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: 

  • VPPs are integrated into the grid. Microgrids are often off-grid, and in an on-grid setting, they are designed to be islanded so they can carry on working independently if the grid goes down. 
  • VPPs can be assembled using assets connected to any part of the grid, whereas microgrids are usually restricted to a particular location, such as an island or a neighborhood. 
  • The two concepts use different systems for control and operation. VPPs are managed via aggregation software, offering functions meant to mimic those of a traditional power plant control room. Microgrids rely on additional hardware-based inverters and switches for islanding, on-site power flow and power quality management. 
  • Another difference concerns markets and regulation. VPPs are aimed at wholesale markets and do not usually require specific regulation. Microgrids, on the other hand, are more focused on end-user power supply. 

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:

  • Geothermal and renewable energy company Ormat Technologies picked up Viridity Energy at the start of 2017.
  • The same year, Greensmith Energy was bought by Finnish power giant Wärtsilä
  • Italy’s Enel has gone on a distributed energy technology spending spree, purchasing Demand EnergyEnerNOC and eMotorWerks to lay the foundations of its VPP offering. 
  • Engie bought a stake* in Kiwi Power of the U.K. in 2018 and Tiko of Switzerland in 2019. 
  • Shell bought sonnen, a German home battery maker which is developing VPPs in Australia, Germany and the U.S., in 2019. 
  • Hanwha Q Cells acquired San Francisco-based VPP technology provider Geli in August this year.
  • Generac Power Systems bought Enbala Power Networks for an undisclosed sum in October.
  • Also in October, grid-scale energy storage leader Fluence acquired AMS.
  • Spain’s largest oil and gas company, Repsol, last year invested an unspecified amount into Ampere.

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

  • Green Mountain Power of Vermont is working with software developer Virtual Peaker to dispatch customer-premises-based Tesla Powerwall batteries into the New England grid.  
  • Germany’s Next Kraftwerke is bidding electric vehicle battery capacity into the Dutch secondary reserve market, and startup Tibber is doing the same in Germany. 
  • Residential solar giant Sunrun has established solar-plus-storage-based VPPs in U.S. markets from Massachusetts to California and Hawaii
  • Tesla claimed the world’s largest VPP in 2018, with a deal to install 50,000 solar-plus-storage systems in South Australia, and is involved in a slew of other projects worldwide. 
  • U.K. smart storage player Moixa orchestrates 22,000 storage systems in Japan, along with smaller VPP deployments elsewhere. 
  • Centrica has assembled a VPP in Cornwall, western England, in association with sonnen, Belgian software firm N-Side, Western Power Distribution and National Grid.
  • Centrica-backed GreenCom Networks is assembling "energy communities" in Germany with software that can provide VPP services. 
  • General Electric has investigated building VPPs using blockchain technology and sells digital systems for VPP development alongside traditional power plants. 

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.