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Virtual Power Plants (VPP) Explained

July 31, 2023
The words "Virtual Power Plants" over an image of various forms of power and energy generation and consumption, including solar power, wind power, electric vehicles, and the grid, representing what Virtual Power Plants (VPPs) are, how virtual power plants work, the benefits of VPPs, and the difference between a virtual power plant and a microgrid.

So many things are going virtual these days, it is hard to keep track. Virtual learning, virtual reality, and now… virtual power plants?

No. It’s not what you are thinking. A virtual power plant is not an industrial energy facility in the Metaverse.

Instead, virtual power plants are a rapidly developing real-world technology that is gaining popularity all over the globe.

What are Virtual Power Plants?

A Virtual Power Plant (VPP) is a diverse collection of small-scale, distributed power and electricity production, consumption, and storage devices that are aggregated together into a single system to support the grid's needs.

These devices include solar panels, solar batteries, smart home thermostats, electric vehicles, and appliances, which can combine to enhance their power generation capabilities and provide additional options for demand-side load reduction by being charged, discharged, or managed in a flexible way.

The Department of Energy defines virtual power plants as “a connected aggregation of distributed energy resource (DER) technologies” that “offer deeper integration of renewables and demand flexibility, which in turn offers more Americans cleaner and more affordable power.” In other words, a virtual power plant (VPP) is a network of interconnected, small-scale, energy-related equipment that can work together to deliver benefits greater than each part could alone.

By encouraging home and property owners to share their clean energy with the public, VPPs can lower the financial and carbon costs of communities connected by transmission and distribution power lines, from small neighborhoods to national networks of program participants.

Virtual Power Plant Examples

In conjunction with governments, utilities, and private companies, virtual power plants in the US have slowly begun to emerge in the last five years.

Here in the United States, home and business owners in select Texas utility service areas can enroll in a VPP pilot program run by the grid operator Electric Reliability Council of Texas (ERCOT). Also, Tesla’s virtual power plant is up and running in the Lone Star State, much like the company’s similar ventures in California and overseas.

Internationally, other notable virtual power plant projects include Germany’s Next Kraftwerke, and Australia’s AGL Virtual Power Plant, which claims to be the largest of its kind in the world.

How do Virtual Power Plants Work?

Decentralized and activated in response to local energy demand, VPPs use advanced software to balance grid loads with customer-supplied resources.

Although participants in virtual power plants maintain ownership of their equipment, VPPs are controlled by aggregators, private companies, and other grid operators who can utilize enrolled resources in terms set out by a contract agreement.

For example, if you enroll your solar battery storage in a VPP, your stored power may be automatically discharged to the grid during peak demand hours, resulting in direct compensation or credits on your energy bills. Most VPP agreements have preset hours for discharges, and also allow participants to opt out of energy sharing during select events.

As VPPs become more advanced, participants can gain even more control over their power, including how, when, and where their energy is sold on the open market.

Virtual Power Plants vs Microgrids

Two similar concepts with critical differences, virtual power plants are fundamentally separate from microgrids. While microgrids are self-contained, VPPs are a bit more fluid and can constantly change in size, shape, and structure.

Despite usually being integrated with the larger electricity grid, the defining feature of microgrids is their ability to disconnect and operate independently with incorporated energy storage. Although virtual power plants often utilize solar batteries, VPPs are decentralized and cannot operate without the assistance of the greater electrical grid.

Benefits of Virtual Power Plants

Linking together distributed energy resources (DER), virtual power plants bring strength in numbers that deliver many benefits to consumers and society at large:

Grid Stability, Efficiency, and Electrification: In an effort to build a more sustainable future, virtual power plants can help prepare communities for widespread electrification by reducing peak electricity demand on conventional power plants. With distributed clean energy flowing into the grid during high-demand hours, VPPs can intelligently distribute customer power at the highest efficiencies and lowest stress levels.

Decarbonization and Human Health: Incentivizing clean energy generation at the consumer level, VPPs can help utilities decarbonize their electricity portfolio with enrolled customer equipment. By creating programs that encourage participants to share their solar power, VPPs can accelerate green energy use to reduce total grid-related emissions from fossil fuel, improve local air quality, and meet decarbonization goals.

Disaster Resilience and Recovery:  While cost savings and a blanched grid are great day-to-day benefits, VPPs also have the potential to play a crucial role in power resilience during and after hurricanes, wildfires, tornadoes, and other natural disasters. With an interconnected network of distributed resources, advanced VPPs may be able to send energy wherever it is needed most after isolating downed lines or damage that has caused disrupted or unreliable electricity access.

Financial incentives: Most importantly, virtual power plants can help you (as a participant) save and even make money when you share your energy resources with the electricity grid. In addition to giving consumers more control over their electricity costs during time-of-use rates and allowing utilities to create equipment rebate programs, VPPs enable power producers to sell their clean energy for cash or bill credits on the open market.

What’s Stopping Virtual Power Plants?

Virtual power plants are gaining speed in the mid-2020s but are not readily available everywhere in the US. Despite their benefits, many barriers still prevent virtual power plants from establishing widespread adoption.

For instance, unless they create profitable business endeavors, most utilities don’t necessarily have a financial incentive to establish a virtual power plant. Although virtual power plants enable grid operators to bypass infrastructure costs for planned storage projects by tapping into a network of customer energy resources, VPPs still require considerable time, capital, and risk to establish.

Like a community solar garden, VPPs are also nothing without their participants. While some homeowners may distrust energy companies to keep their best interests in mind, VPPs cannot grow unless a mutually beneficial balance is established between participants and operators.

Summary and Additional Resources about VPPs

To recap, virtual power plants combine dispersed hardware and advanced software to connect energy resources to benefit individuals and communities efficiently. Enabling cost savings, energy trading, and more sustainable access to clean electricity, virtual power plants are set to play a vital role in global electrification and decarbonization.

If you’d like to learn more about virtual power plants, check out this Sector Spotlight from the Department of Energy or read why some of the biggest names in tech and auto are teaming up on virtual power plants.

And if you’d like to participate in a virtual power plant, the first step is to go solar, which you can start today using Palmetto’s free Solar Qualification Tool.

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