In 2020, Tesla connected over 4,000 solar PV homes and 1,000 Powerwall battery systems to up to 50,000 Australian homes, which became the world’s largest Virtual Power Plant. In April this year, the company announced that they were authorized for a new phase to add another 3,000 batteries to further stabilize the energy supply in several additional states and regions Down Under. Virtual Power Plants are all over the media with these headlines, and it is not surprising that most participants at our recent battery webinar requested for VPPs to be the topic of the next webinars. Clearly, people want to know more about how they work and what they actually do, that's why we want to look at this exciting asset class.
Looking into the near future, we want to introduce to you this ‘virtual’ asset that could gain traction in the years to come and could become something that huge energy suppliers will have to reckon with. In our recent blogs, we have already covered several types of energy assets that make up the energy market of today, most notably, pumped hydro, thermal power, wind & solar, nuclear, and also battery storage. So how are VPPs to be positioned in this line-up of energy assets?
Decentralization and digitalization are two of the most viable current developments for meeting the ever-increasing electricity demand, and they will reshape the market entirely. A key development materializing from these two trends are distributed energy resources (DERs) as the alternative to conventional centralized power plants. To optimally harness the potential of DERs, virtual power plants (VPPs) provide a decentralized platform and energy-efficient management scheme. VPPs can help make renewables run more efficiently, while also enabling smaller producers to unite and gain some leverage. This is how VPPs have become one of the most interesting assets in the market today.
Virtual power plants are basically multiple power assets from decentralized energy resources that get bundled to appear as one and are aimed at wholesale markets (day-ahead and intraday markets). This typically includes small to medium-sized generation and storage assets - such as battery storage, solar panels, wind turbines, combined heat and power plants, biogas, electric vehicles, and demand-side management with loads such as heating, refrigeration, industrial processes, etc. VPPs not only ride in the slipstream of renewables but also help to integrate renewables into the energy system as a whole, as fluctuations in the generation of renewables can be balanced by ramping up and down generation and consumption of controllable VPP units. By addressing peaks in electricity demand, they can replace more expensive flexibility providers and help dissolve distribution network bottlenecks. By providing this crucial flexibility, VPPs are a boost for the decentralization of energy supply on a system level.
“(...) 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.”
- Greentech Media (Wood Mackenzie)
But VPPs are also very beneficial to operators of small to medium-sized assets. The main incentive for joining a VPP is very similar to joining a union, as by bundling their capacities, asset owners are able to grab a better foothold in the energy market by selling their generated surplus electricity on balancing or intraday markets. This sets them free from low feed-in tariffs, as they are now able to offer a sizable capacity and trade on the same markets as the big conventional power operators. Enabling local producers to have a say in pricing their electricity allows them to operate their assets to be more in touch with the demands of the markets and to produce electricity more profitably and efficiently. While this does not do away with the need for big centralized power plants, it 'democratizes the energy supply (as some experts have phrased it).
How does a VPP work?
VPPs are typically cloud-based with a central or distributed control center that aggregate the capacities of DERs. This is done for the purpose of trading the accumulated energy on wholesale electricity markets to offer real-time operating reserve capacity or for providing grid-stabilizing ancillary services for system operators. Operators can use demand-side services provided by aggregators through load shifting and aggregators can compensate for a lack of solar or wind energy by relying on flexibility from storage plants. But if there is a surplus of solar or wind power, they can also reduce the output of one of their power plants. This smart distribution of the power is the real strength of aggregation, as VPPs are able to react quickly to changes in energy supply and demand, and the effects of increased efficiency trickle down to all participants. The technology behind forming a VPP and trading its energy on energy markets involves a lot of digital data synchronization, but there are already service providers out there that offer aggregation software that is rather easy to implement.
Two types of VPPs
There are two types of VPPs that have different tasks but work together to guarantee both economic and technical operability. A commercial VPP (CVPP) mainly focuses on the financial aspects of the electricity market, maximizing profits with minimum system cost. Here different DERs are integrated by considering the precise marginal cost prior to the scheduling of renewable energy sources based on the exact energy market conditions of current load demand and load demand forecasts. Integrating DERs from different locations through CVPP reduces the imbalance and risks in the system.
The main focus of the second type, the TVPP or technical VPP is to fulfill the load demand in the electricity market by monitoring the DERs’ activities and their connection to local networks. A TVPP collects a different set of information, such as DERs’ maximum capacity, and future load demand to observe the system efficacy and to further enable an optimal operation of DERs, all while considering the marginal cost of the system. Here the values of different technical parameters and real-time data are used to ensure the optimal operation and management of the VPP to provide a secure and safe way of processing and maintaining a better connection with CVPP.
VPP is the trend to watch
"Virtual power plants represent an 'Internet of Energy’ and maximize value for both the end-user and the distribution utility using a sophisticated set of software-based systems. They are dynamic, deliver value in real-time, and can react quickly to changing customer load conditions."
- Peter Asmus, Senior analyst at Pike Research
Especially as the use of renewable energy resources for power generation increases worldwide and power generation shifts from centralized to decentralized, the benefits of VPPs are becoming more apparent and the incentive to take part in one is growing exponentially. The numbers back it up: the global VPP market size was valued at $1.3 billion in 2019, and is projected to reach $5.9 billion by 2027, growing at a yearly rate of 21.3% from 2020 to 2027, according to Valuates Reports. And now imagine the huge capacity that will not only supply thousands of homes but also will be able to be traded on energy markets in a couple of years.
How can you trade your VPP?
By splitting your capacity and flexibility into multiple markets, you can create the best opportunities to make a profit with your asset, as we already discussed in a recent blog post, and with VPPs it’s no different. Today, the biggest share of VPP capacity is still being traded on balancing markets, but day-ahead auctions and intraday continuous markets are also getting more popular. Trading VPPs is just as profitable as trading any other asset on all these markets, with the exception that, compared to other assets, VPPs can have a variety of different requirements that originate from the composition of their respective energy mix, and their unique storage and flexible consumption profiles. This is why the key to a successful trading strategy is to fine-tune it to the VPP on hand.
As a VPP operator, you can rely on our energy trading expertise to market your capacity in the best way possible. We tailor-fit our AI-based trading modules to your unique requirements and let our AI-supported algorithms learn and adapt to changing market conditions 24/7. This way you can rest assured that your energy is being traded most profitably, and you can focus on optimizing your VPP and make sure it runs smoothly.