The Case

Duke Energy Coal Allocation
Duke Energy generates and distributes electricity. Duke recently purchased Cinergy, which has
generating facilities and energy customers in Indiana, Kentucky, and Ohio. For these customers
Cinergy has been spending $725 to $750 million each year for the fuel needed to operate its coal-fired
and gas-fired power plants; 92% to 95% of the fuel used is coal. In this region, Duke uses 10 coal-
burning generating plants: five located inland and five located on the Ohio River. Some plants have
more than one generating unit. Duke uses 28–29 million tons of coal per year at a cost of
approximately $2 million every day in this region.
The company purchases coal using fixed-tonnage or variable-tonnage contracts from mines in Indiana
(49%), West Virginia (20%), Ohio (12%), Kentucky (11%), Illinois (5%), and Pennsylvania (3%).
The company must purchase all of the coal contracted for on fixed-tonnage contracts, but on variable-
tonnage contracts it can purchase varying amounts up to the limit specified in the contract. The coal is
shipped from the mines to its generating facilities in Ohio, Kentucky, and Indiana. The cost of coal
varies from $19 to $35 per ton and transportation/delivery charges range from $1.50 to $5.00 per ton.
A model determines the megawatt-hours (mWh) of electricity that each generating unit is expected to
produce and to provide a measure of each generating unit’s efficiency, referred to as the heat rate. The
heat rate is the total BTUs required to produce 1 kilowatt-hour (kWh) of electrical power.
Note: 2000 lbs make 1 US ton
Coal Allocation Model

Duke Energy uses an LP model, called the coal allocation model, to allocate coal to its generating
facilities. The objective of the coal allocation model is to determine the lowest-cost method for
purchasing and distributing coal to the generating units. The supply/availability of the coal is
determined by the contracts with the various mines, and the demand for coal at the generating units is
determined indirectly by the megawatt hours of electricity each unit must produce.
The cost to process coal, called the add-on cost, depends upon the characteristics of the coal (moisture
content, ash content, BTU content, sulphur content, and grindability) and the efficiency of the
generating unit. The add-on cost plus the transportation cost are added to the purchase cost of the coal
to determine the total cost to purchase and use the coal.
Current Problem
Duke signed three fixed-tonnage contracts and four variable-tonnage contracts. The company would
like to determine the least-cost way to allocate the coal available through these contracts to five
generating units. The relevant data for the three fixed-tonnage contracts are as follows:
Supplier Number of Tons Contracted For Cost ($/ton) BTUs/lb
RAG 350,000 22 13,000
Peabody 300,000 26 13,300
American Coal 275,000 22 12,600
For example, the contract signed with RAG requires Duke to purchase 350,000 tons of coal at a price
of $22 per ton; each pound of this particular coal provides 13,000 BTUs.
The data for the four variable-tonnage contracts follow

Supplier Number of Tons Available Cost ($/ton) BTUs/lb
Consol, Inc. 200,000 32 12,250
Cyprus Amax 175,000 35 12,000
Addington 200,000 31 12,000
Waterloo 180,000 33 11,300
For example, the contract with Consol, Inc., enables Duke to purchase up to 200,000 tons of coal at a
cost of $32 per ton; each pound of this coal provides 12,250 BTUs. Coefficients
The number of megawatt-hours of electricity that each generating unit must produce and the heat rate
provided are as follows:
Generating Unit Electricity Produced (mWh) Heat Rate (BTUs per kWh)
Miami Fort 5 550,000 10,500
Miami Fort 7 500,000 10,200
Beckjord 1 650,000 10,100
East Bend 2 750,000 10,000
Zimmer 1 1,100,000 10,000
For example, Miami Fort 5 must produce 550,000 megawatt-hours of electricity, and 10,500 BTUs
are needed to produce each kilowatt-hour.
The transportation cost and the add-on cost in dollars per ton are shown here:
Transportation Cost ($ / ton)
Supplier Miami Fort 5 Miami Fort 7 Beckjord 1 East Bend 2 Zimmer 1
RAG 5.00 5.00 4.00 5.00 4.75
Peabody 3.75 3.75 3.50 3.75 3.50
American 3.00 3.00 2.75 3.00 2.75
Consol 3.25 3.25 2.85 3.25 2.85
Cyprus 5.00 5.00 4.75 5.00 4.75
Addington 2.25 2.25 2.00 2.25 2.00
Waterloo 2.00 2.00 1.60 2.00 1.60
Add-On Cost ($/ton)

Supplier Miami Fort 5 Miami Fort 7 Beckjord 1 East Bend 2 Zimmer 1
RAG 10.00 10.00 10.00 5.00 6.00
Peabody 10.00 10.00 11.00 6.00 7.00
American 13.00 13.00 15.00 9.00 9.00
Consol 10.00 10.00 11.00 7.00 7.00
Cyprus 10.00 10.00 10.00 5.00 6.00
Addington 5.00 5.00 6.00 4.00 4.00
Waterloo 11.00 11.00 11.00 7.00 9.00

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Duke Energy Coal Allocation

Coal Allocation Model

The data for the four variable-tonnage contracts follow

Add-On Cost ($/ton)

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