TOPIC #3
Virtual Power Plants
With widespread adoption, distributed energy resources
mature into a flexible grid resource.
Virtual Power Plants (VPPs) Are Proliferating, Providing Grid Services, and Poised for Growth
- Evolving from a legacy rooted in demand response, the term VPP applies to aggregations of distributed energy resources (DERs) that are actively controlled to provide grid services to electric utilities or wholesale markets.
- VPPs include a broad range of technologies, including rooftop solar PV, distributed battery storage, electric vehicles, smart thermostats, smart water heaters, and commercial building automation systems.
- Using a broad VPP definition, Wood Mackenzie estimates that more than 500 VPP projects operate in North America, using an array of technologies (see Figure 3.1). Meanwhile, the U.S. Department of Energy (DOE) estimates current VPP capacity in the United States to be 30 to 60 GW.
- Looking forward, VPPs are set for rapid expansion.
- RMI estimates VPPs could reduce peak demand in the United States by 60 GW by 2030.
- With rapid and coordinated action, DOE estimates this figure could be higher, reaching 80 to 160 GW (or 10% to 20% of peak load) by 2030.
- To prepare for this future, electric utilities should evaluate the role and benefits VPPs could provide their service territories.
Figure 3.1: Number of North American VPPs Utilizing DER Technologies (by Type)
Source: Wood Mackenzie, North America Virtual Power Plant Market: 1H 2023
KEY TAKEAWAYS
Electric utilities are enrolling customers and deploying DERs as VPPs in large numbers across the country.
Implementation of FERC Order 2222 will expand market access for VPPs by allowing aggregated DERs to participate in wholesale markets.
Additional drivers encouraging VPP growth include the success of early projects, expanding DER capacity and technologies, extended federal tax credits, and growing reliability concerns.
Utilities interested in introducing or expanding VPPs should develop a strategic plan focused on assessment, stakeholder engagement, and DER investments.
Electric utilities are enrolling customers and deploying DERs as VPPs in large numbers across the country.
Implementation of FERC Order 2222 will expand market access for VPPs by allowing aggregated DERs to participate in wholesale markets.
Additional drivers encouraging VPP growth include the success of early projects, expanding DER capacity and technologies, extended federal tax credits, and growing reliability concerns.
Utilities interested in introducing or expanding VPPs should develop a strategic plan focused on assessment, stakeholder engagement, and DER investments.
With an Ability to Be Tailored, VPPs Offer a Broad Value Proposition
In a recent report, DOE notes: “VPPs are a tool used for flexing distributed demand and supply resources with a level of dexterity that has historically only been possible in flexing centralized supply.”
- Based on the availability of DERs in a service territory, a VPP can function as demand, generation, and storage.
- This makes VPPs highly configurable and capable of being designed to deliver grid services tailored to a specific time, location, and scale.
- By being dynamic and flexible, DERs can be used to:
- Shift demand from peak to off-peak hours
- Shed demand on the grid during supply shortages (by reducing consumption or providing on-site energy)
- Reshape and reduce baseload consumption
- Provide ancillary services to satisfy the needs of the distribution or transmission grid
- In addition, a VPP can be adapted over time to meet the changing needs of the electric grid.
VPPs can reduce grid operating costs and offer a host of additional benefits.
- A recent Brattle analysis concluded that a VPP consisting of residential DERs (i.e., thermostats, water heaters, EV chargers, and behind-the-meter batteries) could provide peaking capacity with a net cost 40% to 60% lower than traditional alternatives (i.e., natural gas peaker plant and utility-scale batteries).
- With the ability to perform a wide array of functions, VPPs can provide broad value to the electric system, grid operators, local communities, and individual customers (see Figure 3.2).
- VPPs recruit DER owners in a variety of participation models that offer rewards for contributing to efficient grid operations (see Figure 3.3).
- Market Participant: A VPP aggregator enrolls members and dispatches the VPP to provide capacity, energy, and ancillary services to the wholesale market in response to price signals from the market operator.
- Retail: A distribution utility enrolls customers to establish the VPP and controls the VPP directly to meet system needs. The utility may run the VPP project in-house or partner with a third-party service provider.
Figure 3.2: VPP Value Proposition
Source: DOE VPP Liftoff Report
Figure 3.3: VPP Market Participation Model
Source: DOE VPP Liftoff Report
Multiple Drivers Create Strong Tailwinds for VPP Growth, But Implementation Hurdles Remain
Continued growth of VPPs will depend upon some key drivers:
- Early Success: Pilot programs and early adopters have demonstrated value and allowed third-party service providers to refine and enhance offerings.
- Diverse Technology: A growing number of technologies may contribute to VPPs. This may include traditional demand response technologies (e.g., smart thermostats) and emerging technologies (e.g., bi-directional charging of electric vehicles).
- Federal Tax Credits: Following passage of the Inflation Reduction Act, multiple technologies (i.e., solar PV, battery storage, electric vehicles, and heat pumps) are eligible for tax credits through 2032.
- Critical Mass: The sheer number of DERs available to participate in VPPs has rapidly expanded in recent years.
- Solar PV: More than four million residential solar PV systems exist in the United States—more than 700,000 systems were installed in 2022.
- Storage: More than 240,000 residential energy storage systems exist in the United States—more than 90,000 systems were installed in 2022.
- Electric Vehicles: The United States is on track to sell one million EVs in 2023, and more than half of passenger car sales could be electric by 2030.
Strong growth is forecasted for these and other DERs through 2030 (see Figure 3.4).
- Market Access: In September 2020, the Federal Energy Regulatory Commission (FERC) issued Order 2222 requiring regional transmission organizations (RTOs) and independent system operators (ISOs) to amend rules to allow heterogenous DER aggregations in wholesale markets (see Figure 3.5).
- FERC has fully accepted one compliance plan, partially accepted three compliance plans, and not yet commented on two compliance plans. Compliance dates range from November 2024 to October 2029 (see Figure 3.6).
- In several concurring statements, commissioners have noted concerns that implementation of Order 2222 will negatively impact state regulation of the distribution system.
- Implementation challenges and design questions being addressed in implementation plans include defining eligible markets, determining location requirements (i.e., feasibility of multinodal VPPs), and securing FERC approval of tariffs before developing software.
Figure 3.4: Projected Growth of Select DERs
Source: The Brattle Group
- Reliability Concerns: Resource capacity shortfalls and energy risks are both cited as concerns in the most recent Long-Term Reliability Assessment published by the North American Electric Reliability Corporation (NERC). The report specifically notes:
“DER aggregators will also play an increasingly important role for bulk power system (BPS) reliability in the coming years. Increasing DER participation in wholesale markets should be considered in connection with potential impacts to BPS reliability, contingency selection, and how any reliability gaps might be mitigated.”
NERC also notes the need for DER data sharing, models, and information protocols to support BPS planners and operators.
Figure 3.5: Tariff Revisions Required by FERC Order 2222
Source: FERC Order 2222
Figure 3.6: Status of FERC Order 2222 Implementation
Source: ScottMadden research
VPPs Are Numerous and Span a Variety of Geographies and Technologies
Figure 3.7A: Select Operating and Planned VPP Projects (Western U.S.)
Source: ScottMadden research
Figure 3.7B: Select Operating and Planned VPP Projects (Eastern U.S. and Puerto Rico)
Source: ScottMadden research
Utilities Can Take Actions Today to Prepare for a Future with More VPPs
- Utilities interested in introducing or expanding VPPs should develop a strategic plan focused on assessment, stakeholder engagement, and proactive DER investments.
- A key first step in developing a strategic plan is assessing how VPPs may provide value within a service territory. Key activities will include:
- Assess VPP viability: Identifying DERs deployed across the system can give utilities a sense of the support VPPs could provide if aggregated. Beyond a current state assessment, developing a granular DER adoption forecast can inform where VPP deployment is most likely to occur.
- Identify system needs: Analyzing system risk during “worst-day” forecasts can provide a utility with an understanding of system constraints and identify load pockets that may overload the system given extreme weather conditions.
- Define VPP benefits: Combining these two inputs (DER forecasts and system needs) can help utilities understand the potential benefits VPPs can provide to the system. With this understanding, utilities can develop planning requirements and compensation frameworks that utilize VPPs as cost-effective tools.
- In addition to the assessment, utilities should engage with regulators and market stakeholders. Key activities include:
- Education: Ensuring regulators understand the viability, functionality, and benefits of VPPs is critical. This education may lead to support for VPP deployments or other key infrastructure investments. A review of current rates may also be needed to ensure DERs are not dually compensated for the same service.
- Market engagement: Establishing relationships with third-party service providers may help utilities understand offerings and encourage collaboration as opportunities arise. This may also inform DER eligibility requirements should VPP enrollment occur in the future.
- Finally, utilities should consider proactive investments that prepare systems for high DER penetrations.
- If not already in place, investments in advanced meters and advanced distribution management systems may support future DERs and VPPs.
- Similarly, enhancing cybersecurity protocols can mitigate the risk of security breaches in a future, more decentralized grid.
- Being proactive can prepare a utility for any administrative or operational burdens and avoid becoming a bottleneck during VPP deployment.
IMPLICATIONS
VPPs have evolved from basic demand response programs to dynamic offerings capable of leveraging a diverse range of technologies, including rooftop solar PV, battery storage, and electric vehicles. These new technologies allow VPPs to provide a broader range of grid services, including energy, capacity, and ancillary services that can be tailored to specific geographic locations and time periods.
The continued expansion of VPPs, including their integration into wholesale markets, could prove useful in ensuring reliability during peak demand periods. Electric utilities will need to develop strategic plans for VPPs to ensure maximum benefit is delivered to the electric grid.
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