Onsite Conversion - How Onsite Conversion in Lean Energy Reduces the Specific Risk of Electricity...

7/27/2019 Onsite Conversion - How Onsite Conversion in Lean Energy Reduces the Specific Risk of Electricity Pricing, by Mic

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WHITE PAPER SERIESVOLUME II


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Page 2 of 15 2013 ZF Energy Development LLC. All Rights Reserved.

ZFENERGY DEVELOPMENT WHITE PAPER

This is one of a series of white papers on Lean Energy. Download the other papers in the series

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2013 ZF Energy Development LLC. All Rights Reserved. Page 3 of 15

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.
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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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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)

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2

4

6

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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 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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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!!

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1 8 : 0 0 !

1 9 : 0 0 !

2 0 : 0 0 !

2 1 : 0 0 !

2 2 : 0 0 !

2 3 : 0 0 !

$/MWh&


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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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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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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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