emissions reductions.

The recent passing of the Healthy Air Act in Maryland demonstrated that Constellation’s strategy would need to continually monitor and re-evaluate their compliance/fuel options.

As Constellation is a deregulated power generation entity, its goals must focus on a wide range of compliance, performance and financial issues. Specific goals include:

Achieving compliance with the 1990 Clean Air Act.
Optimizing capital and operations and maintenance (O&M) expenditures.
Understanding the implications of additional regulations on current compliance plans.
Remaining flexible to meet changing regulatory and market conditions.
Achieving maximum competitiveness.
Leveraging opportunities present in the fuel market.

Constellation recognized that these factors could influence decisions concerning fuel supply, environmental compliance, and capital expenditure.

Black & Veatch Corporation (Black & Veatch) has also recognized that many clients can benefit from their experience in developing emissions control plans, increasing fuel flexibility, and improving fuel planning. In response, they have developed integrated fuel and capital equipment planning systems. With these systems, Black & Veatch can provide detailed cost projections that model a variety of strategies and economic conditions and aid utilities and power generation companies in developing the most cost effective and flexible strategies for their generation systems.

Constellation chose to move away from traditional planning processes that attempt to consider planning issues in isolation. They recognized that those restrictive processes would limit their planning abilities as they could not account for all variables – or the interplay between variables. Instead, Constellation worked with Black & Veatch to develop a framework, which could evaluate various fuel sources, competing legislative agendas, and varying levels of commitment to capital investment. Those evaluations were then applied to a variety of future market (power, fuel, and allowance) scenarios to confirm that Constellation’s capital investment plan targeted the long-term viability of their facilities.

Over the study period, the analysis considered:

Changes in demand for Constellation’s units, based on regional power market forecasts (addition of new generation facilities, retirements, and addition of environmental equipment/costs over time).
Available fuel sources and their impacts on plant performance, operating costs and emissions.
Transportation modes and routes for available fuel sources.
Existing emissions regulations, including changes implemented over the study period.
Implications of potential future environmental regulations.
By-product utilization/sales or disposal issues and costs.
Plant modifications to minimize fuel change impacts, efficiently meet emissions requirements, or improve fuel reception flexibility as a means of lowering delivered fuel costs.
Market forecasts.

Options were evaluated against a range of pessimistic and optimistic market assumptions to clarify potential trade-offs between capital investments, fuel flexibility and market choices.

Lengthy time horizons required to evaluate major capital investments introduced another fundamental need – the need to address uncertainty within the analysis. Uncertainty includes market variability across time and fundamental shifts in market behavior resulting from future changes in environmental regulations or regional power markets. It was critical, therefore, to compare strategies across a wide range of possible future situations and market forecasts. Therefore, the process incorporated extensive stochastic analysis to compare and contrast both the expected values and relative distributions of financial results.

The result of the stochastic analysis takes the form of probabilistic distributions for each strategy evaluated. Given the large number of results generated, visual aids were used to better understand strategy characteristics and sources of risk.

Distributions compare alternate scenarios to a base plan.
Tornado diagrams show relative impacts of different factors.

Click on image to see full-size version.

Once models were set up for the power portfolio, additional fuel options, strategies, forecasts and scenarios could be rapidly evaluated. This capability is quite important as it allows Constellation to continue to apply and refine ongoing fuel and capital strategies. The ability to address this need became quite apparent in late 2005 and early 2006 as bills and policies proposed by the state government would reshape the nature of Constellation’s compliance obligations. Tools and processes were rapidly redeployed to reassess and subsequently redefine the compliance strategy. The ability to quickly respond allowed Constellation to work with authorities in a proactive manner thereby minimizing the financial impacts associated with the proposed regulatory strategies.

The risks associated with mission-critical decisions can be reduced with integrated modelling and risk management techniques. It is important to note that the integrated model, unlike other methods – where results are cascaded forward through a series of multiple, independent or segmented analyses – provides a number of critical benefits for utilities:

An ability to more fully recognize, evaluate, and quantify trade-offs between coal quality (heating value, sulfur/mercury content, etc.), emissions equipment, allowance costs, and O&M costs.
An ability to see how an underlying fuel strategy can shift dramatically over the course of a five- or ten-year window, given the introduction of new supplies within a region (i.e., PRB moving east or additional mines opening), potential mid- to longer- term commitments to specific coal providers, introduction of new legislation, or the completion of major capital modification projects.
An ability to assess the risks associated with alternative strategies – segmented models can only see specific elements of risk – and aggregate results.
Provide an efficient platform that can be reapplied over time to as strategies need to be refined.

Black & Veatch’s integrated modeling and risk management techniques provided Constellation confidence that stringent emission limits could be met, and that a strategic plan was identified to meet these limits in the most cost-effective manner.