06 14, 2023

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By Steffi Klawiter

Steffi is a Senior Product Manager at Enel. She is responsible for understanding the VPP market and how Enel’s software services can be enhanced to serve organizations of all sizes and technologies, allowing them to earn revenue by assisting the grid to balance electricity supply and demand in real-time.

What is a virtual power plant (VPP)? 

A virtual power plant (VPP) is a decentralized portfolio of distributed energy resources (DERs) and other assets that can be aggregated and operated as a larger scale asset in response to external factors – such as requests from grid operators or price signals like time-of-use rates. Adoption of DERs is growing, as they enable organizations to be more flexible in how they consume energy, advance their sustainability goals, and boost resilience across their operations. A wide variety of DERs and assets can be aggregated into a VPP, including:

  • Flexible load: The load of a facility can be bundled into a VPP by pledging to be flexible. The most common form of flexibility is load curtailment. Curtailment is incentivized through many utility and market operators’ demand response programs, where organizations are paid to curtail their load during peak grid hours.
  • Energy storage: Battery energy storage systems can enable organizations to stop drawing energy from the grid and instead use energy stored in their batteries. In some states and some circumstances, batteries can contribute stored energy directly to the grid as part of a VPP.
  • On-site solar: On-site solar can help reduce a facility’s consumption from the grid. In some states and under specific circumstances, excess solar can be exported back to the grid under a net metering program.
  • Electric vehicles: Much like a battery, smart EV charging can respond to grid signals and allow EV owners to shift their charging time to a period where the price (typically correlated with grid demand) is lower.

VPPs can leverage and aggregate DERs to address grid challenges. For example, VPPs can be helpful in addressing energy supply shortages during times of peak demand by using flexible capacity to help reduce demand during system peak hours. They can also improve real-time balancing of supply and demand on the grid by providing energy flexibility and ancillary services – energy can be focused on essential loads and shifted away from non-essential tasks, enabling more resilient communities.

VPPs orchestrate a variety of assets to help supply meet demand

Infographic showing how a Virtual Power Plant (VPP) works


How is a VPP different from a traditional power plant?

For practical purposes, VPPs act like and have the same effect as a traditional, centralized large power plant. Their ultimate goals are the same – ensuring that energy demand on the grid is met instantaneously by the available energy supply and that the grid remains stable. But they achieve this in significantly different ways than traditional power plants. Traditional power plants operate out of one physical location and work only on the supply side of the grid equation – as demand increases, the centralized physical power plants ramp up to supply more energy. 

A VPP, by contrast, orchestrates the many decentralized assets within its portfolio to help supply meet demand, most often by lowering the overall combined demand of those assets. This turns out to be incredibly useful to the grid, because decreasing demand has the same effect as a peaker plant increasing supply – ensuring that supply and demand stay balanced. By virtue of leveraging DERs, VPPs offer many benefits over the traditional model. This is because the alternative, peaker plants, are often expensive to operate. In addition, grid operators spend a lot of money maintaining these plants so they can be ready to quickly start up at times of peak demand. They are also highly polluting. DERs in a virtual power plant, by contrast, have much lower marginal costs and are typically using much cleaner energy – like on-site solar, storage, or controllable load. 

VPPs can curtail various load sources across multiple hours of the day

Graph illustrating the ability of VPPs to reduce power demand from different sources throughout the day

The image above from Real Reliability: The Value of Virtual Power, provides a visual demonstration of how VPPs provide flexibility as an alternative to peaker plant power generation. During the peak demand times of 6PM–12AM, the net load reduction offered by the different assets in a VPP (i.e., batteries, managed EV charging, and smart appliances like water heaters and thermostats) would otherwise have to be served by a high-polluting peaker plant.


There’s also another factor to consider. As peaker plants age and extreme weather events increase in intensity and duration, VPPs may be a more reliable resource than fuel-constrained systems for grid support. In last year’s Winter Storm Elliott, for instance, there were widespread capacity shortages in the PJM Interconnection, a regional transmission organization that serves all or parts of 13 different states in the Mid-Atlantic United States. PJM found that gas-fired power plants accounted for 63% of the unplanned outages, and coal-fired generators made up 28% of the outages on a MWh basis. PJM noted that “a lack of fuel supply was the largest single cause of the outages at the gas-fired power plants, followed by freezing equipment.” In contrast, VPPs helped to avert what could have been an even larger disaster, with aggregated demand response performing well during the extreme weather. 

What are the benefits of VPPs?

At the most basic economic level, organizations that participate in VPPs can decrease energy spend and earn new revenues by participating in grid programs. 

Organizations that don’t have any storage or generation assets may still be paid because they are offering flexibility to the grid by temporarily reducing their energy use or shifting it away from times of peak demand, and they will be doing this at times when it is most valuable. As a result, they receive new revenue from utilities or grid operators based on their level of energy reduction. They are compensated for contributing much needed energy flexibility to an energy grid that is increasingly pushed to its limit.

But the value of VPPs goes further than just these direct economic benefits. VPPs are a growing contributor to local energy stability as the energy transition progresses. Participants are helping to keep energy reliable in their communities.

It’s important to note that today, participating in a VPP with DERs requires a site to be integrated with the grid to monetize their assets. However, the growing integration of DERs can create challenges for both organizations and grid operators. For an aging grid that was not initially designed with DERs in mind, rapidly integrating DERs can disrupt electrical frequencies and create voltage issues. As a result, VPP participation is only possible in certain states and regions based on local regulations. Organizations need an energy partner with energy market expertise across the country, like Enel, to help them navigate this landscape and unlock all available value streams. 

The need for VPPs will continue to grow

VPPs can do even more in the future. While current VPPs are focused on removing demand from the grid, some of the DERs in a VPP can also, in certain cases, supply energy to the grid (e.g., on-site generators, storage technologies). This is not happening at scale just yet, but it’s a trend that we see increasing in the future – and one that could have massive implications for the electrification of the grid in the years to come.

As more organizations see the financial benefits DERs provide, these solutions will continue to establish themselves as an important part of the future of any integrated energy strategy, especially as organizations adjust their strategies during this time of economic uncertainty. The continued growth of DERs is crucial to the future of the energy transition. Guidehouse Insights estimates that by 2030, decentralized generation will total more than 500,000 MW of capacity, while centralized generation will total about 280,000 MW. VPPs will be needed to orchestrate these decentralized assets to maximize value for energy end-users and the grid.

VPPs are not a new solution, but they are becoming increasingly technologically viable from a regulatory perspective, with advancements made to allow DERs to tap into wholesale energy markets. FERC Order No. 2222, in particular, has been and will be instrumental in paving the way for VPPs. 

FERC Order No. 2222 is a landmark decision released by the Federal Energy Regulatory Commission in September 2020. It requires regional grid operators to remove barriers for DERs to participate in wholesale markets. By aggregating a multitude of DERs within a VPP, these assets can now participate in the markets alongside traditional power plants, unlocking opportunities for DERs that otherwise would not be able to participate on their own, while increasing the influence of VPPs as well. 

In addition, the Loan Programs Office (LPO) for the U.S. Department of Energy, which provides financing for technologies that have yet to cross the final milestones to market acceptance and commercialization, has identified VPPs as a highly popular sector for loan requests. In the LPO’s inaugural blog series on VPPs, Jigar Shah, Director of the LPO, wrote that “virtual power plants can catalyze DER deployment at scale and help make affordable, resilient, and clean energy accessible to all Americans.” 

How can Enel help you maximize value with your VPP?

Partnering with an energy expert like Enel North America will make it easier to evaluate your options and get support for building a VPP. Beyond that, Enel North America can help organizations participate in VPPs through demand response, solar, battery storage and more. Our team of experts at Enel North America is ready to help you understand these programs and take action to capture value from the relevant federal and state incentives, like the Inflation Reduction Act and Bipartisan Infrastructure Law. Contact us today to evaluate your facilities and your potential to take advantage of new opportunities. 

Learn more about advancing your energy strategy by leveraging our integrated energy solutions.