WHITE PAPER SERIES VOLUME II

ZF ENERGY DEVELOPMENT WHITE PAPER

This is one of a series of white papers on Lean Energy. Download the other papers in the series from http://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. Copyright 2013 ZF Energy Development LLC. All rights reserved.

This document and translations of it may be copied and furnished to others, and derivative works that comment on or otherwise explain it or assist in its implementation may be prepared, copied, published, and distributed, in whole or in part, without restriction of any kind, provided that the above copyright notice and this section are included on all such copies and derivative works. However, this document itself may not be modified in any way, including by removing the copyright notice or references to ZF Energy Development LLC or Z-FED, without the permission of the copyright owners. This document and the information contained herein is provided on an "AS IS" basis and Z-FED DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY THAT THE USE OF THE INFORMATION HEREIN WILL NOT INFRINGE ANY OWNERSHIP RIGHTS OR ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 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 info@z-fed.com.

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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 to multiple energy, construction, manufacturing, and IT journals, as well as authored a publication on the topic of energy engineering. He also holds patents/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.

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ZF ENERGY DEVELOPMENT WHITE PAPER

INTRODUCTION
Lean is a word often used in modern manufacturing as 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 perworker productivity is now five times 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
Figure 1, Non-Growth: GWh generated from Industrial Onsite conversion in the US. Source (Energy Information Administration), ZF Energy Development

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 analogous concept - 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?
Figure 2, Lean Energy Framework

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.

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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 doom another 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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ZF ENERGY DEVELOPMENT WHITE PAPER

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.
16 14 12 10

8 In deregulated markets, dispatch scheduling 6 allows the highest price 4 generator to determine the price of electricity. In 2 other words, as daily demand increases, higher 0 priced generators are dispatched, and prices increase in a natural Figure 4, Henry Hub NG Spot Market Price 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.
Jan-2001 Jul-2001 Jan-2002 Jul-2002 Jan-2003 Jul-2003 Jan-2004 Jul-2004 Jan-2005 Jul-2005 Jan-2006 Jul-2006 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012

$ per MMBTU

Jul-2012

Jan-2013

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.

Success breeds complacency. Complacency breeds failure. Only the paranoid survive. (Grove, 1999)
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Jul-2013

Onsite Conversion in Lean Energy

ONSITE CONVERSION AND CONVERSION CYCLE REDUCTIONS

Standard Demand Standard 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 Intervals As 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 Intervals are the times between energy dispatch signals. Each Load Interval features unique pricing, volume, and demand. Load Intervals are typically several minutes, and are dependent on the supply architecture. Gas supply infrastructure usually features a daily Load Interval because it has slower flow rates. Standard Flow is the physical routing of heat and electricity throughout a facility, to the points of use, both conveyance and conversion. Standard Flow describes maximum transmission losses and conversion losses. Standard Load is the amount of energy that is demanded within a Load Interval. Absence, shortage, or intermittent energy supply is a Standard Load failure.

Standard Work

Sequence

Standard Demand
Load

A B C
1 Sequence 3 2

Interval

Grid Connection

Standard Load

kWe

A
WIP

C
WIP

Takt

Microgrid

kWe

Flow
kWth (Class k, j) kWth(Class i, l)

kWe

Multi-modal Heat Exchanger

kWth(Exhaust Gas)

kW th

kW th

B
WIP

Renewable Supply Combustion

Fuel

Figure 5, Standard Demand defines energy requirements in the Takt timeframe of Standard Work
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ZF ENERGY DEVELOPMENT WHITE PAPER

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 of many, 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
2

Figure 6, Typical ISO simplified network profile

Assuming markets are free and undistorted by subsidies or other such intervention. We emphasize: these are not retail transactions, these are wholesale transactions with minimal value chains.
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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, and can 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. Microgrids Not 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. Nondispatchable resources typically serve to offset Standard 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 gateway to a larger network the (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.
3

LMP 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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!$120.000!! !$100.000!! !$80.000!! !$60.000!! !$40.000!! !$20.000!! !$#!!!!

$/MWh&

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).

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 grid instead of using Onsite Conversion when 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.
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0:00! 1:00! 2:00! 3:00! 4:00! 5:00! 6:00! 7:00! 8:00! 9:00! 10:00! 11:00! 12:00! 13:00! 14:00! 15:00! 16:00! 17:00! 18:00! 19:00! 20:00! 21:00! 22:00! 23:00!

Figure 8, Definition of Conversion Cycle Envelope

Onsite Conversion in Lean Energy

3500 kW demand 3000 LMP ($/MWh)

300

250

2500 200 2000

$/MWh
150

kW
1500

100 1000

500

50

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 efficiency of 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.

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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 these constraints. 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 prerequisite 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
Trillions of BTU 0
325 331 311 322324 326 336 332 327334 333 321 323 313 335 312 339 337314 315 316

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Leather and Allied Products Apparel Textile Product Mills Furniture and Related Products Miscellaneous Beverage and Tobacco Products Electrical Equip., Appliances, and Components Textile Mills Printing and Related Support Wood Products Machinery Computer and Electronic Products Nonmetallic Mineral Products Fabricated Metal Products Transportation Equipment Plastics and Rubber Products Petroleum and Coal Products Paper Food Primary Metals Chemicals 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000

Electrical Demand

Thermal Demand

Thousands of Megawatthours

Figure 9, US industrial energy use, Source: EIA MECS 2010

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.

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Onsite Conversion in Lean Energy

Grid Connection

Standard Load

Control Signals Electrical Flow Thermal Flow

kWe

Microgrid

kWe

kWe kWth(Class i, l)

kWth (Class k, j)

Multi-modal Heat Exchanger

kWth(Exhaust Gas)

kWth

kWth

Renewable Supply Combustion

Fuel

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, other extraordinary events), and deliver what Robert Galvin calls Perfect Power (Galvin & Yeager, 2009) to Standard Demand.

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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 ZF ENERGY 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 onsite 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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