This is the fifth and final installment of our series: The Top 5 Challenges Facing Distribution Utilities.
Ding dong – the centralized grid is dead. Over the last decade, the number of devices connected to the US distribution grid has skyrocketed, as increasing numbers of Americans have adopted distributed energy resources (DERs) like rooftop solar, smart thermostats, and EVs. In Q3 of 2023, more than 210,000 residential solar projects were installed, accounting for 1.8 gigawatts (GW) of new capacity.
The shift to a distributed grid with hundreds of thousands – soon millions – of flexible local resources has introduced challenges for grid operators, who must contend with the increased complexity while maintaining reliability. At the same time, it has opened up new opportunities for forward-thinking utilities to leverage local resources for cost-effective grid services, and establish new relationships with device owners as partners, not just consumers of electricity.
But how can utilities make this transition – embracing community members as partners, not just consumers?
A fast emerging model for embracing consumers as partners is the development of grid-supporting Virtual Power Plants (VPPs). A Virtual Power Plant is an aggregation of local resources such as rooftop solar, behind-the-meter batteries, electric vehicles, electric water heaters, smart buildings, and flexible commercial and industrial loads that can provide critical grid balancing support like a traditional utility power plant.
While many utility leaders are familiar with the concept of a virtual power plant, the specifics of how one works remain less well understood. In this article, we introduce the fundamentals of VPP operation and discuss how engaging local resources to support power systems can empower utilities to embrace the changing role of consumers and take on the role of a Distribution System Operator.
The US Department of Energy’s (DOE) definition of a VPP is purposefully broad, as a VPP can incorporate diverse aggregations of energy technologies, as well as be used for a range of applications including shifting load, shaving peak demand, and bolstering electricity generation.
VPPs have been lauded as an affordable, fast solution for grid operators to accommodate increasing electricity demand while reducing bills for consumers. According to the DOE, a VPP of residential thermostats, water heaters, EV chargers, and batteries could deliver peaking capacity at about half the net cost of a natural gas peaker plant or utility-scale battery. What’s more, VPPs can enable grid operators to defer investing in new generation and transmission infrastructure, as well as reduce operation of peaker plants. In fact, if the current US VPP capacity of 30-60 gigawatts (GW) triples, as expected, to 80-160 GW by 2030, ~20% of peak load will be served by VPPs, saving utilities a whopping $10 billion in annual grid costs!
So, what does it actually look like for a utility to engage with a VPP? Today, there are two common models for engaging a VPP to provide distribution-level grid services: utility-operated VPPs and third-party-operated VPPs.
For a utility-operated VPP, the distribution utility directly enrolls DER owners, often through a utility-run incentive program, dispatches them to provide grid services, and compensates device owners accordingly. Programs are often accompanied by utility-funded subsidies designed to incentivize more customers to purchase and enroll their devices. Utilities typically use a DER management system (DERMS) to monitor and manage their utility-operated VPP. Their DERMS partner may aid in many of the responsibilities above, but ultimately the utility operates and manages the VPP.
For a third-party-operated VPP, the utility procures grid services (e.g. peaking capacity) from a third-party, who is responsible for enrolling devices, dispatching them when called upon to provide services, and compensating device owners. This third-party can be a device manufacturer (e.g. Tesla, Enphase), an electricity retailer (e.g. David Energy, Octopus Energy), or an independent VPP platform provider (e.g. Leap, Swell). It's important to note that third-party VPP operators may provide services to multiple parties (e.g. a distribution utility and a wholesale market operator) and must manage any conflicts that result.
With either approach to operating a VPP, the utility is responsible for deciding when and where to procure services from a VPP. To unlock the full potential of local resource flexibility, utilities must understand:
This level of VPP-tied grid awareness is essential for the utility to call upon VPPs to provide high-value, local grid services (such as distribution network capacity management or distribution infrastructure deferral) in addition to system-wide services.
The role of a grid orchestrator is to provide the awareness to determine when and where to call upon VPPs and the control mechanisms to dispatch multi-party VPPs.
Critically, the orchestrator does not provide the enrollment, device-level dispatch, or billing integration. Instead, the orchestrator works in close collaboration with the VPP operator(s) (whether utility or third-party) to deliver group-level dispatch optimized for cost and reliability.
The rapidfire growth of Virtual Power Plants is a sign of a larger shift in the changing dynamics between utilities and the communities they serve. As they look to the future, many utility leaders are familiarizing themselves with the concept of a Distribution System Operator (DSO). This idea, at its heart, speaks to the transition to a distribution grid with robust two-way power flows, where the grid operator harnesses the full flexibility of local energy resources to support real-time operations and long-term system planning.
With the grid-wide visibility and advanced control enabled by a grid orchestration platform, utilities can be empowered to take on the role of Distribution System Operator (DSO), developing the capabilities and responsibilities similar to those of independent system operators (ISOs) for transmission grids.
Procuring local grid services from VPPs is a key part of that vision, though by no means the only goal of a DSO. As more DERs continue to flood the grid, VPPs present a critical opportunity for utilities to mitigate risk, improve affordability and reliability, and embrace the distributed, flexible grid of the future.
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