Energy Utility Fuel Allocation Model for Non-Linear Revenue and Regulatory Tariff Implications

Abstract

The primary motivation for this paper is based on the challenge faced by a utility firm that generates its electricity through multiple coal fired thermal power plants. The utility firm operates in a regulated market and faces severe shortages of low priced coals that are critical to its profitability. The regulatory authority prices the electricity generated on the basis of capacity utilization and energy costs. The capacity component of tariff encourages operation of plants at high utilization levels. Hence, the surplus maximization of the firm turns out to be a non-linear problem. Based on the characteristics of the problem, we suggest a heuristic approach to arrive at the solution. The fallout of the tariff pricing is that it is more profitable to shut-down a power plant rather than operate it at low utilization levels. The secondary motivation for this paper is to address this regulatory tariff issue. An alternate tariff model is proposed that encourages consumption of costlier coals also so that the firm operates at a high utilization level while offering electricity to the grid at a reasonable tariff. Determination of the optimal solution is simple is this model which makes it simple to administer.