Millions of US homes and businesses have added rooftop solar arrays, wall-mounted batteries, electric vehicle chargers, smart thermostats, electric water heaters and other distributed energy resources in recent years. A growing number of hardware and software specialists want to orchestrate these widely dispersed devices into remote-controlled virtual power plants (VPPs) as alternatives to conventional large-scale generators.

Among them are tech giant Google LLC; automakers Ford Motor Co., General Motors Co. and Tesla Inc.; solar companies Sunrun Inc., Sunnova Energy International Inc. and SunPower Corp.; and VPP upstarts OhmConnect Inc. and Virtual Peaker Inc. Some independent grid operators and electric utilities are also taking a closer look at the broader potential of coordinated small-scale assets.

Such flexible fleets could provide the same reliability to the grid as natural gas-fired power plants and emerging lithium-ion battery stations for billions of dollars less, according to a new Google-funded report highlighting the emergence of VPPs and hurdles that impede their further proliferation.

"The main punchline from this report is there is an undervalued resource that has humongous untapped potential for a grid that is increasingly facing reliability challenges, both from the weather as well as decarbonization ... [and] just general load growth," said Rizwan Naveed, lead product planner for grid services at Google's Nest thermostat business.

In addition to offering smart thermostats, which are at the heart of some of the largest VPPs deployed to date, the Alphabet Inc. affiliate offers a service, dubbed Nest Renew, that helps households shift their energy consumption to times when the grid is rich in renewable energy and power is cheaper. The platform is designed as "a true front door to the virtual power plant world for the residential customer," said Keven Brough, who leads product planning and strategy at Google Nest.

So far, however, VPPs have been mostly relegated to the side and back doors of power markets by technological, market and regulatory barriers flagged in the report, which was prepared by economists at The Brattle Group.

"In my personal view, what has been preventing this from happening on a larger scale for a long time is still the lack of financial incentives that utilities have to go out and spend money on VPPs rather than spending money on the conventional options, the utility-scale batteries or the gas plants," said Ryan Hledik, a Brattle principal who co-authored the report. "The regulatory model doesn't align the utilities' financial interest with going out and deploying cost-effective VPPs."

Overcoming key barriers could unlock enormous potential, according to the report, which compares the net cost of delivering 400 MW of resource adequacy from a natural gas peaker plant, a large-scale transmission-connected battery system and a residential VPP. The modeled virtual power plant — including smart thermostats, behind-the-meter batteries, electric water heaters and EV chargers — beats large-scale gas and battery plants by providing resource adequacy at roughly 40%-60% of the net utility system cost of those resources.

By harnessing 60 GW of VPPs, US utilities could save $15 billion to $35 billion on capacity investments over 10 years compared with big gas and battery plants, the report found. That finding is extrapolated from nonprofit group RMI's estimate on potential US peak power reductions with virtual power plants.

Calls for federal and state action

Virtual power plants made a strong case with their performance during California's prolonged September 2022 heat wave, when home batteries, thermostats and other distributed resources operated by companies including Sunrun, Tesla and OhmConnect helped the California ISO keep the lights on.

Overall, however, momentum for VPPs has been mixed.

The Federal Energy Regulatory Commission's landmark Order 2222, issued in September 2020, required regional transmission organizations (RTOs) and independent system operators to allow aggregated customer-sited resources to participate in wholesale energy markets. But there has been significant "pushback" from RTOs and investor-owned utilities, according to Jon Wellinghoff, a former FERC chairman who is now chief regulatory officer at distributed energy software company Voltus Inc.

"From a policy standpoint, we need to do some heavy lifting at the federal government, in my opinion," Wellinghoff said in a March 31 media briefing on VPPs.

Some of that heavy lifting came in April, when the US Energy Department announced an up to $3 billion conditional loan guarantee for Sunnova to supply rooftop solar, battery storage and VPP-ready software to up to 115,000 households in disadvantaged communities throughout the US.

"We expect the transaction with the DOE to close in the second quarter of 2023," Sunnova President and CEO John Berger said on an April 27 earnings call with analysts. Sunnova expects the partial loan guarantee to support up to $5 billion in loan originations and to save "hundreds of millions of dollars" on interest while supporting grid reliability and improving access to clean energy, Berger said.

But state utility commissions are the more critical venue for regulatory innovation to support VPPs at this point, according to Hledik.

"I think really what's needed is just awareness and an advocate at the state commission level," Hledik said. "In states where we have seen a commissioner with a real awareness of the potential for VPPs or demand flexibility, and an understanding of the issues and the potential value, that's where we tend to see more progress being made in terms of aligning the business model with the opportunity."

'Key exhibit'

The Brattle Group report highlights several VPP initiatives at utilities across the US, which are partly an outgrowth of demand response programs that have existed for years.

In February, for instance, Sunrun teamed up with PG&E Corp. subsidiary Pacific Gas and Electric Co. (PG&E) on an initial up to 30 MW VPP created with as many as 7,500 new and existing battery-backed home solar projects in California.

"One of the things I love about the pilot we're doing with PG&E is it actually shows the value of just relying on these storage devices, particularly when they're powered by the sun ... to then distribute back to the grid like in a repeatable, more baseload fashion," Sunrun CEO Mary Powell said in a recent interview.

Green Mountain Power Corp., a Vermont-based utility formerly led by Sunrun's CEO, has enrolled more than 4,000 behind-the-meter batteries in a VPP and plans to expand the program to 55 MW. A Hawaiian Electric Industries Inc. subsidiary plans to deploy an 80-MW VPP, relying mostly on solar-powered batteries at 6,000 homes. Arizona Public Service Co. manages more than 50,000 smart thermostats, and the Pinnacle West Capital Corp. operating arm is targeting 100,000.

"I think what we're going to see is some states move more quickly on this than others," Hledik said.

The Brattle report "is going to be a really key exhibit" in making the case for VPPs, said Kevin Brehm, manager of carbon-free electricity at RMI.

In January, RMI launched the Virtual Power Plant Partnership (VP3) to advocate for virtual power plants, including through the development of industry road maps, best practices and policies. Among the founding members were Ford, GM, Sunrun and Google Nest.

"As the Brattle report pointed out, VPPs are the best option for ensuring resource adequacy," Brehm said. "And the only way to make sure VPPs are available is to make sure VPP technology and service providers have viable businesses so they can provide those solutions."

But "VPP options" currently are limited and market and utility rules "basically introduce friction that increases the cost for virtual power plants," Brehm added. "So we need to ensure that rules and policies are designed to reduce that friction and allow VPPs to have the role that they can [have]."

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