Virtual power plants are a key to controlling energy costs for businesses

Solar energy is a proven distributed energy source that helps businesses reduce energy costs. Yet it appears to be the tip of the iceberg in terms of the power companies can wield to wrest control of their energy management and costs. In addition to solar energy, there is a plethora of distributed energy resources and connected devices that create virtual power plants, or VPPs. And companies must act or lag.

What exactly are VPPs and how fast will they grow?

AWS describes VPPs as: “A connected collection of cleanly distributed energy resources (DER) – solar, storage, grid-interactive efficient building equipment, EV charging, controls and more – remotely and automatically controlled to deliver affordable power, reliability, decarbonization and grid services . VPPs are utility scale (large) and utility scale (reliable, controllable) and thus a de facto power plant that is virtually connected from multiple locations.

Fortune business insights forecasts that the global VPP market will grow to $6.47 billion by 2028, up from the 2021 level of $0.88 billion.

This expected VPP growth is fueled by the growth of connected distributed energy sources, for example electrical appliances that you can monitor and/or control via an app on your phone. Most people are familiar with smart thermostats; these are joined by water heaters, home electric car chargers, electric vehicles and battery backup systems.

To reach net-zero emissions in the US, we need to replace nearly 1 billion appliances with efficient electrical versions that can participate in demand flexibility; this represents approximately $2 trillion in investment. And these are generally replaced, as they wear out in a five to fifteen year replacement cycle.

In addition, VPPs will be fueled by the United States Loan Programs Office as large-scale DER implementation will be required to meet the government’s goal of achieving 100% clean electricity by 2035.

DERs at the 5% tipping point

Within two years (by 2025) $110 billion is expected to be invested in distributed energy resources (DERs) – $5 billion per month, rising to more than $20 billion per month by the end of the decade. Driving this demand is the fact that DERs can provide critical grid support at a cost lower than the grid and are lucrative for homeowners who choose to participate in demand flexibility.

VPP participants can take advantage of the greater affordability and performance of clean, distributed energy and even receive compensation for services rendered. Income is provided to DER owners to achieve greater resilience for all during adverse grid events.

In fact, in California in the summer of 2022, 25,000 PG&E and Tesla powerwall customers were invited to launch a new pilot program to create a virtual power plant to support grid reliability and save customers money. Powerwall home battery systems create a virtual power plant to feed power back to the grid.

This initiative is part of PG&E’s Emergency lighting program (ELRP). In September it paid off; Tesla powerwall customers were paid for power used during a extreme heat wave and the looming possibility of rolling blackouts.

Energy reliability essential

The need for VPPs will continue to drive energy reliability. Just think of Hurricane Ian in September, which more than 580,000 Florida residents and businesses powerless for days; and public safety closures that are a regular occurrence in Western states during the wildfire season. These are examples where VPPs could have provided significant benefits.

Vehicles connected to the network will play a major role. Electric vehicles in the US have passed the critical mark 5% point of sale in 2022, which is considered by many to be a tipping point. More than a quarter of new car buyers are considering purchasing an electric car today.

Electric car batteries can hold approx 60 kilowatt hours (kWh) of energy that can power an average American household for two days. An example of this was when a Ford F-150 Lightning was powering a home in Ontario two days during a power outage caused by a massive snow storm. Also, EVs can provide power during peak hours and vehicles’ stored energy also contributes to VPPs.

The IoT creates the Internet of Energy (IoE)

Beyond EVs, net-interactive efficient devices and efficient buildingselectric vehicle charging and energy storage can be linked to create VPPs. The Internet of Things (IoT) is well established. Since each of these devices, buildings and vehicles can store energy, the VPP is the Internet of Energy (IoE).

This network of DERs allows Aggregators, Utilities or Grid Operators to enter into business agreements with DER owners to remotely and automatically adjust power consumption and discharge. This interaction between DERs and the power grid provides clean energy, helps balance loads at any given hour, and builds energy system resiliency while maintaining end-user (household and business) comfort and productivity. This reduces overall system costs, which can translate into lower electricity bills for all consumers, even those who do not export power to the grid.

A combination of software and hardware enables VPPs to better open the grid to an entirely new utility-scale supply, behind the meter, and coordinate disparate DERs into holistic, demand-flexible resources. It is the IoE and any ‘thing’ that creates and/or stores clean energy can be part of the aggregated energy source.

The “smart home” could have an EV charger that automatically charges the car, runs the dishwasher during off-peak hours, has rooftop solar power with a battery that kicks in at night or during a power outage, and more. The 2023 Consumer Electronics Show (CES) highlighted this with “Matter”, one protocol to connect compatible devices and systems, making the smart home plug ‘n play.

Enterprise VPPs are on the rise

In January 2023, GM, Ford, Google and solar energy producers announced a partnership set standards for scaling up the use of virtual power plants as the electrification of the US economy progresses and demand for power grows. It underlines that VPPs are on the rise for the enterprise.

VPPs also give utilities new flexibility to mitigate spikes and improve demand. The cost of supplying electricity fluctuates depending on a variety of factors, including weather and time of year. The cost of electricity for example, is higher in summer when demand is higher (think powerful air conditioning).

During peak demand, utilities turn on so-called “peak-plants,” or power plants that come online only during peak events and typically run on high-emission fossil fuels. VPPs can deliver utility-scale savings, allowing energy companies to defer investments in additional capacity and infrastructure to handle a peak load.

VPPs rely on proven clean energy technologies: solar energy, smart IoT devices and more. As more resources become part of IoE, VPP technology will accelerate, allowing grid operators to take advantage of the increasing amount of aggregated power.

Software to optimize usage

The opportunity for the technology industry is to continuously collect data to improve software and artificial intelligence (AI) to adapt faster to grid and customer needs. Determining these needs and electricity load starts with the end user and works back to the grid.

A simple example today is a smart thermostat that can detect when people are or are not at home or in a building to reduce electricity consumption and costs. Or EV charging technology that learns when a car is typically plugged in and waits for off-peak hours to charge. Every device that uses electricity has the potential to apply software to optimize electricity consumption. The current software meets, but will not meet the needs for our goal of 100% clean electricity by 2035.

Enterprises must take stock of their current distributed energy resources, IoT devices and software to manage them. In doing so, they can realize that they can indeed support and benefit from VPPs. Some use cases include:

• Enterprises as energy consumers can continue to invest in distributed energy resources in their facilities. The value of grid-interactive DER will continue to grow as opportunities to participate in VPPs increase. In addition to solar panels, they can evaluate internet-enabled water heaters, heat pumps and batteries. A company should look for opportunities to participate in a VPP. This is especially critical in factories or data centers. According to the American Chamber of Commercea data center can spend as much as 40% of its operating costs on energy to cool servers. In comparison, an office building or shop typically spends 5 to 10% of its operating costs on energy.

• Device OEMs and software vendors can build Internet connectivity, remote energy management, and/or telematics into the product, depending on what functionality is relevant to the device. When a device has the ability to bend energy demand in response to grid signals, it becomes valuable as a source of flexible load and can generate revenue for its owner.

• VPPs: Enterprises need to access large datasets of energy use and use predictive analytics to model future energy demand and ensure that the VPP is well positioned to manage that demand.

As connected sources become smarter and distributed energy sources become more prevalent, enterprises need to optimize their energy resources.

If companies do nothing now while VPPs are at an inflection point, they could lose one key to a competitive advantage.

Jigar Shah is the director of the Office of Loan Programs of the United States Department of Energy.