Are Virtual Power Plants being underutilized in the US and UK?

April 18, 2024
8 mins

Are Virtual Power Plants being underutilized in the US and UK?

Virtual Power Plants could be an important tool as the energy industry continues its transition to net zero, providing additional resilience to the energy grid and opening up new opportunities for energy retailers and consumers. However, their spread worldwide has been uneven, with some nations surging ahead. Is there room for more investment?
April 18, 2024
8 mins

Are Virtual Power Plants being underutilized in the US and UK?

April 18, 2024
8 mins

As a global provider of SaaS applications to energy retailers, here at Gorilla we bear witness to a lot of differences between nations and different trends. However, one constant is that the UK tends to be the most mature market, while the US lags behind and Germany is even further back. One area where this has been upended is the deployment and use of virtual power plants (VPPs), with Germany leading the way and US retailers beginning to invest more heavily. Are UK retailers missing out? What has driven the expansion of VPPs in Germany? In this blog, we will look at the current state of VPPs in these countries, exploring the advantages of the German market and discussing why VPPs present the next big opportunity for forward-thinking energy retailers.

Virtual Power Plants - a Primer

Before we get started, a quick refresher on VPPs. A virtual power plant is typically an aggregate of distributed energy resources (DERs), such as solar panels, wind turbines, and battery storage, which connect to the electricity grid in order to combine the generation and storage capabilities of the DERs. Combining these resources enables the owner of the VPP to balance supply and demand by, for example, drawing power from generators at peak times, or storing electricity in batteries when there is an excess.

Aside from the distributed nature of a VPP, one big difference from traditional power plants is that they can also include demand management capabilities. IoT devices like smart thermostats can be linked to a VPP and turned up or down depending on the needs of the grid, as can EV chargers. Individually, DERs are too small to contribute to balancing energy supply and demand but when combined by a utility they can be a powerful tool for balancing the grid.

VPPs in Germany

The expansion of VPPs in Germany began in the early 2000s, when the country’s push for more solar and wind put stress on the grid, leading to an explosion in battery storage capacity. To manage the pressure from intermittent renewable generation, Germany was forced to invest in greater power system flexibility, with VPPs being a key tool.

Some statistics:

EDF estimated the energy aggregation and local flexibility market in Germany at 75GW in 2019 and expects a doubling by 2030. Germany's push towards expanding VPPs has seen significant involvement from both established and emerging companies. Shell subsidiary Sonnen is looking to operate VPPs around the world but their largest market is in Germany, where they operate a VPP with 250MWh of capacity, claimed to be the largest in Europe. Next Kraftwerke, a Cologne-based start-up, is another major operator, boasting 10GW of capacity spread across 13’000 independent generators, while Getec Energie offers 4GW. 

Why has Germany moved ahead of other markets? Aside from the pressure brought about by the transition to renewable energy generation, one other advantage is from regulation. Germany’s energy market has undergone similar liberalization to other countries but they have taken particular steps to encourage VPPs. 

Transmission Service Operators (TSOs) in Germany are responsible for maintaining a continuous balance between supply and demand, utilizing the balancing power market. VPPs are operational within the Frequency Restoration Reserve, as TSOs in Germany accept pre-qualification at the aggregated pool level. In the past, providers of balancing energy had to participate in a capacity auction, in which VPPs often could not participate due to forecasting challenges. Since November 2020, any pre-qualified providers, regardless of their prior participation in a capacity auction, can deliver balancing energy.

The 2012 amendment to the Renewable Energy Sources Act (EEG) introduced an optional 'direct marketing' scheme for renewable electricity. In this scheme, renewable energy producers can sell their electricity directly on the wholesale market and receive both the market price and a market premium. The 2014 EEG update further mandated that all new renewable energy installations with a capacity over 100kW must participate in direct marketing. Additionally, biogas installations are eligible for a capacity-oriented flexibility supplement, encouraging the addition of flexible capacities. For instance, installations that add new flexible capacities can receive a supplement of up to 65 EUR/kW annually as outlined in §50a of the EEG 2021.

As a result, medium-sized renewable power producers with capacities above 100 kW are incentivized to connect to VPPs to facilitate their participation in the wholesale electricity market. This shift has led to a significant increase in the number of plants connected to VPPs, enhancing the business opportunities for German VPPs.

In 2021, the Grid expansion acceleration act (NABEG) came into force, reforming grid congestion measures to provide more opportunities for VPPs. The act reduced the capacity needed to participate, and created a new role - “deployment manager” - that would have responsibility for the deployment of controlled energy resources across a large area.

In truth, we have only covered a handful of the market and regulatory conditions that have led to VPPs thriving in the German electricity market; to cover everything would go beyond the scope of a single blog post. Overall, the German market for VPPs is evolving rapidly, driven by technological advancements, regulatory support, and increasing investment in smart grid technologies. 

VPPs in other markets

In the United States, the Department of Energy estimates VPP capacity at around 30 to 60 gigawatts, which is not far from German capacity but as a percentage of the total is far smaller, around 4% - 8%. The DoE aims to expand capacity to 80-160GW by 2030. Naturally, the capacity varies greatly by state, with California leading the way. Of the approx. 500 VPPs in the US currently, around 150 are found in California.

The UK has seen some companies commit to VPPs, but capacity figures appear to be far short of those on the continent. Octopus and Flexitricity have both gone on record with capacities of 100MW and 500MW respectively, but the major energy retailers have not committed publicly to VPPs and the size and number of start-ups remain low. 

The Australian Energy Market Operator (AEMO) predicted that the nation would have 700MW of VPP capacity by 2022, but reality ended up falling well short of that figure, with around 300MW of capacity estimated by the Institute for Energy Economics and Financial Analysis

What role do VPPs play?

Germany has surged ahead of other countries in their use of VPPs, but so what? Why should energy retailers be concerned about developing more VPPs? Let’s take a closer look:

Managing Intermittency and Increasing Flexibility

VPPs are crucial for managing the intermittency issues associated with renewable energy sources like solar and wind. Since these sources depend heavily on weather conditions, their power output is naturally variable. As the share of electricity generated by renewables grows larger, this presents greater issues for ensuring consistent supply. A VPP helps bring more predictability. By coordinating DERs in real-time, VPPs can adjust the power supply based on demand and availability, enhancing the overall flexibility and stability of the electricity grid​​.

Enhancing Energy Resilience

VPPs enhance grid resilience by encouraging investment in storage for excess renewable energy, acting as a backup system during weather-related or other disruptions, and shaping consumers’ energy use in real time. This functionality delivers a more reliable energy supply and helps maintain grid stability during peak demand times or unexpected power outages​​.

“Roughly tripling virtual power plant capacity to 80 GW to 160 GW by 2030 could save about $10 billion a year in grid costs, while redirecting spending on peaking power plants to distributed energy resources at a lower cost,” the Department of Energy said in a report.

Encouraging Residential Renewable Investments

VPPs encourage residential users to invest in solar panels and other renewable energy generators by offering them opportunities to benefit economically. Homeowners can contribute excess energy from their solar panels to the VPP and receive compensation - for example in the UK, participants can be compensated through either deemed feed-in tariff rates or according to smart export guarantee (SEG) rates. This makes their investment more attractive and viable. This not only accelerates the adoption of renewable energy technologies at the consumer level but also integrates these small-scale productions into the broader energy system, optimizing the use of generated power​.

Broadening Opportunities for Energy Retailers

The expansive nature of VPPs opens up numerous opportunities for energy retailers. By integrating various energy resources into a single virtual facility, retailers can offer more tailored energy solutions to their customers. As outlined above, homeowners can be paid for generation capabilities, but this can extend to storage and demand management as well. This flexibility allows retailers to maximize profits while promoting sustainable energy practices, as they can more effectively manage supply and demand, participate in energy trading markets, and offer innovative services like demand response programs​​.

What is holding back VPP development?

Investing in VPPs presents a range of technological and logistical challenges that stem primarily from the complexity of integrating numerous independent energy sources. VPPs amalgamate hundreds, if not thousands, of disparate generators, batteries, and IoT devices into a single, coherent entity. This integration is not merely a matter of physical connectivity but also requires sophisticated administrative coordination. The diverse nature of these resources—each with its own operational characteristics and requirements—complicates the management and optimization processes​. 

Beyond the logistical challenges, the core difficulty lies in the software required to operate VPPs effectively. Connecting all these different energy sources to the wider grid and harnessing their collective capabilities for energy production, storage, and demand management places significant demands on the underlying technology infrastructure. The technology stack must not only facilitate real-time communication and coordination across the network but also enable effective decision-making to maximize efficiency and reliability. This requires advanced algorithms capable of predictive analytics and rapid response to changing conditions​.

VPPs can be seen as part of the broader need for digital transformation sweeping through the energy industry. This transformation is driven by the need to integrate more renewable resources, improve system resilience, and optimise energy use across increasingly complex networks. The challenges associated with VPPs, therefore, mirror those faced by the energy sector as a whole as it moves towards a more digitized, decentralised, and dynamic system. 

Digital transformation is the problem that Gorilla was founded to try and solve. Though we aren’t directly involved in the management of VPPs, the data and integration challenges that they pose are much the same as those that trouble pricing and forecasting teams within energy retailers. The ‘solution’ to encourage VPPs is not going to be a one-off application but will instead require a holistic approach that brings your whole technology capacity forward. There is no point in an energy retailer enrolling customers into a VPP if they cannot devise tariffs that compensate them for generation or demand management. And there are no benefits to balancing through a VPP if forecasts cannot take into account the generation capabilities of a VPP to produce more accurate predictions of electricity supply. Gorilla’s energy data cloud is intended to be the central point for managing your digital transformation, even if Gorilla applications do not touch every aspect of an energy utility.

What’s next for VPPs?

We have illustrated circumstances - both regulatory and market-driven - in the German electricity market that have led to the rapid expansion of VPP capacity there, but can it be the whole story? After all, Germany has seen similar pressure over its smart meter rollout, but here the country lags far behind the others. The US might not be as developed as Germany in renewable capacity, but the UK is not far behind. Could it be down to individual companies? Next Kraftwerke and Getec were both start-ups, but few would argue that Germany is an easier place to create a successful start-up compared to the US or the UK. However, even Sonnen, which operates in the US, Germany, Italy, and Australia, still has their largest virtual plant in Germany.

Perhaps there is no simple explanation available. Regardless of why Germany has moved ahead, utilities in other countries must now be looking at the pioneers in the country as examples to follow, lest they be left behind or lose out on the opportunity to similar local start-ups.

The US at least is pushing forwards. Several developments in the VPP space have been announced across the states. In 2020, the Federal Energy Regulatory Commission ordered regional transmission organizations and independent system operators to let DERs participate directly in wholesale markets by 2026. Texas is not far behind California and the Public Utility Commission of Texas launched a pilot VPP scheme in 2023, with Colorado announcing a similar measure. In Utah, Sonnen has enrolled more than 4’000 batteries in its Wattsmart battery program, providing 100MW of capacity. 

In the UK, the Electricity System Operator (ESO) has moved to encourage development through the Demand Flexibility Service (DFS), which was introduced in the winter of 2022. The system paid residential and I&C customers for voluntarily reducing demand at peak times, saving over 3,300MWh across the winter of 2022. However, as the name implies this is demand-side only, with no similar initiatives being pushed for supply. 

Final Word

VPPs could be a powerful tool for utilities as they look to transition to net zero. The spread of DERs, which include resources like smart thermostats and EV chargers, has opened up more potential capacity to create new VPPs. Germany leads the way, while the US, UK, and Australia play catch-up. The spread of VPPs could help these nations to deal with intermittency issues, encourage more investment in renewable generation, and improve the balancing capabilities of energy retailers. Nonetheless, there are challenges to be solved, particularly around technology. The ability to manage a VPP and incorporate its tariff offerings or forecasting will be a barrier for many energy retailers.

Should governments or retailers outside of Germany rush to embrace VPPs? This isn’t a question Gorilla can answer, nor is it clear what the answer would be. Certainly, there are advantages to developing VPP capacity. However, the developmental difficulties will need time to solve, and grids will manage just fine without VPPs in the near term. Different regions will push forward with VPPs on their own terms as regulation, technology, and the spread of DERs continue to develop.

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