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Solar energy is a proven distributed energy resource that helps enterprises lower energy costs. Yet, it is proving to be the tip of the iceberg for the power that enterprises can wield to wrest control of their energy management and costs. Beyond solar is a plethora of distributed energy sources and connected devices creating virtual power plants, or VPPs. And enterprises must act or be left behind.
So, precisely what are VPPs, and how fast will they grow?
AWS describes VPPs as: “A connected aggregation of clean distributed energy resources (DER) — solar, storage, grid-interactive efficient building equipment, EV charging, controls and more — remotely and automatically controlled to deliver affordable power, reliability, decarbonization and grid services. VPPs are utility-scale (large) and utility-grade (reliable, controllable) and thus a de facto power plant that is connected virtually from multiple locations.”
Fortune Business Insights projects the global VPP market to grow to $6.47 billion by 2028, up from its 2021 level of $.88 billion.
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This projected VPP growth is fueled by the growth of connected distributed energy resources — for example, electrical appliances you can monitor and/or control through an app on your phone. Most people are familiar with smart thermostats; these are being joined by water heaters, home EV chargers, electric vehicles and battery backup systems.
To achieve net zero emissions in the U.S., we must replace almost 1 billion appliances with efficient electric versions that can participate in demand flexibility; this represents roughly $2 trillion in investment. And these are generally replaced, as they wear out in a five to 15-year replacement cycle.
In addition, VPPs will be fueled by the United States Loan Programs Office, as DER deployment will be needed at scale to meet the administration’s goal of achieving 100% clean electricity by 2035.
DERs at the 5% tipping point
Within two years (by 2025), $110 billion is expected to be invested in distributed energy resources (DERs) — $5 billion every month, accelerating to more than $20 billion per month by the decade’s end. Driving this demand is the fact that DERs can provide critical grid support at a lower price than the grid and be lucrative for homeowners who opt to participate in demand flexibility.
VPP participants can reap the benefits of the greater affordability and performance of clean, distributed energy and may even receive compensation for services rendered. Income is provided to DER owners to achieve greater resilience for everyone during adverse grid events.
In fact, in California in the summer of 2022, 25,000 PG&E and Tesla customers with powerwalls were invited to launch a new pilot program to create a virtual power plant to help support electric grid reliability and save customers money. Powerwall home battery systems create a virtual power plant to discharge power back to the grid.
This initiative is part of PG&E’s Emergency Load Reduction Program (ELRP). By September, it paid off; Tesla powerwall customers were paid for power sent back to the grid during an extreme heatwave and the looming possibility of rolling blackouts.
Energy reliability essential
The need for VPPs will continue to drive energy reliability. Just consider Hurricane Ian in September, which left more than 580,000 Florida residents and businesses powerless for days; and public safety shut-offs that have become a regular occurrence in western states during wildfire season. These are examples where VPPs could have had significant benefit.
Connected vehicles to the grid will play a large role. Electric vehicles in the U.S. crossed the critical 5% point of sales in 2022, which many consider a tipping point. Over a quarter of new car buyers are considering EV purchases today.
Electric car batteries can hold approximately 60 kilowatt hours (kWh) of energy that can power an average U.S. household for two days. One example of this was when a Ford F-150 Lightning powered a home in Ontario for two days during a power outage caused by a massive snowstorm. EVs can also feed electricity during peak hours, and the stored energy of vehicles also contributes to VPPs.
The IoT creating the Internet of Energy (IoE)
Beyond EVs, grid-interactive efficient appliances and efficient buildings, electric vehicle charging and energy storage can be connected to create VPPs. The Internet of Things (IoT) is well established. As each of these devices, edifices and vehicles can store energy, the VPP is the Internet of Energy (IoE).
This network of DERs enables aggregators, utilities or grid operators to create business agreements with DER owners to adjust the consumption and discharge of power remotely and automatically. This interaction between DERs and the grid provides clean energy, helps balance load at any given hour and builds the resilience of the power system while maintaining end-user (household and business) comfort and productivity. This reduces overall system costs, which can translate to lower electric bills for all consumers — even those not exporting power to the grid.
A combination of software and hardware enables VPPs to better open the grid to a whole new utility-scale, behind-the-meter supply, and coordinate disparate DERs into holistic, demand-flexible resources. It is the IoE, and any “thing” that creates and/or stores clean energy can be part of the power aggregated source.
The “smart home” can have an EV charger that automatically charges the car, runs the dishwasher during non-peak hours, has rooftop solar with a battery that kicks in at night or during a power outage and more. The 2023 Consumer Electronics Show (CES) highlighted this with “Matter,” one protocol to connect compatible devices and systems, which will make the smart home plug ‘n play.
VPPs for enterprise is burgeoning
In January 2023, GM, Ford, Google and solar energy producers announced they will work together to establish standards for scaling up the use of virtual power plants as electrification of the U.S. economy progresses and demand for power grows. It underscores that VPPs for the enterprise is burgeoning.
VPPs also give utility operators new flexibility to reduce peaks and better shape demand. The costs of delivering electricity have peaks and valleys depending on several factors, including weather and time of the year. The cost of electricity is higher, for example, during summer when demand is greater (think power air conditioning).
During demand spikes, utilities turn on so-called “peaker-plants,” or power plants that come online only during peak events and are typically run with high-emission fossil fuels. VPPs can have utility-scale savings, allowing power companies to defer investment in additional capacity and infrastructure to serve a peak load.
VPPs rely on proven clean energy technologies: solar, smart IoT devices and more. As more sources become part of the IoE, VPP technology will accelerate, allowing grid operators to capitalize on the increasing amount of aggregated power.
Software to optimize usage
The opportunity for the technology industry is to continually gather data to improve the software and artificial intelligence (AI) to more rapidly adapt to grid and customer needs. Determining these needs and electricity load starts from the end user and works back to the grid.
A simple example today is a smart thermostat that can sense when people are, or are not, at home or in a building to lower electricity usage and costs. Or, EV charging technology that learns when a car is typically plugged in and waits to charge until off-peak nighttime hours. Every device that uses electricity has the potential to apply software to optimize electricity usage. Today’s software is adequate but will not meet the needs for our 2035 100% clean electricity goal.
Enterprises should take stock of their current distributed energy resources, IoT devices and software to manage them. In doing so, they may realize they can indeed support and benefit from VPPs. Some use cases include:
- Enterprises as energy consumers can continue investing in distributed energy resources in their facilities. The value of grid-interactive DER will continue to increase as opportunities to participate in VPPs grow. Beyond solar panels, they can evaluate internet-enabled water heaters, heat pumps, and batteries. An enterprise should look for opportunities to participate in a VPP. This is especially critical in manufacturing plants or data centers. According to the U.S. Chamber of Commerce, a data center can spend as much as 40% of its operating costs on energy to cool servers. Comparatively, an office building or retail store typically expends 5 to 10% of operating costs on energy.
- Device OEMs and software providers can build internet connectivity, remote energy consumption management and/or telematics into the product, depending on what functionality is relevant for the device. When a device has the ability to flex energy demand in response to grid signals, it becomes valuable as a source of flexible load and can generate revenue for its owner.
- VPPs: Enterprises should look for access to large energy use datasets and use predictive analytics to model future energy demand and ensure that the VPP is well-positioned to manage that demand.
As connected sources become smarter, and distributed energy resources more prevalent, enterprises must optimize their energy sources.
If enterprises do not act now while VPPs are at a tipping point, they could lose one key to a competitive cost advantage.
Jigar Shah is the director of the loan programs office at the U.S. Department of Energy.
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