Developing a Risk Management/Plant Optimization Strategy to

Developing a Risk Management/Plant Optimization
Strategy to Support Cornell University’s Conversion
to Natural Gas Cogeneration
Presented by:
Jim Adams, Director of Utilities
Energy and Sustainability
Cornell University
Rick Sievertsen, Vice President
Fellon-McCord
June 28, 2011
BACKGROUND
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Why Change?
• Was operating a 90% coalfired power plant
• Local utility offered low,
fixed-price electricity
– 1997: rate structure no longer
available
• Had been studying feasibility
of building cogeneration
– Natural gas plant more
efficient
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Why Change?
• Cogeneration = higher fuel demands
• Annual fuel consumption would increase
almost 70%, 15 x more gas
– From 1.6 mill Dth (coal + gas)
to 2.7 mill Dth
• Needed strategic approach
to energy procurement
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DEVELOPING AN
ENERGY
PROCUREMENT
POLICY
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Guidelines Defined
• Initial business rules for procurement
– Purchases of $2+ million need Board of Trustees
approval
• Lengthy approval process
• Would limit effectiveness
of program
• Volatility of natural gas
markets require quick
decision
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Internal Team Created
• Partnered with senior administration
– CFO, treasurer, vice president of budget and planning, vice
president of facilities and purchasing, representative from
investment office
• Energy purchasing policy established
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June 28, 2011
Portfolio could extend 5 years and have $180 million value
Transaction caps, resulting in layered coverage
80% cap on hedged volume
Derivatives and weather-related hedges permitted
Physical and financial hedges permitted
Energy Risk Oversight Committee (EROC)
Minimum credit rating requirements
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FINDING A PARTNER
AND DEVELOPING A
PLAN
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EROC Directive:
Third-Party Consultant
• Initially researched large financial
counterparties
• Determined needs were best served by a firm
focused only on energy management
• Partnership established between Cornell
University and Fellon-McCord
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Develop Purchasing Strategy
• Together developed a plan
– Identified level of risk tolerance
– Developed risk charter
– Recommended natural gas purchasing program
Quantify
Risk
Evaluate
& Adjust
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Determine
Tolerance
Document
Procedures
Choose
Instruments
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Purchasing Program
Recommendation
• Three-year program
100
Incremental Purchases
Hedged % of Physical Supply
– First year: base hedge
40% of expected
consumption
– Subsequent years: 30%
and 20% based on
forward price curve
75
50
Month
13
Month
25
25
Month
37
0
12
24
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Hedge/Fixed Price Term (months)
• Program approved in 2009
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Time to Execute Hedging Strategy
• Fellon-McCord
– Identified qualified suppliers
• Had to meet natural gas requirements, be able to facilitate
Cornell’s forward purchases, appropriate credit rating
– Worked with Cornell and potential vendors to identify
best options
– Walked Cornell decision-makers through every step of
the process
• University made final decisions
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Continuous Review
• Original Risk Charter still in-place
• Continuous communication is key
– Immediate communication if markets change
– Weekly calls to discuss changes in market
conditions, price activity, underlying market
trends
– Quarterly reviews between EROC and FellonMcCord ensure budget targets are met
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BENEFITS OF AN
OUTSOURCED
ENERGY PARTNER
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Benefits
• Cornell has access to all of Fellon-McCord’s
resources
– Expertise across the energy supply chain
– Difficult for Cornell to replicate
with internal staff
• Market / industry happenings
• Contract knowledge
• Day-to-day mechanics
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Energy Resources
• Market Committee
– Committee of energy professionals with diverse
backgrounds and extensive industry experience
– Daily review of all market factors
– Recommendations – based on
Cornell’s risk tolerance –
published in Fellon-McCord
Market Update©
and discussed in person
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Energy Resources
• Regularly issued publications
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Energy Resources
• Fellon-McCord helped Cornell maneuver
through entire process
– Developed purchasing strategy from initial
discussion through execution
– Acts as liaison with natural gas suppliers
– Works with local utility to export Cornell’s excess
electricity to grid
– Advises on all aspects of energy market
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Cornell University + Fellon-McCord =
Strong Strategic Partnership
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QUESTIONS
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