Virtual Power Plants: The Next Operational Model for Electricity Generation

There are a few great reasons that utilities and the energy industry, in general, are looking for the next big thing. Whether that’s in distributed energy generation or demand flexibility to free up existing resources, utilities are challenged more than ever to meet evolving customer needs.

While this will prove costly in the short term, investing in distributed energy resources (DERs) opens up load management opportunities such as virtual power plants, which can help utilities avoid infrastructure buildout, decrease wholesale energy costs, and avoid or defer transmission and distribution investments. In fact, according to the U.S. Dept. of Energy (DOE), tripling virtual power plant capacity in the next seven years alone could save billions!

Distributed Energy Generation & Demand Flexibility

Distributed energy generation and demand flexibility are complementary strategies. Broadly, distributed energy generation provides a source of prosumer-generated renewable energy, while demand flexibility strategies serve as conservation efforts to minimize, mitigate, or otherwise load shift energy to off-demand hours. DERs like electric vehicles (EVs), solar, battery storage, and smart thermostats have become increasingly sophisticated and accessible and can offer utilities a powerful tool to shift load, integrate more renewables, and alleviate grid constraints.

These otherwise disparate devices are manageable outside of customers’ personal use through a distributed energy resources management system (DERMS). DERMS technology allows utilities to control these devices for DER programs through nuanced device control, enabled by Internet of Things (IoT) technologies. Utilizing this evolving technology, program operators can manage different types of devices to meet demand flexibility goals as needed.

The next generation operational control model beyond DERMS is virtual power plant (VPP) technology. When aggregated, these community resources employ existing technologies to meet demand during peak usage times while shaping top-line energy loads. As such, VPP technologies are the realization of the alignment of these technologies, which can employ load demand strategically to support more advanced use cases.

Want to learn more about virtual power plants and electrification? Read “Energy Storage, VPPs Accelerate Growth in Hybrid Power” in the December 2023 issue of POWER. Also read this POWER exclusive, “Electrification: Plugging into the future of energy.”

In August 2023, the California Energy Commission became one of several places around the world to approve a VPP program for area customers, a strategy that supports demand flexibility initiatives statewide. Touted as “the next big thing in electric utilities,” VPPs provide a flexible energy management solution that aggregates existing community energy assets and leverages them to mitigate supply and grid constraints. Research indicates that VPPs may save utilities $15 billion to $35 billion in capacity investments over the next decade. Given recent actions by the Federal Energy Regulatory Commission (FERC) to streamline the process for new renewable energy projects, determining the most effective type of VPP for your operation has never been more critical.

Virtual Power Plant Business Models

VPPs aggregate DERs, which include both distributed energy generation technologies like solar and a host of other resources to tap into for energy or load management, like thermostats or batteries. Let’s take a look at the most common virtual power plant strategies.

Market-Participation Virtual Power Plants: With a market-participation VPP, a third party aggregates energy resources, for sale back to wholesale electricity markets. This VPP can feature software-enabled aggregations of consumer assets like batteries, EVs, or other smart devices managed directly by third-party operators. In this case, utilities cede control of DERs in their territory, as well as the direct engagement with customers. We’re starting to see this market-participation VPP model heat up in places like Texas, where aggregators like Octopus Energy and other EV makers like Tesla look to capture VPP value streams directly with their customers and the wholesale markets.

Retail Virtual Power Plants: Retail VPPs typically include aggregated DERs for services compensated by or for a utility. In this VPP model, utilities retain direct control over demand events and dispatch, while benefiting from real-time insights on existing grid conditions. These types of VPPs are increasingly visible as community assets and can help utilities defer the cost of expensive upgrades to transmission or distribution equipment. We are seeing the adoption of VPPs within this business model heat up as well, with utilities like Green Mountain Power experiencing tremendous success with their “bring your own device” battery program, and preparing for unprecedented growth as they remove their program cap.

Operational Control Model: The Technical VPP: Underpinning the two VPP business models, technical VPPs aggregate community assets and provide the technological capabilities to orchestrate VPPs, enabled by DER aggregation software of all device types. Technical VPPs assess the full range of DER potential by monitoring and assessing devices at an individual level, rather than as a regional aggregate. This operational control model can be applied to both VPP business models previously mentioned.

This type of VPP control model allows utility program managers to shape load as they need it, whether that’s in peak shaving demand response conservation strategies, or for more advanced dispatch of aggregated DERs to meet the evolving needs of the grid. Built into the capabilities of a technical VPPs’ decision-making is optimizing for enhanced customer user experience, by pursuing peak load reduction strategies that minimally impact customers, further encouraging the likelihood of further event or program enrollment and participation.


VPPs are quickly catching on. From the growth of Texans participating in market-participation VPPs through energy retailers like Octopus Energy, to the quick expansion of retail VPPs in Vermont, the need to adopt technologies with the necessary operational control capabilities continues to spread. These technologies are here already, and with the right DER management software, utility program managers can plan their virtual power plant strategies to meet the needs of their constituents best.

Brenda Chew is the Director of Product Management at Virtual Peaker, where she focuses on advancing the company’s product offerings and capabilities. Brenda previously was the Director of Research & Industry Strategy at the Smart Electric Power Alliance.

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