As grid disruptions and energy price volatility continue to accelerate due to increased power demands and extreme weather spurred by climate change, the need for a distributed energy model has become clear. When renewable energy is generated where it is consumed — opposed to generated in centralized power plants and transmitted to end users over long distances — customers can enjoy increased energy security, reliability, and affordability while limiting their environmental impact.

A virtual power plant (VPP) embodies this concept of localized energy production. It revolutionizes the way organizations and commercial and industrial companies can benefit from clean, reliable energy while also easing strain on utilities. In short, a VPP is win-win for businesses, the grid, and the environment.

Read ahead to learn how VPPs work, the advantages they bring, and how companies like yours can participate in them.

What Is a Virtual Power Plant?

A virtual power plant is an aggregation of distributed energy resources (DERs) — which can include solar photovoltaic (PV) systems, wind turbines, and energy storage systems — that are often privately owned by individuals, companies, or organizations and are sited behind the meter. Essentially, they are small power plants intended to serve the electricity needs of a facility, building complex, or connected community.

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Most VPP resources remain connected to the grid, enabling the location to draw energy from it when there is not enough generated or stored on site. That means these DERs can also supply the grid with excess electricity as needed.

In most cases, the amount of excess electricity any one site can provide is very small in comparison to the needs of the grid. A typical commercial renewable energy project ranges from 1 to 10 megawatts, whereas utility assets usually generate 500 MWs to several gigawatts (GW) of power. But when DERs are aggregated together, they can add up to hundreds of megawatts — a meaningful amount of energy to help stabilize the grid during peak usage or an unplanned outage.

DERs in a virtual power plant are managed remotely to provide a variety of energy services to the grid. This is done using cloud-based technology that orchestrates the available power across the aggregated resources in coordination with the grid operator, and dispatches as needed. Beyond benefitting the grid, VPPs provide many advantages to participating businesses — from protection against blackouts to energy bill savings.

Types of businesses enrolled in VPPs include:

• Steel and aluminum, oil and gas, and other industrial manufacturers that risk damage to their equipment without power

• Retailers with variable energy needs

• Data centers processing high volumes of transactions

• Transportation and distribution centers converting their fleets to EVs

• Hospitals, medical facilities, and other emergency services that require energy resiliency

• Schools and universities that do not need power all year round

No matter your industry, chances are there’s something for you to gain by participating in a VPP.

Types of VPP Participation

There are two main types of VPP participation: demand side and supply side. To participate on the demand side, you can connect smart appliances, thermostats, and EV chargers that automatically reduce their energy needs when the grid is stressed. This occurs when there is more demand for power than there is available from generating assets. A VPP can reduce the demand for power across the collection of assets in a way that is barely noticeable to users but collectively provides a significant impact to the grid. These demand response, or demand-side, programs are often managed by the local utility and help prevent brownouts and blackouts (more on this later).

Another type of VPP is one in which customers participate in grid services on the supply side, or through power generation. You can use your own DERs like solar panels, energy storage systems, and even electric vehicles and backup generators to generate and store electricity that, when you’re enrolled in a virtual power plant, can be optimized to meet your business needs as well as be sold to the grid for revenue. Some VPPs include a mix of behind-the-meter resources and larger front-of-the meter assets such as large-scale wind and solar farms.

VPP operators manage these resources regardless of the type of participant or energy asset in order to orchestrate efficient operation and dispatch the resources effectively. This benefits both the grid and the VPP participants, as demand-side and supply-side participation is compensated by the grid operator or local utility.

How Virtual Power Plants Work

As mentioned, distributed energy resources are aggregated across many businesses, organizations, and even communities to form a virtual power plant with enough capacity to service the participants and the grid. The combination and variety of these assets ensure a consistent source of power that can be managed at scale, allowing flexible configurations and many benefits depending on your business needs.

DERs commonly utilized in a VPP include:

• Solar arrays (rooftop, ground-mounted, and carports)

• Wind turbines

• Natural gas turbines

• Medium- and large-scale battery energy storage systems

• Electric vehicle chargers (when capable of bi-directional energy flow)

• Electric vehicles themselves (when leveraged as “mobile batteries”)

• Combined heat and power (CHP) systems

• Smart home electronics like smart appliances and thermostats

• Traditional backup generators (in some cases)

An aggregated VPP is managed and operated remotely and often leverages smart meters, artificial intelligence (AI), and machine learning. These advanced technologies continuously monitor the weather, local power grids, and energy prices to optimize the performance of DERs and allow for a more efficient distribution of energy throughout the system.

Business Benefits of a Virtual Power Plant

Virtual power plants provide a variety of benefits for participants including more affordable and dependable energy with the potential for additional revenue streams, plus reduced carbon emissions. VPPs can also optimize energy management, reduce stress on operational equipment by maintaining power levels, and improve asset utilization and utilization of renewable resources.

Let’s dive deeper into these benefits to see how VPP participation makes a big difference for organizations and commercial and industrial businesses.

Cost Savings

Enrolling your distributed energy resources in a VPP can reduce your electricity costs by increasing efficiency, picking the right times to charge and discharge your energy storage system or electric vehicles based on energy rates, and providing more predictable pricing through long-term energy contracts with renewable generation sources. You can also earn revenue by participating in various regional programs or incentives.

The annual economic value of a typical business participating in a VPP depends on various factors such as the size and type of DERs. Generally speaking, most businesses see significant energy cost savings and often earn revenue from the sale of excess power to energy markets or by participating in paid demand response programs.

There are also various financial incentives and tax credits associated with renewable energy systems that may require special operating conditions to comply with the program.

Energy Resiliency

VPPs provide participants with a more reliable source of clean energy, which creates improved resiliency against grid disruptions that can result in costly productivity losses.

Resiliency is a critical consideration for many types of businesses. For one, industrial customers who rely on a constant flow of energy to operate machinery stand to incur considerable financial harm during a prolonged blackout. But when enrolled in a VPP, these companies can remain online through onsite energy generation and storage.

The distribution sector is also especially prone to blackouts and brownouts, as power is needed to keep up with round-the-clock delivery schedules, especially if a company has adopted electric fleet vehicles that require charging. And for companies that operate warehouses with cold storage, ensuring 24/7 uptime is even more essential.

With a virtual power plant, businesses of all kinds can reduce the risk of their utility's underperformance and be energy-resilient enough to keep their operations running through outages.

Emissions Reduction & Electrification

Additionally, VPPs play an integral role in helping support the transition to a low-carbon economy by providing clean energy through DERs.

Clean technologies like onsite solar energy can power operations without the environmental impact of greenhouse gas emissions, helping to considerably shrink VPP participants’ carbon emissions and achieve sustainability goals. And if battery energy storage is installed, the use of solar energy can be shifted to later in the day to power loads even once the sun goes down.

By fulfilling energy needs locally, VPPs also enable shifting of demand away from fossil-fuel-burning energy sources — further reducing emissions while relieving strain on the larger grid.

VPPs also promote the advancement of electrification by replacing assets that require fossil fuels with smart electric appliances and battery-powered equipment. And by providing power to EV chargers, VPPs facilitate and encourage the adoption of electric vehicles. This not only helps businesses electrify their fleets but also benefits their employees and customers who can easily charge their cars while on the property.

Furthermore, by embracing clean energy through a VPP, businesses can improve their standing in the hearts and minds of eco-conscious consumers who weigh a company’s sustainability practices when making purchase decisions.

Monetization

VPPs also create new opportunities for monetizing energy assets. While the amount of revenue generated varies depending on the size of your business, its location in relation to the grid, and the size, type, and configuration of your energy resources, a VPP can potentially add hundreds of thousands of dollars in annual savings or additional income. Let’s explore a few tactics.

Net Metering

Say a business with a rooftop solar installation is enrolled in a VPP that gets paid for exporting electricity to the grid when needed. This arrangement, called net metering, provides businesses with an additional revenue stream in the form of energy bill credits and helps them achieve return on investment on the solar asset. It can even be used to “pay it forward” by providing capital to invest in other clean technologies like energy storage or electric vehicles.  

Peak Shaving

Your business may also be able to receive payments from the grid for peak shaving. This is when a facility reduces its maximum utility consumption by utilizing onsite renewable energy. In addition to these payments, businesses that participate in peak shaving can save money via reduced energy costs thanks to improved efficiency and better load management.

Demand Response Programs

Demand response programs present another revenue stream for VPP participants. Businesses enrolled in a demand response program are typically compensated for reducing energy use during peak times. A commercial customer can earn up to $200 per kilowatt during peak demand times, while an industrial customer could earn up to $400 per kilowatt (rates depend on the region and market).

California’s Demand Response Auction Mechanism (DRAM) and New York’s Distribution Level Demand Response are just a couple examples of demand response programs. Retail energy providers like NRG and NextEra, which serve many U.S. states as well as Canada, have also established demand response programs — providing revenue to their customers in exchange for curtailing demand or shifting energy loads in response to a grid signal.

Energy Markets

VPPs also provide a platform to monetize distributed energy resources through energy markets, which allow businesses to buy and sell energy from a variety of sources such as solar, wind, and energy storage systems. By participating in these markets, businesses can not only save money on energy costs but also contribute to the growth of renewable energy adoption across the region.

The highest utilization of VPPs is in regions with wholesale energy markets like CAISO in California, ERCOT in Texas, and ISO NE, which services states like Massachusetts that offer incentives like SMART for solar and energy storage.

When you enroll in a VPP that participates in energy markets, you can offset your renewable energy investment by earning up to $150,000 annually, depending on the size of your project.

One way to participate in energy markets is by providing grid services, or actions that support the health of the larger power grid. A specific type of grid service called ancillary services is where a VPP ensures grid reliability by supporting the transmission of electricity from generation sites to customer loads. Depending on location and configurations, a VPP could carry out:

• Load following — producing more electricity as demand increases

• Operating reserve — providing electricity during a grid failure

• Frequency regulation — helping balance electricity supply and demand on a moment-by-moment basis, ensuring that the frequency remains as steady as possible

Regional Programs and Incentives

Regional programs and incentives offer additional economic benefits for VPPs. These programs often provide revenue options, tax credits, or other financial support to incentivize investments in renewable energy resources throughout an area.

Additional tax benefits are available to offset the costs of renewable energy projects from the Inflation Reduction Act and the National Electric Vehicle Incentive (NEVI) Program.

Examples of VPP Configurations

In addition to participation in energy markets, VPPs can also generate benefits through a number of configurations that are designed to prioritize certain kinds of energy sources and business needs.

For example, a VPP might have an integrated portfolio of distributed energy resources that includes a combination of battery storage systems, solar energy systems, microgrids, and electric vehicles and EV chargers. This configuration allows the VPP operator to balance supply and demand across the system, ensuring EVs are charged efficiently, facility power needs are met, and financial goals are achieved.

Commercial and industrial customers deploy VPPs in several configurations that each provide a unique set of economic and non-economic value streams.

Microgrids

Microgrids are small electrical grids designed to operate independently from the main grid and allow some or all of a business’ operations to remain online during outages or other disruptions. They typically incorporate distributed energy resources and demand response technologies to provide efficient, resilient, and reliable energy services.

Microgrids help businesses with mission-critical power needs such as industrial manufacturers that must always remain operational or risk damage to machinery, data centers running critical loads for banks, and hospitals and other emergency services running life-saving equipment.

Utility-Scale Projects

Utility-scale projects typically involve the integration of large-scale renewable energy sources — such as solar, wind farms, and energy storage systems — with long-term contracts that are tied to energy prices in regional wholesale markets.

These arrangements can provide significant cost savings over traditional generation sources while also providing additional benefits such as higher earnings from energy markets, increased system reliability, and lower emissions.

Utility-scale projects require more upfront investment and can take longer to see returns but may be very lucrative for businesses with enough land to site a renewable energy power plant.

Virtual Net Metering

Virtual net metering (VNM) is a way for energy consumers to take control of their electricity costs while accessing renewable energy. VNM arrangements allow customers to receive credits from offsite renewable energy sources such as solar, wind, or energy storage systems for electricity they generate and use. This is different from conventional net metering arrangements where customers are only credited for the energy they produce onsite with their own renewable system.

With VNM, a customer can receive credits for electricity generated from an offsite source, enabling them to access energy from renewable assets without having to install their own system.

Community Energy Storage Systems

Community energy storage systems are decentralized systems that rely on stored energy from renewable sources. These systems allow business and industrial parks or multi-tenant communities to store energy and then use it when demand is high. This helps reduce energy costs, provides a steady supply of clean energy, and offers the opportunity to sell excess power to energy markets when enrolled in a VPP program.

These systems also provide communities with more control over the energy they consume, allowing them to prioritize the use of renewable energy sources.

Furthermore, community-based energy storage systems are less expensive than large centralized systems used by utilities, making them a more attractive option for communities looking to switch to renewable energy. These systems can also help reduce peak electricity demand and improve energy efficiency, helping reduce carbon emissions. Overall, community-based energy storage systems can provide a cost-effective and sustainable alternative to traditional methods of energy storage.

The Benefits of Using a VPP Operator

Not all businesses have the resources and bandwidth to manage their energy assets or VPP participation themselves. This is where virtual power plant operators can be useful. VPP operators provide a turnkey way to manage electricity supply and demand for businesses. They also enroll and actively manage participation in grid services or energy market programs.

A VPP operator is a central entity that aggregates energy from multiple renewable sources. They provide tailored electricity services to customers at competitive prices and often manage all negotiations and contracts with utilities and other participants on your behalf.

By providing access to power when it’s needed, operators help ensure solar assets generate maximum output and offer the greatest return on investment. When solar is paired with energy storage or EV chargers, VPP operators can capture as much of the clean energy produced when the sun is shining and use it effectively to charge batteries. They can also navigate the complexities of electricity rates, energy markets, and net metering and determine the best times to sell excess power for financial gain.

In addition to providing access to clean energy resources, VPP operators offer a wide range of services that can help better manage energy consumption. This includes monitoring and adjusting settings in real time through an online portal, customizing peak load management strategies, improving grid reliability, and much more.

VPP operators also help you leverage incentives such as demand response, frequency regulation, or capacity programs offered by local utilities. By using a VPP operator, you can take advantage of existing regional programs that are designed to incentivize renewable energy generation such as feed-in tariffs and the aforementioned net metering. These programs allow businesses to offset their electricity costs or even receive payments for excess electricity they generate.

Energy markets, utility tariffs, regional incentives, and national tax credits change frequently. A VPP operator keeps pace with this dynamic energy landscape, leaving organizations to focus on their core business.

Choosing a VPP Operator

When choosing to use a VPP operator, consider selecting a partner with experience orchestrating, monitoring, and dispatching energy resources while utilizing the latest technologies to capture as much value as possible. They should have existing relationships with utilities and be able to interface with other energy market entities on your behalf.

A quality VPP operator can also advise you of which programs are best for your business and quickly enroll your energy systems for faster time-to-value. Additionally, the operator’s expertise in developing and managing distributed energy resources can help ensure that your clean energy assets are meeting desired performance targets.

By leveraging a VPP operator’s expertise, your business can enjoy all the benefits associated with making the switch to renewable energy without sacrificing performance or reliability, or having to hire costly staff to manage the system in house.

How VPPs Work With Utilities, CCAs, and Other Entities

Utilities, community choice aggregators (CCAs), municipal utilities, and cooperatives all play a role in the VPP ecosystem. Depending on your location, your VPP may be tied to a specific entity such as these and may offer different economic benefits based on the needs of the overall system. These entities can work with a VPP operator to manage their distributed energy resources more efficiently and cost effectively.

Utilities are typically responsible for managing energy delivery infrastructure and providing power to customers. They also provide necessary data access for the VPP operator and help facilitate electricity generation from customers’ distributed energy resources. Utilities pay VPPs for infrastructure deferral, peak shaving, and load shifting.

Community Choice Aggregators are formed by communities that wish to control the sources of their energy supply with cleaner options and take ownership of their energy future. According to a recent Wood Mackenzie report, VPPs that service CCAs have the highest utilization from solar, energy storage, electric vehicles, and EV chargers, with investor-owned utilities (IOUs) following.

Municipal utilities provide energy under the direction of local governments and can benefit from VPPs by providing cleaner energy options to their customers that offer cost savings and environmental benefits.

Cooperatives bring together groups of members who can benefit from shared electric resources. By pooling together resources, cooperatives can reduce costs associated with energy generation and storage while increasing reliability for their individual members. In addition, these organizations can use VPPs to provide energy services such as peak demand management, which can help keep overall costs down. (Cooperatives are further behind CCAs and IOUs in the variety and size of distributed resources used in VPPs.)

Growth of VPPs

VPPs are growing in number of pilots and participants, providing utilities with more flexibility to manage the supply and demand of electricity without having to invest in large, lengthy projects to build more power plants themselves.

The most common use case for the growth of VPPs is to help balance the load on the grid during peak consumption. This can occur on very hot or cold days when the demand for heating and cooling puts stress on the grid. It can also occur when the supply of power drops off during the day faster than demand, such as late afternoons when electricity from wind and solar plants decreases, or when there is an unplanned outage.

Recognizing the value of leveraging DERs, Public Utility Commissions (PUC), grid operators, and utilities have embraced adding VPPs into their generation mix to manage peak demand. Thanks to VPPs, a reduction in peak demand of 60 GW is expected by 2030 and could grow to more than 200 GW by 2050 as noted by a VP3 report.  

But progress is being made right now. According to a recent Brattle Group report, the U.S. has invested about $120 billion to add 100 GW of new capacity. It goes on to state that VPPs could save U.S. utilities $15 to $35 billion in capacity investments over 10 years, meaning when DERs are included in grid services, utility companies don’t have to build more large-scale power plants. It helps the grid and introduces a new class of customer known as a “prosumer” that both consumes and produces power.

Every VPP is aggregated within a territory and is tied to a utility, market, or market zone. VP3 also notes that VPPs could avoid 44 to 59 million tons of CO2 in 2050. With Federal Energy Regulatory Commission (FERC) Order 2222, which allows the aggregation of DERs to compete in wholesale energy markets, we should expect two-thirds of U.S. businesses and households served by utilities and retail electricity providers within regional transmission operators (RTO) and independent systems operators (ISO) to participate in VPPs.

How to Participate in a VPP

Participating in a VPP is simple and convenient with the help of an experienced VPP partner. Your business can sign up for a plan/project with one of the many companies that provide virtual power plant services, such as PowerFlex. With a virtual power plant, you get access to renewable energy sources like solar and energy storage while also benefiting from enhanced reliability, flexibility in supply, and cost savings.

Once enrolled, experts will determine the best configuration for your business and which energy market and programs can provide the best economic outcomes. From there, you just need to monitor your system performance and adjust settings as needed via a user-friendly online interface or opt into monitoring and operation services with a virtual power plant operator.

Businesses interested in participating in a VPP have options — they can choose to join an existing VPP or create their own independent VPP. The benefits of joining an existing VPP include leveraging the resources and expertise of the operator, optimizing use of renewable energy sources, and taking advantage of existing contracts and economies of scale when it comes to accessing electricity markets or incentives.

You might consider forming your own private VPP or partnering with other businesses with similar objectives if you need more control over your energy needs. A private VPP would need to find an experienced facilitator or operator that specializes in managing such arrangements.

The Bottom Line on VPPs

Whatever route you choose, virtual power plants offer tremendous potential for commercial and industrial companies looking to optimize their energy strategy and take advantage of renewable energy. VPPs provide valuable opportunities for businesses in terms of cost savings, revenue generation, increased sustainability, enhanced resilience, and long-term cost stability.

When considering participation in a VPP or forming a private arrangement, it is important to evaluate all options carefully to find a configuration that’s best suited for your needs. With the right VPP partners, your business can benefit from a range of value streams and help accelerate the growth of clean energy across the world.