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Climate change and energy

How virtual power plants are shaping tomorrow’s energy system

By orchestrating EVs, batteries, and smart home devices, VPPs can help make the grid cleaner and more efficient.

February 7, 2024
Photo illustration concept of virtual power plant, showing two power plant stacks with a glitch effect.
Sarah Rogers/MITTR | Getty

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For more than a century, the prevalent image of power plants has been characterized by towering smokestacks, endless coal trains, and loud spinning turbines. But the plants powering our future will look radically different—in fact, many may not have a physical form at all. Welcome to the era of virtual power plants (VPPs).

The shift from conventional energy sources like coal and gas to variable renewable alternatives such as solar and wind means the decades-old way we operate the energy system is changing. 

Governments and private companies alike are now counting on VPPs’ potential to help keep costs down and stop the grid from becoming overburdened. 

Here’s what you need to know about VPPs—and why they could be the key to helping us bring more clean power and energy storage online.

What are virtual power plants and how do they work?

A virtual power plant is a system of distributed energy resources—like rooftop solar panels, electric vehicle chargers, and smart water heaters—that work together to balance energy supply and demand on a large scale. They are usually run by local utility companies who oversee this balancing act.

A VPP is a way of “stitching together” a portfolio of resources, says Rudy Shankar, director of Lehigh University’s Energy Systems Engineering, that can help the grid respond to high energy demand while reducing the energy system’s carbon footprint.

The “virtual” nature of VPPs comes from its lack of a central physical facility, like a traditional coal or gas plant. By generating electricity and balancing the energy load, the aggregated batteries and solar panels provide many of the functions of conventional power plants.

They also have unique advantages.

Kevin Brehm, a manager at Rocky Mountain Institute who focuses on carbon-free electricity, says comparing VPPs to traditional plants is a “helpful analogy,” but VPPs “do certain things differently and therefore can provide services that traditional power plants can’t.”

One significant difference is VPPs’ ability to shape consumers’ energy use in real time. Unlike conventional power plants, VPPs can communicate with distributed energy resources and allow grid operators to control the demand from end users.

For example, smart thermostats linked to air conditioning units can adjust home temperatures and manage how much electricity the units consume. On hot summer days these thermostats can pre-cool homes before peak hours, when air conditioning usage surges. Staggering cooling times can help prevent abrupt demand hikes that might overwhelm the grid and cause outages. Similarly, electric vehicle chargers can adapt to the grid’s requirements by either supplying or utilizing electricity. 

These distributed energy sources connect to the grid through communication technologies like Wi-Fi, Bluetooth, and cellular services. In aggregate, adding VPPs can increase overall system resilience. By coordinating hundreds of thousands of devices, VPPs have a meaningful impact on the grid—they shape demand, supply power, and keep the electricity flowing reliably.

How popular are VPPs now?

Until recently, VPPs were mostly used to control consumer energy use. But because solar and battery technology has evolved, utilities can now use them to supply electricity back to the grid when needed.

In the United States, the Department of Energy estimates VPP capacity at around 30 to 60 gigawatts. This represents about 4% to 8% of peak electricity demand nationwide, a minor fraction within the overall system. However, some states and utility companies are moving quickly to add more VPPs to their grids.

Green Mountain Power, Vermont’s largest utility company, made headlines last year when it expanded its subsidized home battery program. Customers have the option to lease a Tesla home battery at a discounted rate or purchase their own, receiving assistance of up to $10,500, if they agree to share stored energy with the utility as required. The Vermont Public Utility Commission, which approved the program, said it can also provide emergency power during outages.

In Massachusetts, three utility companies (National Grid, Eversource, and Cape Light Compact) have implemented a VPP program that pays customers in exchange for utility control of their home batteries.

Meanwhile, in Colorado efforts are underway to launch the state’s first VPP system. The Colorado Public Utilities Commission is urging Xcel Energy, its largest utility company, to develop a fully operational VPP pilot by this summer.

Why are VPPs important for the clean energy transition?

Grid operators must meet the annual or daily “peak load,” the moment of highest electricity demand. To do that, they often resort to using gas “peaker” plants, ones that remain dormant most of the year that they can switch on in times of high demand. VPPs will reduce the grids’ reliance on these plants.

The Department of Energy currently aims to expand national VPP capacity to 80 to 160 GW by 2030. That’s roughly equivalent to 80 to 160 fossil fuel plants that need not be built, says Brehm.

Many utilities say VPPs can lower energy bills for consumers in addition to reducing emissions. Research suggests that leveraging distributed sources during peak demand is up to 60% more cost effective than relying on gas plants.

Another significant, if less tangible, advantage of VPPs is that they encourage people to be more involved in the energy system. Usually, customers merely receive electricity. Within a VPP system, they both consume power and contribute it back to the grid. This dual role can improve their understanding of the grid and get them more invested in the transition to clean energy.

What’s next for VPPs?

The capacity of distributed energy sources is expanding rapidly, according to the Department of Energy, owing to the widespread adoption of electric vehicles, charging stations, and smart home devices. Connecting these to VPP systems enhances the grid’s ability to balance electricity demand and supply in real time. Better AI can also help VPPs become more adept at coordinating diverse assets, says Shankar.

Regulators are also coming on board. The National Association of Regulatory Utility Commissioners has started holding panels and workshops to educate its members about VPPs and how to implement them in their states. The California Energy Commission is set to fund research exploring the benefits of integrating VPPs into its grid system. This kind of interest from regulators is new but promising, says Brehm.

Still, hurdles remain. Enrolling in a VPP can be confusing for consumers because the process varies among states and companies. Simplifying it for people will help utility companies make the most of distributed energy resources such as EVs and heat pumps. Standardizing the deployment of VPPs can also speed up their growth nationally by making it easier to replicate successful projects across regions.

“It really comes down to policy,” says Brehm. “The technology is in place. We are continuing to learn about how to best implement these solutions and how to interface with consumers.”

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