VPPs Aren’t Just a One Trick Pony

It’s time to start leveraging the range of benefits virtual power plants (VPPs) offer — beyond just resource adequacy.

The energy transition is altering the demand for grid services

Climate change and the energy transition are driving changes in the power sector. Thermal power plants (mostly coal) are being shut down due to poor economics and environment- and health-related concerns. Wind and solar energy are being built out nationwide, challenging states such as California to operate and manage their grids differently. Over the coming decade, electrification will continue to accelerate as we invest in electric vehicles, heat pumps, and other electric devices. We need to build more resilient power systems in parallel to keep people safe and the economy running in the face of climate-change-driven extreme weather.

These changes are increasing the demand for multiple grid services. The Department of Energy (DOE) defines grid services as services that support the generation, transmission, and distribution of electricity and provide value through avoided electricity system costs. Exhibit 1 shows the additional grid services required because of changes in the power system:

Virtual power plants can provide multiple services for the changing grid

For 40 years, demand response has played an important role in providing for resource adequacy. As of 2021, FERC estimated that more than 32,000 MW were participating in demand response in wholesale markets.

Today, virtual power plants (VPPs) are building on the long history and success of demand response. VPPs are grid-integrated aggregations of distributed energy resources such as batteries, electric vehicles, smart thermostats, water heaters, and other connected devices.

While early demand response programs largely involved manual management of commercial and industrial loads, modern VPPs are highly automated and capable of rapidly responding to signals from aggregators or grid operators.

As a result, VPPs can now provide multiple services to the grid. The Brattle Group identified six grid services that can be provided using managed EV charging and other VPP component technologies. In 2019, the DOE found that grid-interactive efficient buildings can provide up to seven grid services.

A more recent study by Brattle modeled the economics of VPPs that provide multiple grid services and found that VPPs can provide for resource adequacy at 40 to 60 percent of the cost of alternative options in a mature VPP market.

The study also estimated the value of additional grid services from a VPP and concluded that a 400 MW virtual power plant can provide energy, ancillary, distribution, and transmission services worth $21–$42 million per year in the United States.

Roadmap for VPPs to provide multiple grid services

VPPs can provide multiple services but too often grid operators only or primarily compensate VPPs for resource adequacy. VPPs can not only meet near-term resource adequacy challenges by providing rapidly deployable capacity but also provide critical flexibility and resilience to meet emerging needs in a rapidly changing power system.

If regulators and grid operators want resource adequacy from VPPs in the near term, and they want to develop a vibrant VPP ecosystem providing multiple services in the future, they should begin by updating programs and policies to ensure that VPPs can offer, and be compensated for providing, multiple grid services.

For VPPs to play a significant role in the grid, more customers need to participate in VPPs. Customer acquisition, participation, and retention can be secured through increased revenue and revenue certainty. These revenue streams can be guaranteed once VPPs are allowed to provide multiple grid services.

Full-fledged participation of VPPs necessitates thoughtful planning by regulators and grid operators, and it must start today. Regulators and grid operators should develop roadmaps that allow VPPs to provide for multiple grid services.

What would that roadmap look like? It starts by developing initial programs or markets for VPPs. If a state or region does not currently allow for VPPs in any form, they may start by considering how VPPs can provide resource adequacy and later energy and ancillary services. Following this, they may develop programs and policies that allow VPPs to defer distribution and transmission investments. Throughout the roadmap, regulators and grid operators must ensure that measurement, verification, and incentives are appropriate for distributed energy resources rather than forcing VPPs to look and act like conventional generation resources.

As the power grid is changing rapidly, any roadmap should be in the order of years, not decades. VPPs are geared to offer multiple benefits to society and the grid, and it is time for regulators and grid operators to let them do just that.