An optimization model for natural gas supply portfolios of a power generation company

Abstract

This paper considers a deregulated electricity market environment where a natural gas-fired generation company can engage in different types of contracts to manage its natural gas supply as well as trade on the electricity market. If the contracts are properly designed, they can protect the company from fluctuations in electricity price and demand, at some cost to the company's expected profit. This reduction in profit can be mitigated by trading on the natural gas and electricity spot markets, but this trading activity may also sometimes result in losses. A stochastic programming model is formulated to capture the hedging decisions made by the company, as well as the interactions between the natural gas and electricity markets. The benefits offered by this approach for profit maximization in a variety of business scenarios, such as the case where the company can hold some amount of gas in storage are studied and presented. It is found that the stochastic model enables the company to optimize the electricity generation schedule and the natural gas consumption, including spot price transactions and gas storage management. Several managerial insights into the natural gas market, natural gas storage, and distribution profit are given. © 2013 Elsevier Ltd.