How virtual power plants can save the U.S. trillions in grid upgrades

How virtual power plants can save the U.S. trillions in grid upgrades

By Kelechi Udeala

Generating and consuming renewable energy presents challenges due to intermittency and geographical limitations. To address these challenges, utilities ensure that generating resources are distributed and decentralized, and energy storage assets are deployed. 

However, demand and generation can vary unpredictably, resulting in energy surpluses in some areas and deficits in others, which can lead to blackouts and brownouts. Traditionally, fossil fuels have been used to mitigate the adverse effects of these variations.

Fortunately, advancements in power management software, communications infrastructure, and energy storage technology, such as the batteries in electric vehicles and residential battery storage, are helping utilities to manage these challenges. 

The concept of a virtual power plant greatly enhances the grid’s ability to respond to changes in demand and generation, eliminating the need to balance demand and generation with fossil fuels.

Unpacking virtual power plants:

A virtual power plant (VPP) is a system that uses cloud-based software to manage different types of renewable energy assets located in various locations. The VPP aggregates these distributed energy resources (DERs) to balance the supply and demand of electricity to and from the grid or store electrical energy in a connected energy storage system.

Distributed energy resources may include:

  • Grid-scale batteries
  • Residential home batteries
  • Vehicle-to-grid (V2G) systems
  • Residential rooftop solar panels
  • Wind farms

By using a VPP, consumers with rooftop solar panels or battery backup units can provide electricity to the grid to meet broader electricity requirements. Energy providers can also use the VPP to manage gigawatt storage capacities.

Demand response (DR), a reliability tool that adjusts energy demand to match grid capacity, is an example of a tool incorporated into a VPP. For instance, Enel X launched a DR programme in Taiwan in Q2 2020, which involved deploying an Enel X VPP along with distributed battery storage systems to bolster the Taiwanese electricity grid and aid their long-term transition to renewable energy.

The benefits of virtual power plants:

Below are some examples and benefits of virtual power plants (VPPs), which can enhance grid stability, increase renewable energy adoption, and potentially save on grid upgrade costs.

Grid resilience

VPPs can improve the electric grid resilience and stability by reducing the need for polluting fossil fuel-powered peaking power plants. VPPs can signal DERs to dispatch energy to the grid or curtail operation depending on grid demands. For instance, VPPs can request EVs to stop charging to conserve renewable electricity for where it is needed or request electricity dispatch from EVs with bi-direction V2G capabilities.

Energy security

VPPs facilitate decarbonization by increasing renewable energy adoption and enhancing energy security. By reducing the carbon footprint of electricity consumption, the grid becomes more stable and resilient.

German VPP specialist Next Kraftwerke, Belgian transmission service operator (TSO) Elia, IoT solutions provider Actility, and Belgian electricity supplier EDF Luminus, successfully piloted a project to test whether alternative technologies such as VPPs can reliably provide secondary reserve services to the Belgian grid. The firms achieved high compliance rates within a 30% grid compliance margin, potentially reducing the need for costly upgrades.

Cost savings

VPPs can potentially save consumers and prosumers money by discharging power into the grid during times of high demand when electricity prices are high. American utility company Duke Energy identified areas where upgrades are needed to interconnect new resources to its grid, estimating upgrade costs at US$560 million. 

However, VPPs could potentially reduce these costs. Similarly, Australian utility Evoenergy conducted a comprehensive demand management trial, avoiding US$1.6 million in upgrade costs by deploying a VPP instead of upgrading a substation.

What is the market for virtual power plants?

Virtual power plants offer various ways to generate revenue, including forecasting, trading, and curtailment of renewable energy, aggregation of grid flexibility, and demand response aggregation.

By coordinating and curbing renewable assets, energy trading firms can position themselves to optimise price-based renewables dispatch, resulting in better forecasting, avoiding negative-price feed-in occurrences, and lower energy balancing costs.

VPPs can also enable independent aggregators, utilities, or transmission system operators (TSOs) to create revenue by bidding into ancillary services markets. For example, Rocky Mountain Power is partnering with Sonnen and ES Solar to bring grid-scale battery capacity online. Tesla’s Powerwall and PG&E have also seen success with residential-scale batteries discharging into the grid. Additionally, these entities can share in reduced electricity procurement costs for demand response services.

The global VPP market is estimated at US$709.2 million, with North America leading the way at US$429.7 million and a compound annual growth rate (CAGR) of 29.89%. Europe follows with US$203.4 million and a CAGR of 28.74%, while the Asia-Pacific market has a CAGR of 31.15%, comprising only US$68.7 million of the global total. This growth is due to increased investment in grid-scale renewable assets with VPP services potential.

In October 2022, the government of Victoria in Australia held its second renewable energy target auction, awarding six solar PV projects, four of which include battery storage. Shell also acquired a 50% stake in the 375 MW Kondinin Energy project in Western Australia, which includes wind, solar, and battery storage.

The USA remains the dominant player, thanks to its growing EV infrastructure, with General Motors launching an energy storage business and Ford partnering with PG&E for a pilot project testing its bi-directional charging capabilities. The heterogeneity of distributed renewable and storage resources makes VPPs an exciting concept.

VPP can facilitate a circular economy and utility savings:

The International Energy Agency (IEA) reported that the total capacity of grid-scale battery storage in 2021 increased by 60% to 16 GW compared to 2020. The IEA predicts that by 2040, the installed grid-scale battery storage capacity in the USA, EU, India, and China could be 34 GW, 14 GW, 61 GW, and 48 GW, respectively. With the proliferation of V2G (vehicle-to-grid) and domestic battery storage, VPPs and DERs have a bright future.

VPPs can eliminate single points of failure by using decentralized renewable energy generation and grid-scale storage, thereby reducing the effects of natural disasters on energy availability. By using distributed small-scale storage like home storage and EVs, energy consumers can participate in energy markets and become “Prosumers.”

Public infrastructure like power plants is a prime target for hackers. VPPs are vulnerable because of their use of IoT and cloud computing technologies and the distributed nature of the hardware involved. However, Sandia National Laboratories has developed the Proactive Intrusion Detection and Mitigation System (PIDMS) to monitor cyber and physical data streams, recognize intrusion, and react proactively.

VPPs have a significant opportunity to leverage end-of-life (EoL) EV batteries for stationary storage. Research estimates that 1.25 million electric car batteries will reach EoL by 2050. VPPs could experience further growth as these EoL batteries go into service for stationary power storage.

For more information covering the potential for integrating EoL lithium-ion batteries into the economic value chain, you can refer to PreScouter’s report titled ‘State of Battery Recycling: Can we meet our LIB recycling obligations by 2030?

Firms like Zenobe and RWE are taking advantage of this opportunity. RWE uses decommissioned Audi e-Tron EV batteries to power a 4.5MWh storage system at its pumped hydro energy storage (PHES) plant in north-west Germany. This concept transforms distributed V2G resources into a single stationary megawatt-capacity storage unit.


In summary, energy companies can reduce the cost of decarbonizing their portfolios by using virtual power plants, vehicle-to-grid charging, end-of-life EV battery utilization, and standard residential storage systems. 

For instance, according to an Imperial College London study, the UK could save between £17 billion and £40 billion by 2050 by increasing electricity system flexibility through energy storage projects. In the USA, studies estimate that grid flexibility upgrade costs could reach US$5 trillion. 

As grid flexibility, resiliency, and decarbonization efforts become more widespread, virtual power plants can help promote the broader use of renewable energy.

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