Will New Business Models Topple VPP Roadblocks?

My job has made me a frequent flyer, but I can’t imagine stepping onto a plane without confidence in the air traffic control system and its complex interplay of regulation, technology, communications, scheduling, and human expertise. Many obstacles were overcome to achieve modern aviation—and the same is true where I work: today’s electric grid.

Virtual power plants (VPPs) are an essential part of the modern energy landscape. VPPs have emerged as the poster child for power grid modernization at the U.S. Department of Energy (DOE). Central to their sudden popularity is a VPP’s ability to provide the same energy services as a traditional centralized power plant—only cheaper and cleaner. VPPs are poised to become the glue that holds a decarbonized power grid together.

By aggregating distributed energy resources (DERs), VPPs help utilities and energy providers integrate formerly siloed on-site energy solutions into wholesale markets, as now authorized by Federal Energy Regulatory Commission (FERC) Order 2222. In addition to the U.S., VPPs are being deployed all over the world, with Europe, Australia, and other Asia Pacific markets leading the charge.

Their appeal is global because they can reduce operational costs, bolster grid reliability, and help meet clean energy and decarbonization goals. However, several obstacles must be overcome to maximize this opportunity to respond to climate change in the most inclusive way.

Open Protocols Are Crucial

Perhaps the most significant challenge is the lack of standardization in the VPP ecosystem. This makes it difficult for VPPs to communicate with different DER devices and control systems offered up by a variety of manufacturers from around the world. To overcome this challenge, open protocols must be adopted by hardware manufacturers and software platform providers—with this goal in mind, AutoGrid participates in the SunSpec Alliance and the Rocky Mountain Institute’s (RMI’s) Virtual Power Plant Partnership (VP3) initiative, organizations working to create a common set of standards and metrics to help scale up VPPs worldwide. These efforts will create an ecosystem where customers can choose any DER device they prefer, while still being eligible as assets for inclusion in VPPs and microgrids, as well as overarching distributed energy resource management systems (DERMS).

Some progress has been made on creating more open standards for DER aggregations with projects such as Duke Energy’s OpenFMB or the Linux Foundation’s open source microgrid initiative. Among the other obstacles to VPP deployments today are the following:

  • Technical Complexity. One of the main challenges of building and maintaining VPPs is the technical complexity of managing so many assets at scale. VPPs require a wide range of technical expertise, including knowledge of renewable energy sources, battery storage systems, and cloud-based digital control platforms.
  • Evolving Market Rules and Regulations. VPPs are highly dependent upon a viable regulatory framework. Regulations often govern the availability of DERs based on their fuels, size, type, and location on the grid. As market rules continue to evolve, creating a robust and cost-effective VPP can be challenging. This is especially true for market participants who are not well-versed in the minutiae of interconnection processes or new parameters governing grid service payments.
  • Uncertain Capital Costs. The capital costs of building a VPP are likely to vary significantly depending on the scale of the VPP, the type of technologies used, and the geographical location. The many soft and uncertain costs associated with a VPP could surprise an inexperienced vendor.
  • Lack of Incentives. Customers may not be incentivized to participate in VPPs, and the industry may need to offer rebates, credits, and other incentives to drive prosumer adoption. In the U.S., the Inflation Reduction Act provides incentives for multiple DERs, but integrating these DERs into VPPs may require more direct market intervention in the form of clear prosumer payments.
  • Telemetry and Integration Issues. Telemetry requirements and other requirements for a qualified entity to help transact in any energy market may be burdensome and cumbersome, leading to difficulty in following through on system integration steps to create multi-asset, multi-market VPPs.
  • Data Management. VPPs generate and rely on large amounts of data. It is therefore important to manage this data effectively to ensure that VPPs are running optimally and deliver the precise ancillary services required by the market to keep the grid in balance in real time. As VPPs scale up in size and function, granular data management challenges will grow over time.

New VPP Business Models Offer Solutions

VPPs require sophisticated software to manage and optimize thousands (if not millions) of DERs, while maintaining reliable service for end customers. This often requires deep expertise in the DER space and, ideally, knowledge across multiple types of asset owners, multiple market settings, and far-flung geographies.

Furthermore, the process of integrating DER-based flexibility into the market requires a deep understanding of system integration and a market operator qualified to help with fast-responding transactions. There are requirements for certifications, 24/7 desk support, generation management systems, bidding and settlements, and regulatory reporting that all must be met, often in real time.

A utility can move forward with a classic software-as-a-service (SaaS) VPP model if it has sufficient internal resources. Yet, many traditional market players, including large and sophisticated utilities, may not necessarily have the skillset and related resources to set up, and then, manage VPPs.

Market participants need a knowledgeable partner who can provide a concierge VPP service and help navigate solutions to the challenges outlined above. This is where the concept of turnkey VPPs comes in, delivering a specified amount of clean power capacity without tying up utility staff and other customers’ valuable resources. For a growing number of utilities, contracting for a certain amount of clean capacity with an outside expert that already has the in-depth skills to first create, and then, manage a turnkey VPP is an increasingly attractive answer.

Along with the adoption of open protocols, the use of new turnkey VPP solutions helps address many of the obstacles outlined above by creating a one-stop shop for customers wanting to decarbonize their energy resource portfolios while capturing new revenue streams in the new energy economy. Innovative business models such as turnkey VPPs can make these real-time DER aggregations more economically attractive to customers. In the process, they can respond to many of the obstacles now standing in the way of VPP deployments at scale, thereby accelerating creative responses to the energy transition.
From airport control tower to utility control room, it takes careful planning, overcoming obstacles, and grappling with complexity to manage a smooth take-off.

Ruben Llanes ([email protected]) is the CEO of AutoGrid.