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WHITE PAPER SERIESVOLUME II
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This is one of a series of white papers on Lean Energy. Download the other papers in the series
fromhttp://www.z-fed.com/zf-energy-whitepapers
ZF Energy Development (Z-FED) is an industrial energy utility with a unique energy model
that reduces costs and improves reliability.
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Published 2013 by ZF Energy Development, LLC.
Any comments relating to material contained in this document may be submitted to Z-FED, 57
West Avenue, Wayne PA 19087, or by email to [email protected].
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Onsite Conversion in Lean Energy
INTRODUCTION................................................................................................................................... 4
THE FOLLY OF PREDICTION .................................................................................................................. 5
ONSITE CONVERSION AND CONVERSION CYCLE REDUCTIONS.................................................................. 7
Standard Demand ....................................................................................................................... 7
Pricing Uncertainty in Load Intervals .......................................................................................... 7
ECONOMIC DISPATCH ......................................................................................................................... 8
Microgrids ................................................................................................................................... 9
Conversion Cost and Locational Marginal Pricing (LMP) ............................................................ 9
MANAGING AND DISPATCHING ONSITE CONVERSION .......................................................................... 11
BIBLIOGRAPHY .................................................................................................................................. 14
Content for this paper was provided by Michael Overturf, CEO of ZF Energy Development, LLC.
Mr. Overturf has contributed tomultiple energy, construction, manufacturing, and IT journals,
as well as authored a publication on the topic of energy engineering. He also holdspatents/patents pending in the energy field. ZF Energy Development works with a broad
spectrum of manufacturing, industrial, and commercial sectors, benefitting their customers by
gathering and implementing best practices within and across industries.
http://www.z-fed.com/zfenergy-press-room/zf-energy-in-the-media/http://www.z-fed.com/zfenergy-press-room/zf-energy-in-the-media/http://www.z-fed.com/zfenergy-press-room/zf-energy-in-the-media/http://www.z-fed.com/zfenergy-press-room/zf-energy-in-the-media/7/27/2019 Onsite Conversion - How Onsite Conversion in Lean Energy Reduces the Specific Risk of Electricity Pricing, by Mic
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INTRODUCTION
Lean is a word often used in modern manufacturingas a contrast word. Whereas prior
methods were fat, i.e., there was a lot of material volume in production processes; lean
trades volume for speed. By moving
material faster, there is less of it in
the system. Since, lean has come
to mean doing more with less in
general.What does lean do for us? Most
of the modern product flow is the
result of this thinking, and per-
worker productivity is now fivetimes what it was in 1950. One may
dispute the details, but the facts are
this: lean manufacturing made the
world we are in today. In fact, it has
been so successful that it is not
inconceivable that there will be a
time when only 0.5% or less of the
population will make everything we use.
Can we experience something similar
with energy? Is there an analogousconcept - Lean Energy that would give
us a similar revolution where everything
we use requires only a tiny amount of
energy? How does Lean Energy bring
economic benefits to American industry? Given the doom-laden predictions for man-made
climate change, is there a possibility that Lean Energy might save the world?
As Amory Lovins put it: We have nothing to lose but our waste. (Lovins, 2011). In this second
of a series of white papers we will discuss the role of Onsite conversion in the Lean Energy
management framework.
Figure 1, Non-Growth: GWh generated from Industrial Onsite
conversion in the US. Source (Energy Information Administration),
ZF Energy Development
Figure 2, Lean Energy Framework
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Onsite Conversion in Lean Energy
THE FOLLY OF PREDICTION
The years 2007 and 2008 saw a mild panic in the industrial energy management community.
Electricity prices were skyrocketing to unprecedented heights, and market deregulation was
thought by many to be a harbinger of energy pricing doomanother blow to American
competitiveness. Heretofore, electricity prices had been controlled by regulation, in the form of
pricing caps. If determined by supply and demand alone, would free-floating prices rise to
unprecedented heights?
Figure 3, New England pulls away: Average retail electricity prices by region. Source: EIA
The industrial sector reacted to the price increases by creating its own capacity. Self-generated
electricity by industrial customers increased by nearly 10% in a single year between 2009 and
2010, a lagging indicator to the pricing developments over the preceding several years (Figure 1
above). Industrial companies used the feared explosion in the price of electricity to show
attractive rates of return for onsite generation (OG) investments.
Of course, 2009 saw a severe recession overall, and not the price explosion many had feared.
Demand fell, with overnight prices going to unheard lows of $20/MWh and less. The regulatory
price caps came off, and prices remained flat or fell. As predictions proved false, the motivation
to build onsite conversion as a systemic hedge disappeared. Few of these facilities have come
online in the intervening years since 2010.
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The 2009 recession also coincided with something that nobody saw coming: shale gas. New
drilling techniques had released enormous amounts of new natural gas volumes into the
markets, and gas prices fell to historic lows.
Recessionary electrical
demand put natural
pressure on electricity
prices. But this reduction
was not simply due to
lower demand.
In deregulated markets,
dispatch scheduling
allows the highest price
generator to determine
the price of electricity. In
other words, as daily
demand increases, higher
priced generators are
dispatched, and prices
increase in a natural
demand-supply
relationship. In other
words, scarcity lifts prices. Since natural gas turbines spin up quickly, and are the staple of
standby reserve, natural gas prices have a strong influence on peak pricing.
As a result, and against everyones expectations, deregulated electricity markets performed
exceedingly well. The predictions of 2007 and 2008 proved completely wrong.
Is there a way to avoid the hazard of guessing and misallocated investments? Further to the
point, with energy costs a relatively small share of COGS, why should a business manager care
about lean energy principles at a time of tremendous commodity value?
Because only the paranoid survive1. Implementing strategic mechanisms in advantageous
times protects against future specific risk. Therefore, lets consider methods that minimize
specific risk, and take the guesswork out of the system.
1Success breeds complacency. Complacency breeds failure. Only the paranoid survive. (Grove,
1999)
0
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$ p e r M M B T U
Figure 4, Henry Hub NG Spot Market Price
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Onsite Conversion in Lean Energy
ONSITE CONVERSION AND CONVERSION CYCLE REDUCTIONS
Standard DemandStandard Work is one facet of lean manufacturing that
seeks to reduce or eliminate variance from process
outcomes. Standard Work groups work sequence, the
amount of work in process (WIP), and standard Takt Time
into an overall management idea. Production managers
use Standard Work to increase the certainty that an
industrial process will yield the smallest possible defects
per million opportunities.
The Lean Energy equivalent of Standard Work is Standard
Demand, comprised of Standard Flow, Standard Load, and
Load Interval.
Standard Demand is, of course, highly dependent on
Standard Work, as all of the process and systems perform
value added functions in a certain Takt Time, forming an
intricate clockwork of steady runs and demand bursts.
Pricing Uncertainty in Load IntervalsAs discussed previously, experiences in the energy
markets since 2008 underline Niels Bohrs observation:
Prediction is very difficult, especially if it is about the
future.
Load Intervalsare the timesbetween energy dispatch signals.Each Load Interval featuresunique pricing, volume, anddemand. Load Intervals aretypically several minutes, andare dependent on the supplyarchitecture. Gas supplyinfrastructure usually features adaily Load Interval because ithas slower flow rates.
Standard Flowis the physicalrouting of heat and electricitythroughout a facility, to thepoints of use, both conveyanceand conversion. Standard Flowdescribes maximumtransmission losses andconversion losses.
Standard Loadis the amount ofenergy that is demanded withina Load Interval. Absence,shortage, or intermittent energysupply is a Standard Loadfailure.
ABC
Standard Work
Takt
B
A C1
2
3Sequence
WIPWIP
WIP
Standard Demand
Interval
Load
FuelRenewable Supply
kWeMicrogrid
kWe
Grid
Connection
kWe
kWth
(ExhaustGas)
kWth
(Classk, j)
kWth
(Classi, l)
kWth
Multi-modal
HeatExchanger
kWth
Combustion
Standard Load
Flow
Sequence
Figure 5, Standard Demand defines energy requirements in the Takt timeframeof Standard Work
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If we are to define Standard Demand, we have to restrict the specific market risk of energy
commodities, as Load Intervals might bring unpredictable pricing into Standard Work. And
variance, by definition, is antithetical to the idea of lean management in general.
Many companies overcome specific energy risk using hedging or insurance contracts to level the
price of energy for a certain time. However, the objective of lean is to minimize the allocation
of capital, not increase it, so the payment of a non-recoverable premium for hedging purposes is
a less-than-optimal approach.
Bringing Standard Load and Standard Pricing into the Load Interval frames the role of Onsite
Conversion in Lean Energy. We can control the specific risk of energy cost by price-optimally
dispatching OG resources within Load Intervals. As Load Intervals get shorter, this becomes
nearly real time. We call this Economic Dispatch.
ECONOMIC DISPATCH
Economic Dispatch is a process by which the lowest cost conversion is used to satisfy Standard
Demand. During each Load Interval, an Economic Dispatch system calculates the lowest possible
conversion cost within Standard Flow contracts, and delivers Standard Load, at a Standard Price.
Most importantly, Economic Dispatch offers lowest available cost at all times, obviating the
need for price predictions2.
To determine lowest price one must have options. One way at looking at Onsite Conversion is
that it is a market of one.
The grid is a market ofmany, and comparison
offers itself.
Markets require the
communication of pricing
information between
buyer and seller, as well
as the satisfactory
transference of the
traded commodity from
seller to buyer.
In the US, most electricity
markets are created and
managed by ISOs
(Independent System
2Assuming markets are free and undistorted by subsidies or other such intervention. Weemphasize: these are not retail transactions, these are wholesale transactions with minimalvalue chains.
Figure 6, Typical ISO simplified network profile
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Onsite Conversion in Lean Energy
Operators), which connect buyers and sellers in both real-time and day-ahead markets. An ISO
control center collects buy and sell offers and transmits this information over a secure Internet
connection as a Pricing Signal. Registered buyers receive this Pricing Signal for their benefit, andcan instantaneously decide whether to buy or not. The actual transference of electrical energy is
via an installed grid connection point, which is designed to accommodate up to a certain
amount of electrical energy transfer for both load and generation.
To participate in this market, an industrial user must register their OG with the ISO as a load
serving entity. The satisfactory completion of this process ensures the properly sized grid
connection, as well as the receipt and transmission of suitable pricing and capacity signals. The
owner of OG is known to the ISO as a generating entity.
MicrogridsNot every OG technology is suitable for grid exposure. A System that can supply sustained blocks
of electrical energy at the flip of a switch is considered a Dispatchable Resource. Non-
dispatchable resources typically serve to offsetStandard Load, and these are typically ambient
conversion systems such as Solar, Wind, or Geothermal. Therefore, Economic Dispatch decisions
must be made with dispatchable loads: the subset of standard load that can be modulated or
purchased.
The selection and supply of this load requires sophisticated digital controls on a Microgrid.
A Microgrid is an organizing network for Onsite Conversion resources; a network of onsite
energy producers and consumers. Microgrids are similar to data networks: they have a gatewayto a larger networkthe (macro) grid - and internally have a variety of devices, producing
(generation) and consuming (load), connected to it. The installation of any Onsite Conversion
resource requires the installation of a Microgrid.
Conversion Cost and Locational Marginal Pricing LMP3)Advanced Energy Markets use Locational Marginal Pricing (LMP) to reflect the value of energy at
a specific location at the time that it is delivered. It is locational is because the price reflects the
cost of conveyance. It is marginal because of the bidding process by which producers in the
market bid their price. The LMP is the grid price at any given moment.
The LMP is made known to a Microgrid at every Pricing Signal. In most cases a Load Interval can
be synchronized with a Pricing Signal. The following figure shows the relationship between the
LMP and the OG Cost for 24 Load Intervals. In this simplification, the OG Cost is constant for the
period. The red shaded areas show the Load Intervals where the LMP exceeds OG Cost.
3LMP is the real-time (hourly or less) price in an ISO nodal area, adjusted for congestion or other local circumstances
that affect distribution price.
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Figure 7, Example LMP and Conversion Cost Comparison for 24 Load Intervals
At least two conclusions come from the study of this graph: (1) the LMP spends significant
amount of time below the Conversion Cost line, and (2) using OG during this time represents a
financial loss.
We take the up and down movement of the LMP and abstract it into a single line in the
following graph (Figure 8).
Figure 8, Definition of Conversion Cycle Envelope
One can sell converted energy into the grid if the LMP price is higher than the Conversion Cost,
and one can buy energy from the gridinstead of using Onsite Conversionwhen the LMP is
below the Conversion Cost. The subtraction of energy sale revenues from conversion cost is the
Conversion Cycle Envelope, an important part of Standard Cost.
!$#!!!!
!$20.000!!
!$40.000!!
!$60.000!!
!$80.000!!
!$100.000!!
!$120.000!!
0 : 0 0 !
1 : 0 0 !
2 : 0 0 !
3 : 0 0 !
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$/MWh&
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Onsite Conversion in Lean Energy
Example of Standard Load (blue) and Load Interval Pricing (LMP, red)
The key to Onsite Conversion in the context of a Microgrid is that it represents a way of
providing a pricing cap at current fuel cost. The Conversion Cost is determined by the efficiencyof conversion, and the cost of the fuel input.
Multiple fuel options then offer multiple conversion costs for future determinations. This in and
of itself does not provide Standard Pricing, but it does cap electricity costs for managing
Standard Demand, i.e., the Conversion Envelope will not exceed Conversion Cost.
Moreover, it alleviates the need for electricity pricing predictions. Since Standard Load for
electricity is cost optimal, pricing uncertainty is constrained to fuel prices. If OG fuels are the
same as those setting the price on the grid, as is the case for natural gas at the moment, Onsite
Conversion in Lean Energy dramatically reduces the specific risk of electricity pricing.
MANAGING AND DISPATCHING ONSITE CONVERSION
Weve seen that predictions or financial hedging cannot bring about reductions in Conversion
Cycles. Instead, we must use Onsite Conversion such that (1) Standard Load is defined in the
context of Standard Work, (2) Standard Flow brings necessary energy into that Standard Load,
(3) within the confines of a Load Interval.
0
50
100
150
200
250
300
0
500
1000
1500
2000
2500
3000
3500
$/MWh
kW
kW dem and LMP ($/MWh)
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Weve also determined that minimum pricing can only be achieved by Load Interval
synchronization with the ISO Grid. A Microgrid, using responsive and resilient technology
specifically designed for that purpose, must control the infrastructure required to meet theseconstraints.
Combusting a fuel throws off heat, and the rejection of that heat into the atmosphere increases
the Conversion Cycle. Therefore, electrical conversion using cogeneration is a natural pre-
requisite in Onsite Conversion.
Z-FED is focused on meeting the energy needs of industrial customers, the majority of which
have significant thermal needs. The Standard Flow for thermal energy in value-added processes
usually requires specific temperatures and pressures. Thermal Standard Load for value-added
processes is grouped in one or more temperature strata, which we will discuss later. In short,
industrial energy users always need heat, sometimes more, sometimes less.
The sophisticated nature of real-time interaction in Load Intervals with both Grid and Standard
Load requires significant innovations be applied to controlling cogeneration systems. In other
words, cogeneration, in and of itself, does not meet Economic Dispatch constraints because it is
likely uncompetitive for a substantial number of Load Intervals.
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Chemicals
Primary Metals
Food
Paper
Petroleum and Coal Products
Plastics and Rubber Products
Transportation Equipment
Fabricated Metal Products
Nonmetallic Mineral Products
Computer and Electronic Products
Machinery
Wood Products
Printing and Related Support
Textile Mills
Electrical Equip., Appliances, and Components
Beverage and Tobacco Products
Miscellaneous
Furniture and Related Products
Textile Product Mills
Apparel
Leather and Allied Products
3253
313
113
223
243
263
3633
23
273
343
333
213
233
133
353
123
393
373
143
153
16
Trillions of BTU
Thousands of Megawatthours
Thermal Demand
Electrical Demand
Figure 9, US industrial energy use, Source: EIA MECS 2010
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Onsite Conversion in Lean Energy
Figure 10, Standard Demand for Onsite Conversion using Microgrid
Load Intervals are most often measured in minutes. This means that humans cannot take an
active role in controlling Onsite Conversion resources. They are programmatically dispatched, or
remote controlled due to exception management at the Grid level (congestion, weather, otherextraordinary events), and deliver what Robert Galvin calls Perfect Power (Galvin & Yeager,
2009) to Standard Demand.
FuelRenewable Supply
kWeMicrogrid
kWe
Grid
Connection
kWe
kWth(Exhaust Gas)
kWth(Class k, j)
kWth(Class i, l)
kWth
Multi-modal
Heat Exchanger
kWth
Combustion
Standard LoadControl Signals
Electrical Flow
Thermal Flow
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BIBLIOGRAPHY
Energy Information Administration. (n.d.). Form EIA-923 detailed data.Retrieved August 27,
2013 from USEIA Electricity: http://www.eia.gov/electricity/data/eia923/index.html
Galvin, R., & Yeager, K. (2009). Perfect Power - How the microgrid revolution will unleash
cleaner, greener, and more abundant energy.New York: McGraw Hill.
Grove, A. (1999). Only The Paranoid Survive.Crown Publishing Group.
Lovins, A. (2011). Reinventing Fire.White River Junction, Vermont, USA: Chelsea Green
Publishing.
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Onsite Conversion in Lean Energy
ABOUT ZFENERGY DEVELOPMENT
ZF Energy Development (Z-FED) is an industrial energy utility with a unique energy model that
reduces costs and improves reliability. Z-FED designs, implements, and manages networked on-site generation assets that leverage markets to achieve lower energy costs and five sigma or
better uptime. We recommend and assist in the implementation of industrial process
improvements to increase energy productivity and reduce costs. Z-FEDs project portfolio
includes projects in the health, food production, educational, aviation, chemical, and other
commercial manufacturing industries. For more information, visit:http://www.z-fed.com.
ZF Energy Development USA Headquarters
TEL: 610- 482-4337 |www.z-fed.com
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