HomeMy WebLinkAboutA037 - Resolution authorizing staff to enter into natural gas supply contract for Power PlantITEM #:37
DATE:11-18-25
DEPT:ELEC
SUBJECT:JANUARY - JUNE 2026 NATURAL GAS SUPPLY FOR ELECTRIC
COUNCIL ACTION FORM
BACKGROUND:
The two boilers at the Power Plant are primarily fired by natural gas. The natural gas, along
with refuse-derived fuel (RDF), are combusted to generate electricity. When in operation, Unit
#7 typically combusts 8,000 MMBtu of natural gas per day, while Unit #8 typically combusts
12,000 MMBtu of natural gas per day.
On October 15, 2015, Macquarie Energy LLC was awarded a 5-year fixed price contract for
the purchase of 12,000 MMBtu/day of natural gas for Electric Services. Subsequently, a 3-
year extension was approved, followed by two 1-year extensions, which brought contract
period through December 31, 2025. The contract has created efficiency, flexibility, and
affordability in the purchase of a valuable commodity, ensuring that the City has reliable
service while creating stable generation costs.
With the current contract expiring on December 31, 2025, City staff must secure a price and
add additional supply to the existing contract in the next few months. There are several
aspects of a natural gas contract extension which need to be explained further. These include
the price volatility, impact on electric rates, and impacts to the Resource Recovery utility.
The challenge in arranging a contract extension or soliciting bids for a new gas
contract is determining the price at which to commit. In the natural gas market, quoted
prices expire within a 24-hour period, which is less time than is necessary to provide
notice of a City Council meeting and approve the contract.
When staff negotiated the original contract, the process was handled similarly to the sale of
the City's bonds. The Council Action Form did not have prices, nor did it identify the preferred
supplier. Bidders faxed their prices to staff hours before the City Council meeting and a
summary report was handed out during the Council meeting where a decision was made.
Although this approach provides competitive pricing between several suppliers at a single
point in time, it may lock the City into a price that would have been much lower if solicited at a
different time of the year. For the remainder of the 2025/26 fiscal year, staff is proposing to
repeat the method used in 2023 and 2024, which allowed the Director of Electric Services to
obligate the City to purchase natural gas at or below the previously Council-authorized cap.
The current contract has a fixed price for natural gas set at $3 .57 per MMBtu. At the time of
this writing, price estimates for calendar year 2026 show natural gas futures in the $4.29
MMBtu range. The prices are higher than the current contract for a variety of reasons:
customer demand, supply constraints, production cost increases, the uncertainty related to the
Russia-Ukraine war, weather forecasts, and other factors.
As these prices fluctuate between Council meetings, staff is requesting the authority to
commit the City to extensions as short as a month, at fixed prices and fill in small
incremental needs with daily spot-priced purchases. The goal is to avoid energy cost
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increases to electric customers due to high natural gas prices, but continue to
purchase gas to burn refuse derived fuel. At current natural gas contract prices,
keeping cost contained is dependent on the length of the contract, market timing, and
the amount of gas purchased.
It is important to note that the daily gas allotment, if unused by the Electric utility due to
scheduled or unscheduled outages, can be sold back to the market at spot prices. At times
when the gas can be sold back and spot prices are high, this can be advantageous to the
Electric utility. However, if the spot prices are very low, then the gas must be sold by the
Electric utility to the market at a loss.
IMPACT TO ELECTRIC CUSTOMER BILLS:
The natural gas purchased by Electric represents more than 20% of the overall Electric utility
budget. These natural gas fuel purchases (and sales, if they occur), along with the cost of
purchased power from the market (and sales to the market) are summed monthly on a rolling
12-month basis and are used to develop an Energy Cost Adjustment (ECA). The ECA can be
either positive or negative and is an adjustment to the electric rates adopted by the City
Council, applied to customers' bills each month. The more the utility pays for natural gas, the
higher the cost for electricity becomes.
The approved FY 2025/26 operating budget includes $17,600,000 for the purchase of natural
gas, transportation, gas management and related services to operate the Power Plant. The
existing gas contract through calendar year 2025 plus yearly transportation costs $10,600,000.
This leaves roughly $7,000,000 to cover the remaining natural gas purchases needed from
January 2026 to June 2026. If staff is able to procure natural gas for less than $7,000,000 the
savings is passed back to the electric customers through the Energy Cost Adjustment.
Likewise, if natural gas costs more than $7,000,000, electric customers will pay more on their
energy bill.
Also under consideration is the long-term life of Units #7 and #8. The continued burning of
today's RDF with high plastic concentration is quickly destroying the boilers. Staff believes that
by 2027, Unit #7 will have little life remaining. The City's generation resource plan assumes
that Unit #8 will have 10+ years of life remaining after RDF is discontinued. To create a higher
level of success, Unit #7 has become the primary unit for burning RDF. It may be possible to
return burning RDF in Unit #8 in calendar year 2026 if plastics can be removed from the
waste stream used to create RDF. With plans for curbside recycling starting by summer 2026,
this may be possible. It is worth noting that burning any RDF in Unit #8 going forward will
decrease the life of the boiler and cause increased maintenance costs. If either unit is
prematurely retired due to the deterioration caused by burning RDF, the utility is
subject to significant financial penalties for lacking available generating capacity until
the replacement capacity can be constructed and brought online.
IMPACT TO RESOURCE RECOVERY/HAULERS/BOONE COUNTY LANDFILL:
The 12,000 MMBtu of natural gas per day that is currently procured during the non-winter
months is sufficient to operate the Power Plant's Unit #8. This larger unit can consume
approximately 30,000 tons of RDF per year if RDF is available and the unit is operating
continually. Unit #7 consumes up to 8,000 MMBtu/day which would consume approximately
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24,000 tons/year of RDF.
Historically, Unit #8 is relied upon to operate during the non-winter months because it is able
to dispose of RDF at a faster pace than Unit #7. If Unit #7 is operating, the volume of RDF
produced oftentimes outpaces the ability to burn it all, resulting in periods where Resource
Recovery is unable to process all of the MSW which would result in additional material being
diverted to the Boone County Landfill (BCL). Typically, this diversion is handled by instructing
the haulers to transport MSW directly to the Boone County Landfill.
If haulers are diverted, there are a variety of impacts: First, although haulers save $5.50/ton on
tipping fee costs at the Boone County Landfill compared to Resource Recovery, they must
drive longer distances, resulting in higher labor and fuel costs. Second, the additional material
being sent to the Boone County Landfill places additional pressure on the landfill operation
(both in terms of using available capacity and the additional staffing the landfill needs to
arrange to handle the influx of Story County garbage trucks). Third, recyclable material is not
being removed from the solid waste through processing before it is landfilled.
Additionally, hauler diversions result in losses of revenue for the Resource Recovery operation
since tipping fees are not being collected, and recyclable materials are not being sold. There is
no change in revenue from RDF sales, as Electric pays a flat fee regardless of the tonnage of
RDF produced. Although there is less expense for Resource Recovery since it is not
processing (less electricity and maintenance expenses), the fixed costs remain for the
operation, and therefore the overall impact to the Resource Recovery utility can be significant.
ALTERNATIVES:
There are several alternative strategies that could be pursued to purchase the natural gas,
each of which has different advantages and disadvantages. Under Alternatives 1, 2, and 4, the
City Council would authorize staff to approve amendments to the contract with Macquarie
Energy LLC, Houston, TX, to extend the existing natural gas supply contract for a term of not
more than six months in monthly or seasonal increments, for the gas quantities described in
each alternative. Alternative 3 is a blend of Alternative 1 and 2 which relies on purchasing both
firm and spot priced gas.
If staff is authorized to approve such amendments, staff would then report back to the City
Council after each amendment has been agreed to by staff. The report would include staff's
estimates of cost impacts to the Electric customers and Resource Recovery Utility. The
alternatives are:
ALT E R NATI V E # 1: Purchase 8,000 MMBtu/day and divert haulers directly to Boone
County Landfill approximately 2 days/week
In this option, enough gas would be purchased to guarantee the continual operation of Unit
#7. This would allow approximately 24,000 tons of RDF to be consumed by the Power Plant,
at a minimum. This reduction in RDF throughput is approximately 30 tons per day during the
months of April - June. The additional tons not consumed would result in garbage haulers
being diverted to the landfill when the tipping floor and/or storage bin become full. These
diversions would have the negative impacts to the haulers, Boone County Landfill, and the
Resource Recovery operation as described earlier in this report.
If the 8,000 MMBtu/day could be secured at the anticipated average price of $4.25/MMBtu, the
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Electric Fuels budget for natural gas would have approximately $800,000 remaining. This
funding could be held in reserve and used in one of two ways:
To purchase additional gas on the spot market when the pricing is favorable (most likely
in summer months), increasing the amount of RDF that could be consumed from time to
time. The result would be consumption of some greater amount of RDF and reduce the
days haulers need to divert.
Alternatively, if the long-term contract pricing for natural gas was to drop considerably,
the $800,000 could be used to purchase an additional supply of up to 4,000 MMBtu/day
for the April-June time period. However, staff does not have confidence that such a
dramatic price drop is likely to occur.
This option results in the least potential for electric bill increases, but results in a greater
amount of material being sent to the landfill, impacting the haulers, Resource Recovery, and
Boone County.
ALTERNATIVE# 2: Purchase gas only on the spot market (no secure gas contract) and
divert haulers directly to Boone County Landfill approximately 2 days/weekly
This option would eliminate the use of a secure contract and would require the daily gas
needs to be purchased on the spot gas market. The Electric Utility would be subject to
considerable volatility in gas prices, particularly in the winter months when demand for
gas is the highest. It is not possible to project the potential cost to customers for this
alternative.
Because of the time required to startup and shutdown the Electric boilers and Resource
Recovery operation, it would not likely be feasible to plan for purchasing electricity on the
market when electric grid prices are low and burning RDF only when electric grid prices are
h i g h . Therefore, this option exposes the City to extreme volatility with little potential
benefit. The only real benefit that can be seen today is that spot gas prices have
remained below $3/MMBtu for the vast majority of days since early February 2023. To
"cap this risk", staff would set a ceiling price (suggesting $6/MMBtu), where if the spot
price was exceeded, gas would not be purchased for that day, and haulers would be
diverted.
If the 8,000 MMBtu/day could be secured on the spot market at an anticipated blended price
of $3.25/MMBtu, the Electric Fuels budget for natural gas would have approximately
$2,250,000 remaining. This funding could be held in reserve and used in one of two ways:
1. To purchase additional gas on the spot market when the pricing is favorable (most likely
in summer months), increasing the amount of RDF that could be consumed from time to
time. The result would be consumption of some greater amount of RDF and reduce the
days haulers need to divert during those months.
2. Alternatively, if the long-term contract pricing for natural gas was to drop considerably,
the $2,250,000 could be used to purchase an additional supply of up to 4,000
MMBtu/day for the April-June time period. However, staff does not have confidence that
such a dramatic price drop is likely to occur.
With some increased risk, this option results in the greatest potential for stable electric bills
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but results in a greater amount of material being sent to the landfill, impacting the haulers,
Resource Recovery, and Boone County when spot gas exceeds $6/MMBtu.
ALTERNATIVE# 3: Blend Alternatives #1 and #2; securing enough firm gas to burn
some RDF every day and increase burning when spot gas is more cost effective.
The purchasing strategy under this alternative would be to purchase 6,000 - 8,000 MMBtus on
a firm basis in the winter. As spring and summer approach, the amount of firm gas that is
purchased would be 4,000 MMBtu. Regardless of the season, if spot market pricing is
favorable, additional gas could be purchased to increase the RDF consumption. This
approach lowers the amount of firm gas the utility would have to sell in the event of an
unplanned outage compared to the amount of firm gas purchased in the expiring contract.
Lowering the amount of firm gas purchased minimizes the potential for selling unused gas at a
loss during the seasons when spot gas is likely to be least costly.
ALTERNATIVE # 4: Purchase 8,000 MMBtu/day for January through March, and 12,000
MMBtu/day for April through June and divert haulers directly to Boone County Landfill
approximately 2 days/week in winter months.
This option allows the seasonal differences in gas prices to be "smoothed out" or blended to
arrive at a consistent price per MMBtu. This option could allow RDF to be burned at full
capacity for April through June, and at reduced capacity for January through March. This is a
similar approach to the expiring contract's structure.
The remaining amount in the natural gas fuels budget would allow for this gas to be purchased
for the remainder of FY 2025/26 only if the price is at or below $3.87/MMBtu, which is
considerably lower than contract prices available today. It is unlikely that prices will decrease
to this level. At a current price of $4.25/MMBtu, the fuels budget would need to be
increased by $700,000 to lock in this quantity of natural gas. These costs would be
passed to Ames electric customers through the energy cost adjustment, and in this
example would represent a 1.5% increase in electric bills.
If Council wishes to select this option, the Electric Services Director would request an
updated cost, and Council would need to authorize an increase in the adjusted fuels
budget (staff would propose authorizing staff to commit up to an additional $1,000,000
of spending without requiring further approval by the City Council).
With insufficient gas to consume all the RDF generated during January-March 2026 under this
alternative, there are economic impacts to the Resource Recovery Utility with lost revenue
from tipping fees during the winter months.
Since this alternative is the same as was adopted for calendar year 2025, Resource Recovery
assumed this same alternative would be adopted for the next fiscal year and budgeted
accordingly. If haulers are not allowed to tip their MSW approximately two days per week
during the reduced-throughput winter months because of the high price of gas, the Resource
Recovery utility would not incur a budget impact in FY 2025/26. However, haulers and the
Boone County Landfill will continue to be impacted as a result of drive times to the landfill and
increased material quantities disposed of there, respectively.
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CITY MANAGER'S RECOMMENDED ACTION:
Over the past several years, the City has benefited from extremely advantageous guaranteed
natural gas prices through the expiring long-term contract. Natural gas futures pricing is
considerably higher than the expiring terms. Staff is concerned that the window for prices to
drop is closing, and prices will again begin rising as winter weather and market uncertainty
approach. There does not appear to be a risk-free option available to the City Council since
the strategy with the least impact to electric customers, also has the highest impact to
Resource Recovery System, and vice versa.
Staff believes the best strategy is Alternative No. 3 , which calls for a blended cost, and
secures enough natural gas on contract to burn the majority of the RDF that could be
consumed in a typical year. Under this alternative staff will continue to pursue options for
reducing the volume of waste received through recycling and other waste diversion programs.
Therefore, it is the recommendation of the City Manager that the City Council adopt
Alternative No. 3, thereby authorizing the Electric Director to approve an amendment to the
contract with Macquerie Energy LLC, Houston, TX, to extend the existing natural gas supply
contract for a term of not more than 6 months at prices to achieve a total cost of not more
than $7,000,000.
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