“Lean” is a word often used in modern manufacturing. It’s used mainly 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. In this second white paper in a series, we will discuss the role of onsite conversion in the lean energy management framework.

1. WHITE PAPER SERIES – VOLUME II

2. 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
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3. 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.
© 2013 ZF Energy Development LLC. All Rights Reserved.
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4. 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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5. 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.
© 2013 ZF Energy Development LLC. All Rights Reserved.
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6. 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.
16
14
12
Jul-2013
Jul-2011
Jan-2012
Jul-2010
Jan-2011
Jul-2009
Jan-2010
Jul-2008
Jan-2009
Jul-2007
Jan-2008
Jul-2006
Jan-2007
Jul-2005
Jan-2006
Jul-2004
Jan-2005
Jul-2003
Jan-2004
Jul-2002
Jan-2003
Jul-2001
Jan-2002
Jan-2001
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.
Jul-2012
10
Jan-2013
$ per MMBTU
Recessionary electrical
demand put natural
pressure on electricity
prices. But this reduction
was not simply due to
lower demand.
As a result, and against everyone’s 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 survive”1. Implementing strategic mechanisms in advantageous
times protects against future specific risk. Therefore, let’s consider methods that minimize
specific risk, and take the guesswork out of the system.
1
Success breeds complacency. Complacency breeds failure. Only the paranoid survive. (Grove,
1999)
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7. Onsite Conversion in Lean Energy
ONSITE CONVERSION AND CONVERSION CYCLE REDUCTIONS
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 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.
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.
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.
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.
Pricing Uncertainty in Load Intervals
As discussed previously, experiences in the energy
markets since 2008 underline Niels Bohr’s observation:
“Prediction is very difficult, especially if it is about the
future.”
Standard Work
Standard Demand
Sequence
A
B
C
Load
Interval
Grid
Connection
Standard Load
kWe
A
1
Sequence 3
C
Microgrid
Takt
kWe
Flow
kWth (Class k, j)
kWe
Multi-modal
Heat Exchanger
kWth(Class i, l)
kWth(Exhaust Gas)
WIP
2
kW th
WIP
B
kW th
Renewable Supply
Fuel
Combustion
WIP
Figure 5, Standard Demand defines energy requirements in the Takt timeframe
of Standard Work
© 2013 ZF Energy Development LLC. All Rights Reserved.
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8. 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
Figure 6, Typical ISO simplified network profile
2
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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© 2013 ZF Energy Development LLC. All Rights Reserved.

9. 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.
© 2013 ZF Energy Development LLC. All Rights Reserved.
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10. ZF ENERGY DEVELOPMENT WHITE PAPER
!$120.000!!
$/MWh&
!$100.000!!
!$80.000!!
!$60.000!!
!$40.000!!
!$#!!!!
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!
!$20.000!!
Figure 7, Example LMP and Conversion Cost Comparison for 24 Load Intervals
At least two conclusions come from the study of this graph: (1) the LMP spends significant
amount of time below the Conversion Cost line, and (2) using OG during this time represents a
financial loss.
We take the up and down movement of the LMP and abstract it into a single line in the
following graph (Figure 8).
Figure 8, Definition of Conversion Cycle Envelope
One can sell converted energy into the grid if the LMP price is higher than the Conversion Cost,
and one can buy energy from the grid – instead of using Onsite Conversion – when the LMP is
below the Conversion Cost. The subtraction of energy sale revenues from conversion cost is the
Conversion Cycle Envelope, an important part of Standard Cost.
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11. Onsite Conversion in Lean Energy
3500
300
kW demand
LMP ($/MWh)
3000
250
2500
200
2000
$/MWh
kW
150
1500
100
1000
50
500
0
0
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
We’ve 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.
© 2013 ZF Energy Development LLC. All Rights Reserved.
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12. ZF ENERGY DEVELOPMENT WHITE PAPER
We’ve 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
325 331 311 322324 326 336 332 327334 333 321 323 313 335 312 339 337314 315 316
0
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
Electrical Demand
Textile Mills
Printing and Related Support
Wood Products
Machinery
Computer and Electronic Products
Thermal Demand
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
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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13. Onsite Conversion in Lean Energy
Grid
Connection
Control Signals
Standard Load
Electrical Flow
Thermal Flow
kWe
Microgrid
kWe
kWth (Class k, j)
kWe
Multi-modal
Heat Exchanger
kWth(Class i, l)
kWth(Exhaust Gas)
kWth
kWth
Renewable Supply
Fuel
Combustion
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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14. ZF ENERGY DEVELOPMENT WHITE PAPER
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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15. 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-FED’s 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
© 2013 ZF Energy Development LLC. All Rights Reserved.
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