Planning for Virtual Power Plants

In an effort to encourage utilities to utilize resources other than power plants to ensure energy adequacy, a new type of product has been developed: the virtual power plant (VPP). VPPs are aggregations of distributed energy resources (DER) located on the distribution grid, including behind a customer’s meter. DERs ordinarily include solar, storage, demand response, and electric vehicle-charging infrastructure. By aggregating these resources, they can be dispatched and act similarly to power plants.  As concerns about growing demand and the reliability of the electricity system increase, diversifying and distributing resources closer to load can help meet these challenges quickly and cost-effectively.  

Another benefit of using VPPs is that the customers and developers that use and work with them are the ones building them, rather than utilities. Therefore, captive utility customers do not have to pay the costs of constructing and installing these resources, they are already there. This is in contrast to normal utility ratemaking where if a utility spends money, those costs, subject to approval by their regulator, are rolled into electricity rates and paid for by all customers through their bills. VPPs, on the other hand, are investments paid for by participating customers and developers. By allowing the market and individuals to fund these investments, it “will create the potential for 80 to 160 gigawatts of VPP capacity across the country by 2030. That would be enough to meet 10 to 20 percent of U.S. peak grid needs and save utility customers roughly $10 billion in annual costs.”  

It is that benefit, however, that makes third-party VPPs concerning to utilities. Investor-owned utilities profit is a function of how much stuff they own and build. Additionally, utilities have operated generally the same way for over 100 years, so the grid is designed to act in a certain way based on the physics of traditional resources; resources mostly owned by the utility. The effect of this history is that the grid was built with power plants located far away from cities with electricity transmitted over distances by transmission lines and then delivered to homes through lower voltage distribution lines. Now, with DERs, these resources are available at the other end of the grid (near consumers), and utilities need to understand how those resources interact with a system not designed for electricity to flow up into the grid.  

How do VPPs work?  

VPPs are designed to act similarly to how a traditional generator would act, including its responsiveness to a need or signal and that it will provide the requisite response. In essence, the utility knows how a power plant should respond, how long it should take to respond, how long that response should last, and how much energy or capacity is available due to the operations of the power plant. VPPs, being a new service provided by aggregated resources, worry utilities due to lack of experience with VPPs, since there may be uncertainty in how it will operate and its reliability as a resource. However, utilities do have experience with components of a VPP, such as demand response. One of the objectives of a VPP, however, is to aggregate these different types of DER to be used as a VPP. By calling these aggregations a VPP, the expectation is that it can provide utility operators with more confidence in the actions of the VPP—that is, there will be more certainty in how the VPP operates.  

However, VPPs can do more than traditional generation, notably they can be substantially more flexible than traditional power plants. Power plants require a certain amount of notification in order to respond to a signal; if a power plant is needed to ramp up and increase electricity generation, a power plant may need minutes to days to do so, depending on the size and fuel of the power plant. However, a VPP can be responsive within minutes, if not seconds. The mixture of services that can make up a VPP allows for developers to mix-and-match optimal resources to meet the operational needs of the grid. So, if the utility needs a resource that can respond to a direction within minutes and then have the response last for hours, a VPP may be better capable to respond to that need than a power plant.

Of course, demand response, which can be part of a VPP, can be fast responding and utilities have had the ability to utilize demand responses’ grid characteristics for decades. Despite the opportunity to use demand response more often, utilities have, nevertheless, tended to rely upon power plants rather than demand-side solutions to meet their needs. This is because utilities make money by investing in capital projects, such as power plants and distribution lines—whereas demand response would reduce the need for new infrastructure, thereby avoiding potential profit. This profit risk is exacerbated when competitors enter a market that can offer customers products and services that reduce the amount of electricity from the utility, providing less revenue for the utility. When those products also avoid the need to build new capital, then that’s lost profit.  

Policy Recommendations

So what needs to change to enable more use of VPPs?  Many states are pondering this question. To help states understand these issues and how to create a market for VPPs, there are several policies states should consider implementing to support VPP development.

1. Quarantining the monopoly. This would limit the ability of the utility to interfere in the VPP marketplace so that competition can take hold. As R Street stated in its comments to the Department of Justice’s anticompetitive regulations effort, “Conduct-based remedies have proven porous—utilities exploit control of interconnection queues, customer data, and billing platforms to impede rivals even after formal functional separation.” For VPPs, this means that regulators must be more diligent in identifying where utility conduct is actively thwarting competitive opportunities that would bring greater benefits to customers, greater utilization of products and services that are increasingly being installed by customers, and enhanced reliability and resilience of the system by relying on a diverse set of products and services.  
2. Customer data access. The ability of a VPP to save money for customers and to prove the response of the VPP is predicated on access to customer usage data. This is the information that shows how much electricity is consumed—or not, as the case may be. For a VPP, if it’s consuming in response to excess demand, then usage information would show how much electricity was consumed. Without this information, VPP developers could not provide savings estimates to consumers, nor would the VPP developers be able to show the utility how the VPP performed.  
3. Grid data access. In addition to customer usage data, the VPP developer needs access to information about the grid. Making more information about the grid available, such as public hosting capacity maps, would help level the playing field so that customers and developers can have more information about where there is a need. This would increase the locational business-use case for specific VPPs.  
4. Standards. This applies to several aspects of the VPP marketplace. Notably, there must also be a standardized way in which customer usage data is shared between the utility and the customer-authorized third party. Standards, such as Green Button Connect, are necessary to ensure that developers build one solution, not multiple solutions, using different varieties of standards. In addition, contracts and tariffs must be standardized for many of the same reasons. If a developer wants to operate in a state with multiple utilities, it is more cost-effective to the utility, customer, and developer if as many aspects of the VPP marketplace are standardized as possible.  

VPPs have the opportunity to be a major component of the electricity system into the future.  However, much work is still needed to be done to ensure that VPP developers have a functioning marketplace that is not harmed by the role of the utility. Utilities are important partners in making VPPs successful, but must be kept out of the marketplace due to their unfair market position. Limiting utility participation and quarantining the monopoly to minimize barriers to entry will be better for VPPs, the electricity grid, and consumers.