Case Problem 5: Duke Energy Coal Allocation

A linear programming model can be used to determine how much coal to buy from each of the
mining companies and where to ship it. Let
xij = tons of coal purchased from supplier i and used by generating unit j

The objective function minimizes the total cost to buy and burn coal. The objective function
coefficients, cij , are the cost to buy coal at mine i, ship it to generating unit j, and burn it at
generating unit j. Thus, the objective function is ∑∑c xij ij . In computing the objective

function coefficients three inputs must be added: the cost of the coal, the transportation cost to the
generating unit, and the cost of processing the coal at the generating unit.

There are two types of constraints: supply constraints and demand constraints. The supply
constraints limit the amount of coal that can be bought under the various contracts. For the
fixedtonnage contracts, the constraints are equalities. For the variable-tonnage contracts, any
amount of coal up to a specified maximum may be purchased. Let Li represent the amount that
must be purchased under fixed-tonnage contract i and Si represent the maximum amount that can be
purchased under variable-tonnage contract i. Then the supply constraints can be written as follows:

∑x =L ij i for all fixed-tonnage contracts

j

∑x ≤S ij i for all variable-tonnage contracts

j

The demand constraints specify the number of mWh of electricity that must be generated by each
generating unit. Let aij = mWh hours of electricity generated by a ton of coal purchased from
supplier i and used by generating unit j, and Dj = mWh of electricity demand at generating unit j.
The demand constraints can then be written as follows:

∑a x ij ij =Dj for all generating units

i

Note: Because of the large number of calculations that must be made to compute the objective
function and constraint coefficients, we developed an Excel spreadsheet model for this problem.
Copies of the data and model worksheets are included after the discussion of the solution to parts (a)
through (f).

1. The number of tons of coal that should be purchased from each of the mining companies and where
it should be shipped is shown below:

Miami Fort #
5 Miami Fort # 7 Beckjord East Bend Zimmer
RAG 0 0 61,538 288,462 0
Peabody 217,105 11,278 71,617 0 0
0 0 0 0 275,000
0 0 33,878 0 166,122
0 0 CP - 1 0 0 0
0 200,000 0 0 0
0 0 98,673 0 0
 Solutions to Case Problems

American
Consol
Cyprus
Addington
Waterloo

The total cost to purchase, deliver, and process the coal is $53,407,243.

2. The cost of the coal in cents per million BTUs for each generating unit is as follows:

Miami Fort #5 Miami Fort #7 Beckjord East Bend Zimmer

111.84 136.97 127.24 103.85 114.51

3. The average number of BTUs per pound of coal received at each generating unit is shown
below:

Miami Fort #5 Miami Fort #7 Beckjord East Bend Zimmer

13,300 12,069 12,354 13,000 12,468

4. The sensitivity report shows that the shadow price per ton of coal purchased from American Coal
Sales is -$13 per ton and the allowable increase is 88,492 tons. This means that every additional ton
of coal that Duke Energy can purchase at the current price of $22 per ton will decrease cost by $13.
So even paying $30 per ton, Duke Energy will decrease cost by $5 per ton. Thus, they should buy the
additional 80,000 tons; doing so will save them $5(80,000) = $400,000.

5. If the energy content of the Cyprus coal turns out to be 13,000 BTUs per ton the procurement plan
changes as shown below:

Miami Fort # 5 Miami Fort # 7 Beckjord East Bend Zimmer

RAG 0 0 61,538 288,462 0
Peabody 36,654 191,729 71,617 0 0
American 0 0 0 0 275,000
Consol 0 0 33,878 0 166,122
Cyprus 0 0 85,769 0 0
Addington 200,000 0 0 0 0
Waterloo 0 0 0 0 0

6. The shadow prices for the demand constraints are as follows:

Miami Fort #5 Miami Fort #7 Beckjord East Bend Zimmer

21 20 20 18 19

The East Bend unit is the least cost producer at the margin ($18 per mWh), and the allowable
increase is 160,000 mWh. Thus, Duke Energy should sell the 50,000 mWh over the grid. The
additional electricity should be produced at the East Bend generating unit. Duke Energy’s profit will
be $12 per mWh.

CP - 2
 Solutions to Case Problems

The Excel data and model worksheets used to solve the Duke Energy coal allocation problem are as
follows:

Duke Energy Coal Allocation Model (Data)

Duke Energy Coal Allocation Model (Solution)

CP - 3
 Solutions to Case Problems

CP - 4