Virtual Power Plants May Hold The Key To An All-Electric Future – CleanTechnica

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There is an aphorism that most of us have heard at one time or another. It goes like this — work smarter, not harder. If we listen to Tony Seba, Mark Jacobson, and others who suggest the key to a sustainable environment is to electrify everything, particularly transportation, manufacturing, and heating and cooling buildings, working smarter means employing strategies that put the electricity we have available to work more efficiently. A new report by Canary Media suggests virtual power plants (VPPs) could be one key to doing just that. Utilities could save billions by using VPPs to manage the solar systems, EVs, and electric appliances of their customers, it says.

The Flaw In The Investor-Owned Utility Model

In the United States, most utility companies are owned by investors — people who put up the money to build generating stations and distribution networks. In order to encourage people with money to invest it in utility companies, they are guaranteed a certain rate of return on their money. That rate might be somewhat lower than  they could get elsewhere, but it is guaranteed, which is something that investing in the stock market definitely is not. In order to protect the interests of customers, public utility commissions determine what a fair rate of return is, a process that moderates the constant tug of war between rate-payers who want lower utility bills and investors who want higher rates of return.

The flaw in that model is that in order to make more money, utility companies need to build more generating stations and distribution systems. There is little incentive in the business model for using the electricity they generate more wisely. That is why many utilities support nuclear power plants. They are fantastically expensive, but the investors are guaranteed a certain rate of return during their useful life. Would you like an opportunity to put your money someplace where it would pay you a guaranteed rate for 50 years, regardless of wars, elections, pandemics, or climate change? A lot of people would say yes to that.

That is how we wind up with expensive boondoggles such as the Vogtle nuclear power plant in Georgia that began construction in the 1980s and saw its last component — started in 2011 — completed just this year. The project is supported by a $8.3 billion federal loan guarantee. So not only are utility customers on the hook for the outrageous cost overruns associated with the Vogtle project, federal taxpayers are as well. The investors, however, are fully protected. Nuclear power is touted as a low carbon source of electricity, and it is true that nuclear generating stations emit no carbon dioxide into the atmosphere when operating. Yet no one has ever figured out a safe way to dispose of the nuclear waste they create or the contaminated coolant they use. Google Fukushima for more on that topic.

Virtual Power Plants Work Smarter

Canary Media suggests that virtual power plants could help manage the electricity we generate more wisely. Doing so could save utility companies billions of dollars. According to Wikipedia, virtual power plants aggregate large numbers of distributed energy resources (DERs, such as rooftop or ground-mounted solar systems and small wind turbines, small hydro, biomass, backup generators, and energy storage systems such as home or vehicle batteries). They also manage the power consumption of appliances such as water heaters, EV chargers, and heat pumps to shave demand for electricity during times of peak demand.

Virtual power plants may save utility companies money, but they don’t necessarily increase payouts to investors. To encourage more VPPs, state legislatures and regulators will need to put policies in place that allow virtual power plants to thrive. A group of solar advocates have spelled out exactly what those policies should be in recently drafted model utility rules and model legislation that they hope will be widely adopted. Crafting laws and regulations takes a lot of time, effort, and expertise. Such models help legislators and regulators address the future in an appropriate fashion, just as model building codes allow state and local code officials to have access to the latest technologies without devising their own rules and regulations individually. Models also promote uniformity so what works in Peoria also works in Topeka. That makes the whole process more efficient and less expensive.

Solar United Neighbors

Solar United Neighbors is a nonprofit that has helped organize more than 30,000 households to secure lower cost rooftop solar. It has collaborated with Keyes & Fox, a clean energy law firm, as well as Sunrun and Sunnova, to craft the model rules and legislation. The goal was to bring a standardized approach to what is now a fractured state by state process for virtual power plants.

“We’re faced with this gap right now between the enormous potential of VPPs and the actual deployment on the ground,” Glen Brand, vice president of policy and advocacy for Solar United Neighbors. The group plans to work with state lawmakers to convince them to introduce the model tariff and legislation in 2025 in four states — Illinois, Minnesota, New Mexico, and Virginia. “It’s widely acknowledged now that the potential to capture more value for the grid from VPPs is overwhelmingly impressive. If we can dispatch these distributed power plants, and we don’t have to build the transmission system or new power generation, the savings are high,” Brand said.

The US Department of Energy estimates that hundreds of billions of dollars of consumer spending on EVs, rooftop solar, batteries, smart thermostats, and water heaters will create the potential for 80 to 160 gigawatts of capacity from virtual power plants in America by 2030. That would be enough to meet up to 20% of peak grid needs and save utility customers roughly $10 billion in annual costs. But beyond its oversight of interstate wholesale power markets, the federal government doesn’t make the rules for distributed energy resources. The demand for electricity is expected to increase dramatically in the US as more data centers are constructed to handle the need for more artificial intelligence. Whether the world needs more artificial intelligence is a separate discussion, although more human intelligence would be appreciated.

Jamie Charles, the manager of grid services policy at Sunnova, agreed that a standard approach could boost the market for virtual power plants. He said the different rules and regulations in each state mean a national expansion ​of VPPs “becomes an incredibly lengthy and costly process.” The concept of paying utility customers to alter when they generate or use electricity isn’t new. In fact, load flexibility and demand response programs are already providing tens of gigawatts to US power grids. As more homes and businesses take advantage of falling prices for rooftop solar and backup batteries, and as EVs and electric heating grow to become a significant draw on the electrical grid, demand response resources and virtual power plants will become an increasingly important part of how utilities operate.

Strangling Virtual Power Plants With Regulations

Mark Duda, a Solar United Neighbors board member who is a solar developer and contractor in Hawaii, said recently his state has done more to integrate distributed energy resources into its utility grids than any other state. Nevertheless, a successful VPP program launched by utility Hawaii Electric in 2022 has since been altered by state regulators in ways that increase complexity and reduce compensation for participating solar and battery equipped households. He chalked up that outcome to a ​“typical combination of delay, personnel turnover, general lack of understanding of the technology involved, and insufficient interest from key stakeholders.” Given the number of Hawaiians installing batteries with solar at their homes, that’s ​“an enormous missed opportunity,” he said.

Other states have done a better job, according to Amy Heart, senior vice president of public policy at Sunrun, which is operating virtual power plants in California, Hawaii, Massachusetts, and Puerto Rico. She points to Green Mountain Power in Vermont, which was one of the first utilities in the US to promote residential batteries as grid resources on a large scale. Recently, it has expanding its programs for smart thermostats, EV chargers, and remote controlled water heaters as well.

Connected Solutions, a program run by National Grid and Eversource in Massachusetts and other New England states, has delivered hundreds of megawatts during summer heatwaves, making it ​“top of the list, best in class,” she said. Many of the features that have made Connected Solutions successful — the regulations that set the terms and conditions of utility services to customers — have been incorporated into the model tariffs. Brand said that it is important for regulators to allow the companies building and selling solar panels, batteries, EVs, and controllable devices that make up virtual power plants to compete. The same goes for the demand response companies active in multiple markets across the country.

The Devil Is In The Details

One of the hardest things for regulators to resolve is establishing the ​“fair retail export compensation” for the services that virtual power plants can provide. Brand laid out a few guidelines for states to keep in mind in setting those compensation terms. ​“There can’t be any disincentives for participation and it has to reflect the real market value for the power to the grid when it’s most expensive and most needed.”

For decades, regulators and utilities have argued with third party demand response providers over how to calculate the value that utilities realize when customers reduce their electricity consumption in response to surging grid demand. Some of the variables at play include how much to pay customers and the companies enabling their participation in advance for making those promises, how to monitor and reward their performance during the moments they are called on, and how to penalize them if they don’t follow through.

Programs also have to establish limits on how much and how often they tap into customer-owned resources. Many demand response programs have failed because they turned off air conditioners during the hottest days of the year, drew too much power from backup batteries, or failed to charge EV batteries in accordance with customer expectations. On the other hand, utilities and regulators have a responsibility to ensure they are not paying customers who happen to be able to afford those devices more than the value they provide to the grid. Setting the rules so they are fair to all stakeholders is a complex task.

Beyond the four states it is targeting with its new model tariff and legislation, Solar United Neighbors is also involved in proposing its model tariff in regulatory proceedings having to do with virtual power plants in Pennsylvania, New Jersey, New York, and Wisconsin, Brand said. “If [regulators] want to take it up, that’s terrific, but we know we’re going to need state legislative leadership if we’re going to establish these programs quickly and at a scale that makes a real impact.”

The Takeaway

No one is suggesting that virtual power plants are a magic solution for every situation, but they can have a significant impact on the needs of utility companies to build new generating plants and distribution infrastructure. They are a piece of the puzzle, not a one-size-fits-all solution. They allow the utility grid to work smarter, not harder, but since there is little incentive for investor-owned utility companies to do that, policy initiatives will be needed to make them more palatable to those companies. Solar United Neighbors should be applauded for working to create those policy initiatives to promote the use of more virtual power plants and demand response systems in America.