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How Do Virtual Power Plants (VPPs) Work?

Updated: Feb 8


As the world transitions to cleaner energy sources, there are new and innovative ways to meet the demand for low-carbon electricity. Just like we now attend virtual meetings or virtual conferences, virtual power plants have also grown in popularity and are bringing innovation to the renewable energy movement. But many people wonder how virtual power plants work.

VPPs create an opportunity for renewable energy to generate a larger share of the energy mix without hindering reliability, providing greater opportunities for the solar energy industry. Understanding VPPs is beneficial because this innovation offers opportunities for solar power contractors and EPCs. In the energy industry, it is seen as a way to use digital technology to benefit electrical system operators, utility customers, and the clean energy transition.

What Are Virtual Power Plants?

VPPs remotely integrate various energy resources from different locations to deliver reliable power for a network. Virtual power plants utilize software-based technologies for planning, scheduling, and bidding of energy resources. Distributed energy resources (DERs) include on-site power generation, battery systems, electric vehicles, smart meters, flexible heating and cooling loads, and smart appliances.

VPPs pool production from a variety of plants and sources in the electricity market with smart grid technology, encouraging a low-carbon future. Although the energy is dispatched through a centralized system, the energy-producing assets can be independently owned and operated.

Storage assets help ensure the utility company can meet peak demand on the electrical grid, possibly without bringing other power plants online. To ensure grid stability for customers, batteries, like the Tesla Powerwall, can be located on utility customers’ properties, including homes and businesses. Likewise, larger batteries can be owned by a central owner, such as the electricity company.

Remember, most renewable energy sources are variable and weather-dependent, and this fluctuation in production needs to be managed. The goal is to control and optimize the grid, providing reliable power.

Centralized Vs. Decentralized Or Distributed Utility Grids

Traditionally, electricity flows in one direction from power plants to loads (utility customers). This model is a centralized power grid and typically consists of large power plants fueled by natural gas, nuclear, coal, oil, and hydroelectric power. This system has one primary grid operator that ensures consistent and reliable energy, from the power plants to the users.

Now, electricity production also includes wind and solar energy throughout the grid; this model is known as a decentralized or distributed power grid. This model typically includes small to medium-sized projects, such as rooftop solar panels, a few wind turbines, or a medium-sized community solar farm. This approach involves the bi-directional flow of energy, meaning that power flows both ways on the grid, unlike in a centralized power grid. Decentralized power generation is critical as power grids gradually incorporate more clean energy sources, and large polluting power plants are gradually shut down.

Pros and Cons of VPPs

VPPs allow more renewable energy in the power grid, overcoming the issues related to its intermittency. Also, utilizing decentralized power plants reduces losses from electricity traveling long distances to customers. If one power-generating asset fails, others can fill in for it, often without a blackout or interruption. This setup also allows for a variety of development and ownership models.

However, the rise of decentralized power plants raised issues for grid operators. Ironically, an oversupply of renewable energy can actually cause blackouts, so a diligent response is needed. Also, some are concerned that software-based solutions are vulnerable to cyber-attacks, making the grid less stable.

Infrastructure is another concern, as the power grid needs to be upgraded in order to service some areas. For example, some of the windiest areas in North America are located in areas without robust grid infrastructure, partially because they are not in heavily populated areas. Adding infrastructure to these areas could help harvest more renewable energy and contribute to the overall grid energy.

Grid Flexibility

As the world decarbonizes, the need for electricity increases. For example, electric vehicle ownership is rising, along with the need to charge vehicles. Likewise, many homes and businesses are switching to electric heating and cooling. Unfortunately, climate change is causing weather to be more erratic and unpredictable, and cold snaps and heat waves can boost energy use for heating and cooling. In some cases, severe droughts even require power safety shutoffs to help prevent wildfires.

These changes mean that the demand curve is shifting a bit, and grid outages are even more disruptive because homeowners and businesses rely on electricity in more ways than ever before.

Likewise, the supply of renewable energy is variable and can shift around some due to climate change. Hydroelectric power generation relies on precipitation, and droughts, therefore, decrease its production. Solar production, however, can increase during a drought because of the decrease in cloud cover. Typically, wind energy generation increases in the winter and decreases in the summer, but seasonal patterns vary by location.

Thus, the shifting power supply and demand requires the grid to be more nimble and responsive than ever before. If production from one asset is down, managers may look to boost others. Also, energy storage capacity can help make up the difference.

Increased Reliance On Renewable Energy Sources

There is an urgent need to reduce our reliance on polluting fossil fuels to slow down climate change. When renewable energy resources can be managed effectively, it allows more solar and wind power in the energy mix. As technology and management techniques advance, they allow the phasing out of polluting fossil fuel power plants--VPPs are a critical ingredient. Then, countries can further reduce their greenhouse gas emissions for a more stable climate.

Virtual Power Plant FAQs

The concept of VPPs is relatively new to most people, including solar contractors. Let’s examine some of the common questions.

How do virtual power plants work?

VPPs integrate diverse Distributed Energy Resources like solar panels and batteries through a central control system. Leveraging advanced analytics, VPPs optimize energy production, respond to grid signals, and provide grid services. They enhance grid stability, offer demand response capabilities, and enable participation in energy markets. VPPs contribute to a resilient and decentralized energy infrastructure, facilitating the transition to sustainable energy sources.

How do VPPs differ from microgrids?

Microgrids are areas of self-sufficient energy production that can be disconnected from the main power grid if necessary. For example, some islands and neighborhoods are microgrids. Whereas VPPs integrate areas connected to the utility grid, microgrids are more limited in scope. Instead of relying on software solutions, microgrids use hardware-based equipment, such as inverters and switches.

What are the benefits of VPPs?

Virtual Power Plants enhance grid stability, integrate renewable sources efficiently, and enable demand response, reducing peak demand. With flexibility and adaptability, they optimize energy use, cut costs, and generate revenue. Providing essential grid services, VPPs contribute to resilient power infrastructure, lessen environmental impact, and support the shift towards decentralized, sustainable energy systems, fostering community engagement in renewable initiatives.

VPPs vs. demand response?

Demand response enables electricity users to decrease their use of electricity during times of peak energy use. Traditionally, this was done manually by powering down certain equipment. Now, this process can be automated. Whereas demand response impacts the demand for electricity, VPPs relate to the supply of energy. Although they are both related to a smart grid, they address different aspects of it.

Are there incentives for residents on a VPP?

There are some local, state, and federal incentives that help with the implementation of a low-carbon grid. The incentives for households and businesses vary by location. In the United States, federal tax credits for solar power systems and solar batteries reduce the total solar PV system cost. Some local governments or utilities offer additional incentives.

For example, in Oregon, there are discounts available for low-income residents who join community solar farms. In California, the Self-generation Incentive Program offers rebates to eligible households and critical facilities that install battery storage systems with a solar PV installation. This program has been very helpful in encouraging home energy storage deployment. Likewise, Oregon has a rebate for solar systems and solar battery banks and offers up to $5,000.

Virtual Power Plants Could Be The Future

As the world scales up the use of renewable energy resources, the need to manage them is increasing because the sun doesn’t always shine, and the wind doesn’t always blow. VPPs help ensure reliable supply, ideally phasing out more polluting or expensive sources of power. This approach enables larger amounts of renewable power in the grid, creating a larger market for solar companies.

The solar energy industry is rapidly evolving as PV technology matures, concern for climate change increases, and the energy market advances. To keep current on how these trends impact solar installers, read the GreenLancer blog as we explore the solar industry, up-and-coming technology and more!


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