Future of Energy: Can Virtual Power Plants Speed the Energy Transition?

According to data by Europe’s Copernicus Climate Change Service, 2023 was not only the hottest year on record but the global average surface temperature also nudged close to 1.5°C above pre-industrial levels (the temperature at which the Paris Climate Accords pledged to curb warming). The report is fueling the debate on climate change acceleration and risks of tipping over to the point of no return. While scientists sort through the facts and implications, the clean energy industry is calling for increased investment and regulatory changes to incorporate distributed energy resources (DER) – rooftop solar arrays, building-mounted batteries, thermos energy storage, smart thermostats and other smart appliances and electric vehicles (EVs) and charging stations – into virtual power plants to speed up energy transition in 2024. Virtual power plants (VPPs) connect small scale DER into utility grids, with software infused with AI remotely controlling the power shift. The technology exists and clean energy assets are multiplying. But the challenge is bringing VPPs to scale, which requires overcoming regulatory obstacles, developing a new mindset on “flexible demand,” and standardizing open protocols for manufacturing. 

VPPs and Peak Energy Demand

To avoid brownouts and blackouts, utility companies seek access to sufficient electricity supplies to fuel homes and businesses during peak demand periods, such as when everyone is home from work, running multiple appliances, or when cold snaps hit, freezing entire regions. Utilities build or have supply contracts with peaker plants that run only intermittently and normally using fossil fuels. Electricity from peaker plants is more expensive, sometimes double or more than average supply costs. 

VPPs offer grids greater resiliency, affordability, efficiency and reduced greenhouse gas emissions as an alternative to peaker plants. If a grid operator or utility needs additional kilowatt hours in a particular location, it can tap into a VPP, a network of different power sources and source types. Operators gain the flexibility to better reduce peak demand (for example, by taking remote control of smart thermostats and moderately reducing their electricity usage) and, as a result, defer investment in additional capacity and infrastructure to serve a peak load. The Rocky Mountain Institute (RMI), a clean energy NGO, estimates that by 2050, VPPs could avoid 44-59 million metric tons of CO2 emissions per year. VPP participants can receive compensation for services rendered. Compensation models differ, from reduced tariff rates to cash incentives. Not only direct participants benefit; communities served by VPPs would see lower rates.

Demand for electricity is expected to grow as more households and businesses transition to electricity-fueled technologies, such as EVs, heat pumps and water heaters. The Department of Energy (DOE) estimates that between 2023 and 2030, the U.S. will need to add enough new power generation capacity to supply over 200 GW of peak demand. To put the U.S. on track for 100% clean electricity by 2035, new capacity needs could nearly double. In an October 2023 report, “Pathways to Commercial Liftoff: Virtual Power Plants,” the DOE makes the case that VPPs could deploy 80 GW to 160 GW by 2030, covering 10% to 20% of estimated peak power demand in the U.S. RMI offers even more optimistic estimates: By 2030, VPPs could reduce U.S. peak demand by 60 GW, the average consumption of 50 million households, and by more than 200 GW by 2050. 

Challenges to Developing VPPs at Scale

For VPPs to work, the owners of the distributed energy resources must cede absolute control over battery storage and smart appliances. During peak demand times, the VPP may drain all the energy in the battery to feed the grid. This could leave the home or building owner without a backup in case of a blackout. The owners may have limits on when they can use the batteries, such as a restriction on tapping it during peak energy demand when electricity is expensive. A VPP could adjust temperature settings remotely on smart thermostats during peak demand to reduce electricity use. The devil will be in the details of the use agreement on advance notice and parameters, such as setting a notice period of 24 hours in advance of use or making commitments not to withdraw power during blackouts.

Jigar Shah, director of the U.S. Energy Department’s Loan Programs Office, which is supporting investments in VPPs, argues that existing obstacles to scaling VPPs are surmountable. He notes that making demand as flexible as supply will be required to integrate load growth in the future and make grids more efficient. Shifting demand can avoid higher-price power used at the end of the day. Consumers do alter consumption patterns with proper incentives. Getting utilities on board to integrate small-scale storage capacity is also a challenge. Many utilities have been overwhelmed by proposals to integrate alternative suppliers. But the benefits to grid operators are many: decarbonization, new generation and system buildout through automated efficiency, capacity support, and non-wire alternatives.

In September 2020, the Federal Energy Regulatory Commission (FERC) removed a major hurdle blocking access to wholesale markets by enabling sources of distributed electricity to aggregate in order to satisfy minimum size and performance requirements that each may not be able to meet individually. Grid operators still need to revise their tariffs to establish DER as a category of market participation and address technical requirements for location, data, metering, and distribution factors.  

Industry experts also point out the need for standardization in the VPP ecosystem. Open protocols will enable VPPs to communicate with different DER devices and control systems.  Grid operators need confidence in the quality of technology, while customers must be secure in the knowledge that the DER device they choose will be compliant with VPPs and grid requirements.

VPP Coming to a Neighborhood Near You in 2024?

Possibly. Pilot programs are popping up across the U.S., and VPPs are already operational in Illinois, Maryland, Hawaii and Puerto Rico, not to mention elsewhere around the world. Interest is high, with industry partnerships emerging to connect stakeholders, including utility planners and operators, EV producers such as General Motors and Ford, smart appliance tech companies such as Google Nest, and solar and battery storage and energy management specialists. VPPs also have the benefit of being able to be “built” as quickly as customers enroll in a VPP program.

Scaling these will not happen overnight. Extreme weather events and spiking utility bills are certain to continue, which will further create pressure to make utility grids more resilient and efficient. For residential and commercial building owners, investment in DER technology enjoys economic benefits, including tax breaks. Joining a VPP could offer even greater returns on investments.