A good example of Business Opportunity Proposal in Fall 2014 Term Project (#1)

On one hand, according to Short-term Energy Outlook, roughly 40 percent of all electricity in the U.S. is
coal-generated. (U.S. Energy Information Administration, January 7, 2014) On the other hand, according
to 2014 Annual Energy Outlook Early Release Overview, 91% of all coal consumed in the United States
is used for generating electricity. (U.S. Energy Information Agency, 2014) We can clearly notice that the
electricity price, which is an important variable of profit according to the formula we gave in the second
Introduction part, is highly related with the price of coal.
Also, according to an article on Wall Street Journal, coal remains the biggest source of fuel for generating
electricity in the U.S. Even as coal production has dropped in Appalachia, it has climbed in Wyoming and
in the countrys midsection. (Miller, January 8, 2014) Since coal-generated electricity still remain lower
price than the other-source-generated electricity, we could mainly focus on the coal price when considering
the electricity price.
We also have data from the U.S. Energy Information Administration to back up our conclusion. According
to Electric Power Monthly with Data for December 2013, in 2013, the average price of retail residential
electricity was 12.12 cents per kilowatt-hour (kWh). Families in the 17 states that rely on coal for more
than half of their electricity only paid 11 cents per kWh on average, whereas residential electricity in the
16 states that relied on coal for less than 15 percent of their electricity was 45 percent more expensive at an
average price of almost 16 cents per kWh. (U.S. Energy Information Administration, February 2014)
As explained before, we mainly use Monte Carlo Simulation in our projects code and it can model
stochastic processes of variables changes, hence, simulating different outputs to find our best strategy.
Therefore, with proper changes on some of the code, we can consider the coal price changes as inputs,
which can also be considered as a stochastic process, and generated companys profit under the influence
of coal price, like the profit change under the influence of temperature as we did in our project.
Furthermore, as we overviewed the coal industry, most coal company would consider into long-term
contract or forward contract with customer to avoid risks generated by having too much debt or high
leverage ratio. Like the biggest coal producer in Illinois Basin, Alliance Recourses Partner, L.P., in 2013,
approximately 93.5% and 94.2% of sales tonnage and total coal sales, respectively, were sold under longterm contracts with committed term expirations ranging from 2014 to 2020. (Alliance Resource Partners,
L.P., February 28, 2014,) Accordingly, we can enter into forward or long-term contract with coal
companies to hedge the risk caused by coal price changing. Like we hedged the risk caused by temperature
changing in previous part, as explained before, we can use the frame of our project to find the ABC Power
Company a best hedging strategy with the forward contract or long-term contract of coal.
Reference:
Alliance Resource Partners, L.P. (February 28, 2014,). 2013 Form 10-K.
Miller, J. W. (January 8, 2014). The Future of Coal: Sector Survives the Doubters. Wall Street Journal.
U.S. Energy Information Administration. (February 2014). Electric Power Monthly with Data for
December 2013.
U.S. Energy Information Administration. (January 7, 2014). Short-term Energy Outlook.
U.S. Energy Information Agency. (2014). 2014 Annual Energy Outlook Early Release Overview.