So, What Exactly Are Virtual Power Plants?

GTM helps explain a growing grid resource that can mimic power plants without dominating the landscape.

We live in an increasingly virtual world. You can hold virtual meetings with virtual friends using virtual reality systems hosted on virtual servers. And in energy circles, one of the biggest buzzwords in recent years is the virtual power plant, or VPP.  

The term first started to be bandied about in the 1990s. But VPPs have really taken off in the last 10 years, not just as a concept but as something that a growing number of energy companies are creating, using and commercializing. Here’s the real deal on this virtual energy phenomenon. 

Explain this "virtual power plant" thing…

According to Germany’s Next Kraftwerke, one of the pioneers of modern VPPs, it’s “a network of decentralized, medium-scale power generating units such as wind farms, solar parks and combined-heat-and-power units, as well as flexible power consumers and storage systems.”

In practice, a VPP can be made up of multiple units of a single type of asset, such as a battery or a device in a demand response program, or a heterogeneous mix of assets.

These units “are dispatched through the central control room of the virtual power plant but nonetheless remain independent in their operation and ownership,” adds Next Kraftwerke.

In other words, a VPP is to a traditional power plant what a bunch of internet-connected desktop computers is to a mainframe computer. Both can perform complex computing tasks, but one makes use of the distributed IT infrastructure that’s already out there. 

A key feature of VPPs is that they can aggregate flexible capacity to address peaks in electricity demand. In this respect, they can emulate or replace natural-gas-fired peakers and help address distribution network bottlenecks — but usually without the same capital outlay. 

What’s the difference between a virtual power plant and a microgrid?

Microgrids (and minigrids) also often involve a mix of distributed renewables, storage, flexible demand and fossil-fuel plants. But there are important differences, as well: 

What’s the difference between a virtual power plant and demand response?

This one is a bit trickier, and it's tied up with the semantics of the energy industry. The term “demand response” dates back decades to programs that enlisted factories or commercial buildings to manually shut down loads in order to combat grid emergencies. While the industry has gotten much more sophisticated in the past decade or so, it does still include those manual programs alongside more automated and flexible ones.

Another semantic difference is which side of the demand-supply curve it’s considered to be on. According to a document cited by the Institute of Energy Economics in Japan, demand response is a demand-side initiative; a VPP is a supply-side initiative. 

But in practice, this doesn’t equate to much of a distinction. VPPs such as the one being operated by Enel X in Taiwan are essentially based on demand response, with loads forming the majority of its megawatts. 

For this reason, it is probably easiest nowadays to think of demand response assets as simply one type of flexible unit that can be incorporated into a VPP. 

How are virtual power plants making money?

Traditional thermal power plants supply capacity when needed and also deliver a range of grid-stabilizing ancillary services, from voltage stabilization to frequency response. VPPs can potentially make money from both types of operations as well.

On the capacity front, for example, VPPs have already been deployed to sidestep the need for grid strengthening. In one case in Australia, a utility called Evoenergy was able to save around AUD $2 million (USD $1.6 million) by using a VPP to avoid a substation upgrade.

And in Oregon, Portland General Electric is assembling a 4-megawatt VPP as a precursor to 200 MW of distributed flexibility. Households taking part in the VPP experiment get a battery purchase rebate or are paid $20 or $40 per month for use of existing batteries.  

Lastly, in a sign of how VPPs are becoming commodity items, Redwood, California-based AutoGrid, which is operating VPPs in 12 countries with 5,000 MW under contract, is offering its management systems for purchase through the Amazon Web Services marketplace. Try doing that with a combined-cycle gas turbine. 

Don’t you need fancy software to put a virtual power plant together?

Yes. Technology is one of the key ingredients in VPP design, and trailblazers have tended to be companies that have had to build software platforms for the monitoring and control of customer-premises-based assets such as batteries. 

By 2016, there were already at least half a dozen energy storage companies working on VPP concepts in Germany alone

Which companies are creating virtual power plants?

Most VPP pioneers have been snapped up by larger groups in recent years, bringing the virtual power plant concept into the mainstream. For example:

That’s just a sample of VPP-related deal activity. And aside from acquisitions: 

Again, this isn’t an exhaustive list, but it does capture the vitality of the VPP space. Expect more acquisitions and consolidation in the space, as energy giants contend to put together the pieces that can meet future grid needs. 

Correction: The story originally said Enel bought a controlling stake in Kiwi. In fact, it bought a minority stake.