Virtual power plants: unlocking flexibility in a decentralised energy future

What are virtual power plants?

Virtual power plants are commonly referring to the centralised coordination of otherwise decentralised demand and/or supply-side resources. They differ from energy hubs in that the resources deployed are, by nature, in different locations and sometimes even across borders.

Power systems have evolved to support and withstand the increase in distributed energy resources

The rise of virtual power plants marks the beginning of a new era in grid and power system modernisation. As a response to the exponential increase in DER (distributed energy resource systems, such as rooftop solar panels), network technologies have initially provided increased visibility down to distribution voltage levels, subsequently evolving into active network management enabling further grid flexibility – meaning the power grid is able to adapt to fluctuations in electricity supply and demand in real time. In parallel, behind-the meter energy conservation and management has also evolved with the emergence of smart meters, smart appliances, smart import/export tariffs and more demand-side management approaches.

This has contributed to increasing the penetration of DER globally and has mitigated but by no means completely offset the impact they have on power grids and on the system operator’s ability to match supply with demand at all times. 

Power trading platforms play a crucial role in balancing, but DER are generally too small to participate in either day-ahead or intra-day trading. This is mainly due to diseconomies of scale, as the fixed costs associated with market participation are typically dissuasive, or simply not meeting minimum trading quantity thresholds or creditworthy criteria.  

Trading through traditional aggregators (who manage portfolios of DERs) can help to breach minimum thresholds for eligibility and spread fixed costs across multiple smaller systems. This approach can also, through coordinated control signals, achieve a degree of enhanced efficiency, but the scope for genuine optimisation is limited and restricted to power supply costs/revenues. A well-coordinated compound of constrained and relatively inflexible systems will remain a constrained and relatively inflexible system. 

Furthermore, benefits drawn from DER aggregators require resilient local market platforms to be operational and liquid – prerequisites which are not met in many countries and regions where DER penetration raises technical and balancing challenges for power utilities.

Virtual plants can open the next era of power system evolution

This is where virtual power plants (VPP) are set to step in. Unlike traditional aggregators, virtual power plants use a combination of control and software-driven systems to optimise a combination of power supply, storage, grid, and/or demand resources to behave as one “virtual” power source, optimised to maximise revenue and minimise system constraints concurrently. Naturally, progress in artificial intelligence and machine learning is set to increase potential efficiency gains over time.

The emergence of virtual power plant projects around the world

VPPs have recently emerged in power markets around the world, with each instance combining multiple technologies:

• In South Australia, one of the country’s largest VPP was formed by AGL and Tesla with support from the South Australia Government. Composed of distributed solar and batteries installed on social and community housing, it became the first VPP in Australia to help stabilise the frequency of the grid . Participation in this VPP provided local communities an opportunity to achieve 25% lower electricity costs compared to the regulated Default Market Offer (DMO), while also allowing households to benefit from the battery capacity that can provide backup power during outages or blackouts. In addition to benefits to users, the VPP plays a critical role in stabilising the electricity grid by managing frequency levels and responding rapidly to sudden fluctuations. For example, this VPP provided power during high and low frequency issues in the grid in December 20191. Participation in the VPP has shown savings of up to $575 per year on electricity bills , while also supporting renewable energy generation.
• Sunrun, a home solar, battery, and energy service provider, operates a VPP in New England, U.S, which is fully integrated with the distribution grid. In 2022, the VPP became the nation’s first residential VPP in the wholesale market  and from June to August 2022, exported more than 1.8 GWh of electricity which helped manage grid stability. This VPP directly addresses the concerns around capacity constraints and grid reliability by offering a decentralised energy generation system. Its benefits extend across multiple areas including supporting grid decarbonisation , delivering essential grid services and generating financial value for the plant owners. Similar to other VPPs, it has helped to reduce the peak demand and mitigate network constraints. This programme demonstrated the effectiveness of distributed energy generation in providing peak shaving  and reducing reliance on peaking power plants with high emissions.
• In Europe, Next Kraftwerke has over 14,000 aggregated units covering 17 technologies and a capacity of 12.7GW  providing flexibility services to the grid. The technologies used include a range of energy sources such as solar, wind, biogas and hydroelectric plants coming from a network of decentralised energy generators instead of few large producers. This approach provides faster grid flexibility and greater integration of renewable energy while opening markets for small energy producers and reducing overall costs associated with grid balancing . In 2024, these systems traded around 15.1 TWh of energy back to the grid which stabilised the operations during periods of peak demand , offering  flexibility in supply and demand while maintaining connections with grid operators and end consumers . The financial savings are also significant with up to 25% reduction in grid balancing service costs and total savings of about €150 million over four years.   

Potential benefits and expected hurdles

Many benefits are expected to be unlocked by VPPs:

• Delay or downsize grid investments: actively managing power networks alongside a portfolio of DER can unlock additional grid capacity on the network and pre-empt avoidable voltage excursions and congestions. On all counts this could help to postpone or downsize investment in additional grid infrastructure.
• Diverse revenue opportunities: conceptually VPP can participate both in wholesale energy, capacity and ancillary service markets.
• Optimise beyond borders: hybrid projects (combining several technologies on the same project site) are typically constrained by accommodating all technologies on the same site. The site could be optimal for solar, but not for onshore wind and vice versa. At a national scale, VPP can agglomerate and co-optimise resources in different locations. At a regional scale it could – conceptually – operate beyond national borders.

However, some significant hurdles remain:

• Virtual power plants require significant upfront costs: necessitating IT infrastructure, integration and modernisation of Supervisory Control and Data Acquisition [SCADA] systems before generating additional revenues.
• Bankability is likely to be an issue: as with all less established technologies relying on emerging revenue models, challenges should be expected around the cost of financing the system infrastructure.
• The benefits of the optimisation achieved: compared with a more traditional aggregator, these are more restricted when compounded assets do not expand to grid infrastructure. Power utilities are unlikely to relinquish active network management to VPPs unless they themselves operate it.

Mitigating early risks and making VPPs a success

Initially, power utilities are those most likely to benefit from VPP projects – with benefits spanning throughout their whole value chain. Revenue models are also more likely to accommodate higher upfront investments, subject to regulatory approval, and especially in jurisdictions where network innovation is cross-subsidised.

But as recent global experience shows, VPP ventures are also likely to be of financial interest to private developers and aggregators who see this as the next step on their evolutionary journey.

In either case, early-stage feasibility and cost benefit analysis and detailed system modelling covering both supply and network assets will be instrumental to proceed with confidence and secure relevant approvals. 

Ricardo uses proprietary modelling tools designed with energy hubs and VPPs in mind to carry out such analysis. Contact our expert team today.

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