Co-authors: Chris Rittenhouse and Adam Woda, DispatchEnergy
Additional Contributor: Alexi Makris
One of the latest buzzwords in the energy space is virtual power plant (“VPP”). Our key relationships and partners have asked why this matters to them, what the proliferation of VPPs will do to strengthen the grid, and how financing mechanisms can help bring more VPPs online.
First, let us address what a VPP does, why it exists, and how it functions.
VPPs are rapidly transforming the energy landscape, offering a dynamic way to manage distributed energy resources (“DERs”) and enhance grid resilience. But how do VPPs work, and why do they matter in the transition to cleaner, more dependable energy?
At their core, VPPs aggregate and optimize DERs—solar panels, batteries, and electric vehicle chargers, to name a few—creating a decentralized power network that enhances grid stability and flexibility. Today, they function in multiple ways, including aggregating individual home batteries into a network that injects this renewable energy back into the grid during peak hours when power is scarce. They might also shift the timing of EV charging to avoid overloading the grid and charging batteries when clean energy is abundant. Orchestrating DERs in this way can balance energy supply and demand at a large scale. With these assets often located within load centers, this dynamic demand-side management can provide relief directly to the greatest pain points on the grid. The result is disproportionate value for both VPP participants, who can tap additional revenues in return for flexible deployment of their DERs, and grid operators, who can leverage MWs of capacity relief without deploying any upgrades.
DispatchEnergy specifically focuses on VPPs that pair rooftop solar with battery storage, bringing multiple locations together to support utility and grid uptime and ensure peak performance.
Here are three emerging themes for VPPs you should be watching as you invest in new projects, large and small:
VPPs are rapidly gaining attention in the energy sector due to their innovative approach to managing and optimizing distributed energy resources. As economic activity accelerates the shift to an electrified economy, power demand is growing and changing grid demand patterns. This creates unpredictability for distribution operators and utilities, who must plan for new demand and ensure capacity on the grid under a fast-changing demand profile.
Traditionally, the solution has been to build more power plants and invest heavily in the transmission and distribution network. However, this approach often results in overbuilding for peak demand periods, leading to redundancies during standard use times. VPPs offer a more intelligent solution by leveraging all the DERs across the distribution network to create a marketplace that incentivizes and enhances efficiency in the system. This burgeoning market puts value on services that enhance grid stability and efficiency, as well as supporting the integration of renewable energy sources. This makes the energy system more resilient and sustainable, positioning VPPs as a key enabler of the clean energy transition, while also offering new revenue streams to asset owners and operators, which can improve the economics of DER investments.
We are even seeing states like New York consider VPPs a critical technology needed to meet the state's emissions goals. According to New York Governor Kathy Hochul, “New York must support the development and deployment of dispatchable, carbon-free energy resources while continuing to build out the state’s renewable energy grid.” With a laser focus on meeting renewable energy deployment goals, many states are focusing efforts on interconnection reforms and permitting enhancements that will encourage action and deployment of advanced technologies. As governments fund these efforts, longer-duration energy storage is becoming part of state roadmaps to meet peak loads seamlessly.
Government and industry are investing in strengthening the power grid to enhance its resilience, reliability, and capacity to meet future demands. They realize that adopting VPPs brings a powerful ability to mitigate peak demand or hotspots on the grid and deploy power in a more streamlined way. This empowers people to move from passive energy users to active participants, controlling usage and potential returns from their power assets. With an aggregator, program, or platform managing the process, the everyday consumer is given the opportunity to participate in a wholesale market.
Policymakers and regulators like the federal Department of Energy (“DOE”) view VPPs as critical for modernizing the grid without the time and cost burden of building new infrastructure. Instead, there is an opportunity to leverage the VPP model to meet the needs of the local or regional grid. According to the DOE’s latest Pathways to Commercial Liftoff report, “deploying 80-160 gigawatts of virtual power plants by 2030 could expand the U.S. grid’s capacity to reliably support rapid electrification while redirecting grid spending from peaker plants to participants and reducing overall grid costs.” The DOE also projects that by tripling the current scale of VPPs, it could address 10-20% of projected peak demand and avoid ~$10B in annual grid costs, with much of the money spent on VPPs flowing back to participating consumers.
Policies such as Federal Energy Regulatory Commission (“FERC”) Order No. 2222 are designed to allow DERs to participate in wholesale markets, accelerating their integration and contributing to grid resilience. By allowing DERs to aggregate and respond to price signals, developers can build economies of scale without the need to develop a single large project. It also empowers independent system operators (“ISOs”), like California’s ISO (“CAISO”), to incorporate DERs into their existing frameworks, enhancing grid flexibility, efficient grid management and resource utilization. This integration will lead to an expanded range of resources available to balance supply and demand.
As companies consider the assets they have deployed (or are planning to deploy), participating in a VPP model offers more flexibility and improves the economic business case of each investment. Deploying DERs, especially battery storage technology, offers an additional revenue stream and monetization potential, which widens the pool of commercial adopters to include small and medium businesses, ultimately increasing the total addressable market for DER deployment.
For investors, it is not just about the energy produced and pushed to the grid or consumer; it is also about the value of being flexible and being able to dispatch energy in a controlled way while responding to market signals. With a stable program of storage and dispatch, you can now monetize power meaningfully as price signals emerge—much like demand response programs. Today, the typical revenue stream is selling electricity to customers, but VPP programs will provide additional monetization options. Evolving the revenue model means changing how these assets are underwritten. DispatchEnergy is engaging with the capital markets to establish underwriting frameworks suitable for this new marketplace, setting the scene for growing the total addressable market by quantifying the value of assets operating with mixed VPP revenue streams.
Regional transmission operators and utilities alike stand to gain in this scenario. By taking advantage of DispatchEnergy’s track record of innovating between market dynamics and finance in markets like ISO-NE, NYISO, CAISO, and PJM, they can create market instruments to offer economic benefits for the buildout of grid-connected assets that can operate in service of the system at large. With upcoming policy and regulatory changes and the implementation of FERC No. 2222, DispatchEnergy understands the impact this ruling will have on financing projects, how it will create value, and how to secure the financing needed to support the long-term success of projects and invested assets.
Exciting times are coming to our industry. VPPs provide an opportunity to be part of a new growth market, and we have the track record to create a new business model alongside financing opportunities. We can help you put the puzzle pieces together, taking the complexity and benefits of this market and deploying creative, innovative financing solutions in this burgeoning market. By integrating modern technologies, understanding how revenue models change, and growing the addressable market, DispatchEnergy is uniquely positioned to guide you through the complexities of VPP implementation. Contact us to learn how our innovative financing solutions can help you capitalize on the future of distributed energy.