VPPs Help Utilities Meet Peak Demand and Carbon Reduction Targets Cost Effectively

A primary challenge facing utilities in the U.S. is meeting peaks in demand driven by increased variability of wholesale renewable supply from wind and solar resources. New patterns of retail demand shaped by both regulatory changes and the introduction of new technologies such as electric vehicles (EVs) to the grid are also major factors.

Dirty and expensive fossil fuel peaker plants have been the traditional solution for utilities to meet peaks in demand. Yet a far more compelling and comprehensive proposition is virtual power plants (VPPs) that can aggregate and orchestrate a diverse portfolio of distributed energy resources (DER).

These VPPs can provide a wide variety of grid services since they can respond to wholesale price signals in real-time. State-of-the-art VPPs can combine load, generation, energy storage, and even EVs into a single synergistic resource.

The VPP is a more nimble, flexible solution than traditional fossil fuel peaker plants. They can leverage diverse customer-owned assets in new creative ways, reducing capital costs since many of these assets are already deployed and fully paid off. The assets still provide value to host customer sites, whether residential or commercial or industrial customers. Yet with the right digital platforms, these DER assets can also contribute flexibility solutions to support the larger grid needs.

The good news is that advances in digital platforms leveraging cutting edge concepts such as artificial intelligence (AI) can now manage complex aggregations of DER assets VPPS that can replace fossil fuel as peaker plants that are seen as necessary for balancing the grid.

This article highlights how these DER assets,  when optimized into mixed-asset VPPs, can help utilities meet the obligations to their customers while also reducing economic (and environmental) costs across the stakeholder landscape.  Integration of EVs into energy markets in the form of what the U.S. Department of Energy has dubbed “vehicle to everything” or V2X is a groundbreaking technological breakthrough. V2X breaks down long-standing siloes between energy and transportation sectors of the economy, setting the stage for even wider deployments of VPPs to balance loads while optimizing EV charging.

VPPs are Cost Competitive Today

VPP pricing can range from $100-$150 /kW-yr, depending on the region, the required grid services, and the specific VPP asset mix. In most cases, peak capacity reduction can be delivered for less than $130/kW/yr, and the majority of this VPP cost (as much as 70%) goes directly to the local community in the form of customer incentives.

Today VPPs are already at pricing parity with simple cycle gas peaker plants due to the latter’s low-capacity factors. Furthermore, the prices are trending in opposite directions as VPPs are de-risked by wider deployments and accommodating market structures. Over time, the technology components of VPPs will decrease in price as they gain scale (such as batteries and EVs), while gas peaker plants will face increasing financial and regulatory risk, largely due to fuel prices and carbon emissions. Since the less you use them, the more expensive they get, these fossil fuel peakers are likely to become stranded assets. (See this blog for more details on comparing the costs of VPPs to existing fleets of fossil fuel peakers in New York and Texas.)

VPPs Offer Significant Environmental Justice Benefits

Fossil fuel peaker plants are the most expensive and most polluting resources currently in operation. VPPs are cleaner than the conventional fossil fuel peakers and aggregate existing DER assets that have been deployed over a wide area to meet spikes in electricity demand. While VPPs offer environmental benefits in aggregate, they also address environmental justice issues directly. How so?

Fossil fuel peakers tend to have a disproportionately negative impact on disadvantaged communities due to high air emissions. Take the case of New York City. As is often the case in other urban environments, the city’s most polluting peaking plants were developed in locations where high summer temperatures accentuate regional smog and other pollutants. This, in turn, often impacts lower income neighborhoods. The figure below from the Peak Coalition shows that the highest risk areas are parts of the Bronx and Brooklyn near lower income and working-class families and individuals. This reality raises environmental justice issues in addition to larger concerns over the grid’s reliance on peaker plants at a time of accelerated global climate change.

Peaker Plants and Vulnerable Populations in New York City

(Source: Peak Coalition)

Mixed Asset VPPs Deliver the Most Value

If we stick with New York, we’ll see why solely relying upon DR will not solve the peak load reduction problem over the longer term.  Traditionally, DR is most active in summer to shave peaks by curtailing air conditioning loads. Accelerated EV deployments and increased reliance upon electrification for heating will, however, reshape peak demand patterns. The New York Independent System Operator (NYISO) projects winter peaks will surpass summer peaks in 2039 and grow from over 23 GW in 2019 to approximately 38 GW by 2050. This shift implies that a more diverse DER portfolio will be needed for addressing future peaks. Luckily, 29,485 MW of wind and solar capacity and 8,541 MW of energy storage are seeking interconnection with the state’s grid. Integrating this diversity of DER assets into VPPs would offer New York utilities and their ratepayers the greatest environmental value at the lowest possible cost. The ability to aggregate DER assets into a VPP also enables the creative shaping of load, generation, and energy storage to meet the precise needs of the grid at any point in time.

If we look now to Texas, however, we can see how DR still offers tremendous value today, even during winter. The chart below shows DR events dispatched in Texas between January and August 2021 by AutoGrid. These events were dispatched on behalf of AutoGrid customers which include two large investor-owned utilities in central and southern Texas, as well as several Texas electric cooperatives. The investor-owned utilities rely upon a combination of commercial and industrial as well as residential DR resources. The electric cooperatives work with residential DR customers through controllable thermostats (Nest, ecobee, Honeywell, and Emerson Sensi). Of particular significance is the event spike in February, a direct result of the winter storm leading to strained supply and ultimately power outages.

AutoGrid DR Events in ERCOT in 2021

(Source: AutoGrid)

During 268 events to reduce peak demand on the ERCOT system in 2021, 1,811.8 MW of cumulative load was shed, including a maximum of 240 MW during a single event. August contained the highest cumulative load shed by these DR events (over 500 MW shed), when temperatures and grid load typically peak in the summer. Surprisingly, however, February followed with more than 485 MW of cumulative shed during the unusually severe winter storm. Even more illuminating is the aggregated energy savings of these DR events. During February, 8.9 billion kWh were shed, more than half of the total energy saved in all months from January to August 2021

EVs Are the Game Changer

The best near-term opportunity for EVs to play a role in VPPs and enhanced grid resiliency is in California. This past December, the California Public Utilities Commission (CPUC) authorized aggregated EVs for its emergency load reduction program (ELRP). This pilot program is designed to allow the state’s investor-owned utilities and the California Independent System Operator (CAISO) to access innovative ways to maintain a reliable grid when traditional generation options are not available. The goal of ELRP is to eliminate the need for rotating power outages while minimizing cost to ratepayers associated with building additional standby resources such as peaker plants. This program is designed to serve as an extra insurance layer on top of the existing resource adequacy reliability planning requirements integrated into the CAISO wholesale market. One can view this as an experiment, which will run for five years, to offer a new tool for grid operators to address unexpected power system conditions.

Under the program, EV aggregations that reduce load or deliver a supply of 25 kW or more for 30 hours annually during system emergencies will be paid $2/kWh. It is notable that this is California’s first program that offers compensation for the V2X grid services. While traditional backup fossil generators can participate in the program, it is the use of V2X technologies that are the most ground-breaking given the huge potential resource. California already has 1 million electric vehicles on the road, which represent approximately 39% of the national total, according to the California Energy Commission (See Chart below). Given that the state has set a goal that all new vehicle sales be EVs by 2035, the role of V2X as a potential grid resource will only increase over time. Since each electric bus includes a battery that can represent 100 kW of energy storage capacity, this growing fleet represents a vital resiliency for California, the nation and the world.

National and California EV Sales Trends Data

Each EV represents the equivalent load as a new house. As we electrify to reduce carbon emissions across new sectors of the economy such as transportation, utilities must grapple with how to keep the lights on while balancing environmental considerations.

Conclusion: VPP Use Cases Continue to Grow

In addition to their help addressing demand peaks with cheaper and cleaner resources, VPPs provide many other benefits as well:

• VPPs represent a pathway for prosumers to share their resources with neighbors and the grid at large. Democratizing DER asset owners can lower their own costs, increase resiliency at their own sites, and help transition to the net-zero energy economy.
• VPPs can be developed under a diverse set of regulatory environments. Though open and deregulated markets represent the best opportunities, vertically integrated utilities can all leverage VPPs to provide bidirectional value. With the right digital platform, these utilities can expand use cases to shift the focus to active power management applications that align with DER management system (DERMS) functionality as DER assets continue to be adopted by growing numbers of prosumers.
• Since prosumer assets have been paid for outside of conventional utility rate-basing, they represent cheap, underutilized assets to the system that can deliver immense value to asset owners and to the utility grid network. The largest contributor to the grid’s challenges—and its solutions—are EVs, which will represent the lion’s share of DER assets coming online over the next decade.

Utilities can now purchase turn-key VPPs (see figure below), providing GW scale resources to wholesale markets while working with asset partners to deliver real financial value to utilities as they navigate a changing regulatory landscape to deliver a cleaner and more reliable electricity service to their customers.

The VPP Ecosystem for Turn-Key Utility Solutions