Hidden Champion of the Invisible Grid
How Virtual Power Plants Can Help Stabilize the Grid While Saving Consumers Money
Getting paid for using less energy? What type of dark magic is that?!
In case you haven’t yet heard of Virtual Power Plants (VPP) and how they help stabilize electricity grids while saving consumers money, then you’ve clicked on the right article. I will cover the essentials of VPPs and how they can play a pivotal role in the green transition.
Let’s get to it!
Before we dive in, let’s clarify some important terms first.
I highly encourage you to read my previous posts about the grid and how power prices are determined to cover some of the groundwork.
💨☀️🔋 What is a Distributed Energy Resource (DER)?
A DER is a unit that manages, generates, or stores energy, such as a smart thermostat, electric vehicle (EV) charger, solar panel, wind turbine or battery. These are all located at or near the end-consumer and are sub-utility scale (they cannot generate or store electricity on a larger scale).
⚖️ What is Grid Balance?
Remember the Yin & Yang of electricity supply and demand? Grid balance is ensuring that supply meets demand at all times.
When demand is too high, transmission infrastructure can be damaged. The grid literally fries. To avoid that, grid operators can use brownouts (intentional reduction of voltage) or even worse, blackouts (complete loss of electrical power supply). They cut off certain areas from the grid to prevent the damage.
When we face a situation of over-supply, sometimes large-scale customers are paid to increase electricity usage to take that extra electricity so that the additional energy doesn’t go to waste. When that doesn’t work, the additional electricity is simply wasted.
No one wants that.
📲 What is Demand Response?
Demand response is one of the core functions a VPP performs today. It is the shifting and reducing of electricity demand during peak-hours to avoid blackouts. It helps stabilize the grid. It also helps reduce costs since electricity is more expensive during peak-hours than it is during non-peak hours. This is achieved by offering customers financial incentives.
☁︎ What is a VPP?
A VPP is a network of decentralized but connected DERs that are aggregated into a virtual network.
The VPP helps facilitate grid balance through demand response, dispatches energy back into the grid, and helps flatten the demand curve. VPPs orchestrate all connected devices into an intelligent and interconnected system that controls all devices in efficient operations.
💡How Is This Related to Turning on My Lights at Home?
As we learned last week, electrification ⚡️ is one of the core strategies to get away from fossil fuels. All processes that can be electrified, should be electrified. If we believe this is true, electricity demand is forecasted to triple by 2050.
Most electricity grids operating today were built over 30 years ago. The infrastructure was built with different supply and demand dynamics in place. Today’s consumption patterns and flexibility demands are not compatible with the ancient infrastructure anymore.
As a consequence, we see increasing numbers of grid failures and blackouts. This is amplified by the fact that the majority of power outages are caused by severe weather events such as storms, flooding, or heat waves. And we all know that these are only going to occur more frequently thanks to global warming.
The absurd part about this?
In some parts of the country, people are dealing with blackouts; in others, energy is so abundant that wind and solar farms are asked and sometimes even paid to reduce their electricity generation (curtailment of production).
If reliable and far-reaching transmission infrastructure were in place, electrons could be sent to where they’re needed most. In case of weather-related blackouts for instance, that could literally save lives.
Infrastructure projects take decades to complete and require vast amounts of funding. On top of that, they also need political support to drive them.
Just this week, the Pattern Energy Group closed a $11B funding round in tax equity and loan financing to build a 550 mile long transmission line and develop green energy projects.
The issue: It took 17 years to figure out the permits and approvals. We don’t have that kind of time.
The International Energy Agency (IEA) forecasted that we need to build or modernize roughly 50 million miles of transmission lines globally by 2040. If it takes almost two decades to get approval to build one, then we’re doomed. Experts agree that we need to lower the legislative obstacles to get the permits to build. We need to hurry up.
That’s where VPPs come into play.
VPPs have been around for more than a decade. Weird that the public knows so little about them, right?
They were and still are mainly used for demand response management, but the services covered are rapidly changing with the rising popularity of DERs.
They are about to hit an inflection point due to several factors:
Declining cost of DERs
Policy changes (e.g. Inflation Reduction Act)
Advent of software solutions in every industry
Commitments to decarbonize the grid
So how does they work?
🔌 How VPPs Work: Digitizing Power Plants Into The Cloud
A VPP intelligently coordinates multiple energy units to ensure a reliable energy supply. Through hard- and software solutions, electricity can be supplied when needed, and also demanded when it’s opportune.
For example, when renewable energy is cheap and abundant during the day, behind-the-meter (BTM) batteries can be charged with clean energy. During high demand periods, the battery can dispatch electricity to the devices that require loads.
By reducing peak-hour consumption and substituting the demand with renewables, emissions are avoided. Additionally, electricity prices also decrease.
Consumers who enroll their DERs into VPP programs get paid to reduce or shift demand during peak hours. Usually, home owners cannot participate in electricity markets because the loads they generate on-site are too small. With the help of VPPs, that changes.
VPPs aggregate excess loads from all customers to combine their loads. This opens up the opportunity for end-consumers to sell their excess energy to energy market participants. As a result, customers can turn their excess loads into real dollars. The cherry on top is that electricity over-supply is reduced, also reducing the risk of damaging infrastructure.
Democratizing electricity markets with positive outcomes for all participants sounds pretty amazing to me.
This is a huge opportunity to bidirectionally integrate renewable sources into electricity markets. Battery storage capacities can be used as backup in case of blackouts.
We should think of adding more renewables as ways of increasing grid flexibility and reliability. Just think about transportation. Every EV that hits the road is a driving battery that can be discharged at any given point. With the help of VPPs, they can be programmed to charge only when energy is cheap and green.
Let’s look at some of the advantages and challenges VPPs face today.
✅ Advantages of VPPs
Increase efficiency of energy management without need for large-scale infrastructure upgrades
Increase grid flexibility and reliability
Increase demand forecasting accuracy through massive data collection and analysis of all enrolled DERs
Cheaper electricity for all consumers - not only the ones enrolled in programs (remember, VPPs help decrease peak-plant demand)
Reduce emissions by enabling transition to renewable energy sources like solar and wind
Overcome challenges in transmission and distribution of electricity (reducing and shifting peak loads)
🚨 Challenges of VPPs
Low penetration of DERs (only 4% of consumers have DERs in the U.S. as of writing this)
Significant upfront investment to install DERs, which only amortizes over long periods of time
Potential is limited by total number of DERs available
Installation bottleneck with shortage of trained workers
Infrastructure investments are required to upgrade the grid to realize full potential of VPPs
Tricky to enroll DERs in VPP programs to benefit from upsides due to lack of awareness and bureaucratic hurdles
❓What’s Next for VPPs?
A recent study from The Brattle Group found that VPPs are expected to contribute 10-20% of peak demand loads in the US by 2030. That means $13 billion in potential savings, not including potential savings from storage capacity and positive environmental impacts!
The market for VPPs is predicted to grow by 32.8% annually by 2028.
♻️ All in All: Massive Unrealized Potentials
As adoption of renewable energy sources grows, the grid will become less predictable due to the intermittent nature of renewables. You can’t schedule the wind. And when their share in the electricity mix increases, so does the planning uncertainty. That’s why it is of utmost importance to manage available resources effectively.
VPPs are a great way to help enroll more renewable capacity to the grid AND manage existing resources more efficiently. They have the potential to contribute tremendously to the IEA goal of increasing energy efficiency by 50% to reach net zero.
As the adoption of VPPs rises and technology continues to innovate in both hard- and software, VPPs will be able to provide more grid services and can be holistically integrated into utility planning processes.
And that’s it. That’s all you need to know about a VPP. Now you can flex with cool knowledge about VPPs at your next party. Or you can just enroll your DERs without the flex.
If you want to dive deeper into VPPs, I highly recommend reading this paper about the liftoff of VPPs by the Department of Energy.
I hope you learned something today. Next time we will start with a new mini-series focusing on individual DERs. Let me know in the comments which one you would be interested in!
Stay electric,
Basti