An LP Application for Cost Optimization of Coal Imports for a Power Plant

N.S.Nilakantan#1, and A.M.Dharam*2

#

Department of Quantitative Methods, KJSIMSR,Vidya Vihar, Mumbai - 400077,India.

1

nilakantan@simsr.somaiya.edu

Tata Power Company Limited, Mumbai, India.

2

amdharam@tatapower.com

Abstract - This paper details the application of linear programming and transportation model in a power generation company for optimizing the coal purchase plan. The company purchases coal using base tonnage with certain tolerance on lower or higher side from three different sources around the world and the coal needs to be shipped from the suppliers mines to the companys generating facilities. Company would like to have the optimum solution for coal allocations considering the various possible scenarios in the next five years. Based on LP Transportation model, the coal allocation model is developed to purchase coal from different sources and allocate to different generating facilities. The base model is developed for 201011 and future scenarios are created for each year, taking into account the increases in the demand and consequent changes required in the supply. The technical constraints and cost elements are considered in each year with necessary modifications as required for the new plants coming on stream. In the model, we could also include constraints on pollution control based on quality of coal (ash content, sulphur content etc.). The coal cost optimization model can also be extended to include simulation with

appropriate simulation software like Witness, as done by Yabin Li [4]. Keywords- transportation model, Coal purchase optimization, separable programming, integrated modeling I. Introduction

This paper details the application of linear programming and transportation model in a power generation company for optimizing the coal purchase plan. Electrical energy is the most important input for the growth of any economy, including that of India. Indias installed power generation capacity as on 31.03.2010 stood at close to 159 GW, of which about 64% was based on thermal fuels -coal, gas, and oil [2]. In order to sustain high GDP growth rates, the Government of India wants to eliminate infrastructural bottlenecks due to lack of power generation. Thermal power capacity of India is based on three types of fuel: coal, natural gas, and Fuel oil. Coal based capacity represents 83 % installed capacity [1] and thus coal has become an important ingredient in Indias Power scenario.

Review of current utilization of coal-based power plants shows that majority of power plants are not able to operate at Plant Load Factor (PLF) more than 80 % due to coal shortages. For NTPC, considering all 15 coal-based power stations, the average PLF works out to 91.1% with an average availability factor of 92.5% in FY 2009, compared with the all-India average PLF for coal-based stations of 77.2% [5]. Though Coal India Limited claims that its coal is considerably cheaper than imported coal , even state players such as NTPC often have to import around 10-15 million tons of coal annually because domestic coal deliveries are unreliable and cannot support their generation targets. Due to the anticipated huge shortfall in coal supply, India has no option but to go for import of coal. Apart from this, import of coal may be worthwhile from an environmental angle due to the domestic coal having high ash and sulphur content. Import of coal is also viable on the quality front as the heat value of imported coal from Australia or South Africa is around 6300 Kcal/kg as against 3000-4500 Kcal/kg of Indian coal. Indian consumers can import coal from any of the following coal-rich nations viz: Australia, South Africa, Indonesia, China, and Russia. Following are the various criteria to be considered for identifying the right source for importing coal on a long term basis: proven coal reserves, sociopolitical stability and trade relationship with India, Rules and Regulations by Governments of exporting countries, Port Infrastructure, Desired Quality of Coal, Technical considerations, market development, Geographical vulnerabilities, and a very important aspect of Freight Distance. All these points need to be studied before finalizing the sources for long-term tie-ups. Proposed Plant 1- 5*800 MW - coal required -16 million ton per annum Proposed Plant2 3*800 MW - coal required -9 million ton per annum The company purchases coal using base tonnage with certain tolerance on lower or higher side from different sources around the world. The company must purchase minimum obligation quantity as per lower tolerance limits and can purchase varying amounts upto the upper limit specified in the contract. The coal needs to be shipped from the suppliers mines to the companys generating facilities. Company would like to have the optimum solution for coal allocations considering the various possible scenarios in the next five years. The coal requirement is worked out based on the megawatt hours of electricity that each generating unit is Operating Plant1 500MW coal required -2million ton per annum Operating Plant2 250 MW coal required 1million ton per annum II. Case problem The company is one of the largest integrated power utilities in the country. The company has its presence in Hydro, Wind, Solar, and traditional thermal power sector. The company uses Indian coal for some of its plants and imports around 3 million tons of coal per annum for its other plants which is expected to increase to 20 million tons per annum after its proposed plants come on stream in the next 5 years. This case deals with cost optimization of only imported coal. Imported coal demand points for the company are

expected to produce and the heat rate, which is the measure of each generating units efficiency. III. The Model A. Planning horizon Since we are taking up the optimization of coal purchase which normally results from annual contracts, a year is taken as the planning horizon.

model. The problem with piecewise linearity can be handled and solved with Evolutionary Solver as a nonlinear problem or solved as a separable programming problem. C. The Objective function The objective is to minimize the total cost of coal (i.e. cost of coal, cost of transportation, and cost of add-on local handling). The decision variables are the quantities to be procured from different sources and transported to different

B. Assumptions.
1) The requirements assumption: Each

destinations, i.e. generating units. Consequently, we define xij as the quantity (in Million MT) of coal transported from source i to destination j, hi as the calorific value (in BTU/MT ) of coal transported from source i , and cij as the unit landed cost per MT (in Rupees) of coal transported from source i to destination j. The cost objective function will be Min cij * xij Define Xij = xij* hi and Cij = cij / hi and the modified objective function is Min Cij * Xij The cost component cij is calculated as a sum of FOB cost of coal at each source plus cost of transportation from each source to each destination plus cost of handling coal at each destination. D. Constraints Demand related constraint for each generating plant, in terms of Million BTUs, is formulated from an annual generation plan worked out from the capacity, plant loading factor (PLF), and the heat

source has a fixed supply of units, where this entire supply has to be distributed to the destinations. Similarly, each destination has a fixed demand for units, where this entire demand must be received from the sources. In real problems like ours, the supplies may actually represent maximum amounts (instead of fixed amounts) to be distributed. Such problems violate the requirements assumption and hence need to be reformulated by introducing dummy destinations etc. 2)The cost assumption: The objective

function is assumed to be linear in nature with directly related cost coefficients. The cost of distributing units from any particular source to any particular destination is directly proportional to the number of units distributed. Therefore, this cost is obtained by multiplying the unit cost of distribution by the number of units distributed. However, in specific circumstances like our case, the cost coefficients, especially the purchase cost coefficients are likely to be related to certain quantity discount phenomena especially in bulk purchases. The resulting shipping cost function will be given by a nonlinear function C(x), which is essentially a piecewise linear function with slope equal to the marginal cost. Even with this nonlinear objective function, the constraints are still the special linear constraints that fit the transportation

rate i.e. how much heat value (BTU) is required to generate one unit in that plant. While the base model deals with existing operating plants, the commissioning of new generating plants gives rise to new constraints in subsequent years. These changes are appropriately captured in the future scenario models. Supply related constraint for each source, in terms of Million BTUs, is formulated based on calorific value (in BTU/kg) and minimum and maximum quantities available from the source, where sources are identified as having fixed and variable contracts. Minimum and maximum available quantities also change in subsequent years and these are captured appropriately in the future scenario models. Technical constraints are formulated where certain source coal is not available for certain destination plant due to technical reasons. These reasons could be derived from the plants experience with specific sources. IV. Mathematical Formulation The objective function thus will be Min Xij*Cij Subject to Demand related constraints, n in number, one for each generating plant, in terms of Million BTUs, Xij = Dj , quantities in MBTU required at destination j, Supply constraints, m in number, one for each source, Xij <= Si, quantities in MBTU available at source i,

Mi,min * hi <= Xij < = Mi,max * hi , where Mi,min and Mi,max are minimum and maximum available quantities (in MT) of coal from source i. Though an additional constraint Si = Dj may be considered as necessary to take care of the requirements assumption, this may be dispensed with in Solver formulation as Solver uses the general simplex method automatically solves the problem without the equality of Ss and Ds. However, for larger problems, it is worthwhile to reformulate the problem and use the transportation simplex method (or equivalent) with another software package. If coal from specific source i is not acceptable to a specific destination j, then the corresponding Cij is taken arbitrarily high by which the corresponding xij will automatically be excluded in the Solver/Simplex search procedure.

V. Excel and Solver Setup

We now create the required Excel setup. First, we create different mxn matrices for FOB cost of coal, transportation cost, and the add-on handling cost respectively for different source-destination combinations. Then we accumulate all these different costs into one mxn matrix as the total cost per MT. since our optimization is based on the additional feature of heat value instead of MT and the constraints are formulated in terms of MBTUs, we would be requiring a new mxn matrix for writing these costs per MT figures into cost per MBTUs. This is achieved by using the values of MBTU/MT for each source and calculating landed price for each source utility combination as follows: Landed price in Rupees/MBTU = (Landed price /MT) /Heat Value in TU/MT

The required setup for solver involves finally an equivalent allocation matrix of changing cells, which Solver will be using to identify the optimal solution within the constraint restrictions. VI. Solver Instructions and Results The solver dialogue box is now filled with indications of changing cells, minimization objective and the identification of constraints. Options for Solver will include assume linear and assume non-negative. The solution provides the changing cell values of transfer quantities in units of MBTUs. Quantities of tonnage of coal can be back-calculated as Coal allocation in MT (xij) = allocated MBTUs (Xij) / Heat value of respective coal source in MBTU/MT (hi).

across only the objective function being non-linear and other constraint functions are linear. A separable function is a function where each term involves just a single variable, so that the function is separable into a sum of functions of individual variables. For example, if f(x) is a separable function, it can be expressed as f(x) = fj(xj), where each fj(xj) function includes only the terms involving just xj. In the terminology of linear programming, separable programming problems satisfy the assumption of additivity but not the assumption of proportionality [3]. In the case of separable programming formulation, the excel set up has to be modified with more matrices to take care of different slopes in different segments of the line/curve.

VIII.
We can also find out the average cost/MBTU as well as average BTU/kg.

Uses of the model and future scope

The base model is developed for 2010-11 and The results of one sample data alongwith the excel setup are given in the Appendix. VII. Piecewise Linearity If we treat the problem as a nonlinear problem by approximating a piecewise linear function with a nonlinear function, we will have to obtain a graph of the function first through curve fitting with excel and use the resultant best-fit curve formula. In such a case, the option of assume linear will not be included. Separable programming formulation can be used to deal with piecewise linear functions. Separable programming is a special case of convex programming, where the objective function and other constraint functions are separable functions. In cases like our problem, we normally come We can also create an integrated spreadsheet for the problem with different sheets allotted for different years and integrated through worksheet linkages. Quarter-wise analysis within the year could also be done with a separate excel model to review the model at every quarter-end based on the operating conditions during the completed period within the year. Thus, an integrated Planning and Control future scenarios are created for each year, taking into account the increases in the demand and consequent changes required in the supply. The technical considered constraints in each and cost elements are year with necessary

modifications as required for the new plants coming on stream. In the model we could also include constraints on pollution control based on quality of coal (ash content, sulphur content etc.).

model for coal allocation can be developed for a power utility. The coal cost optimization model can also be extended to include simulation with appropriate simulation software like Witness, as done by Yabin Li [4]. Acknowledgement The authors acknowledge the reference of a case study in the U.S. on similar lines [1]. References
[1]. Anderson (2005), Case problem 5 Cinergy Coal A.M.Dharam A.M.Dharam is working as Chief Manager with Tata Power Company,Mumbai and has qualified as a B.E. MechanicaL and as a Masters in Financial Management. He has 20+ years of experience in corporate.

Allocation An Introduction to Management Science by Anderson, Sweeney, Williams India Edition, Published by Cengage pp226-228. [2]. Background Note on Capacity Addition Programme www.infraline.com/power/.../generation/.../

in the XI Plan -

CapacityAddProgrammeXIPlan.aspx (accessed on 27.07.10) [3]. Hillier and Lieberman Introduction to Operations

Research concepts and cases, Mcgraw Hill, special Indian edition, 2009. [4]. Li, Yabin (2008), Yabin Li, Rong Li, "Simulation

and Optimization of the Power Station Coal-Fired Logistics System Based on Witness Simulation Software," Power Electronics and Intelligent Transportation System, Workshop on, pp. 394-398, 2008 Workshop on Power Electronics and Intelligent Transportation System, 2008. [5] New Issue Monitor on NTPC www.cmlinks.com/pub/nim/nimshow.asp?code=12001 (accessed on 27.07.10) -

AUTHORS BIOGRAPHY N.S.Nilakantan .N.S.Nilakantan is working as Associate Professor in K.J.Somaiya Institute of Management Studies &Research, Mumbai and has qualified as an MSc in O.R. and an MBA in Finance, He has 30+ years of experience in Business Industry and Consulting and has been teaching Quantitative and allied Techniques for the past five years.

APPENDIX