Description

The concept of Virtual Power Plants (VPPs) overturns the more traditional idea of relying on centralised (often CO2-emitting) power plants for predictable and reliable power output. As more and more small and large independent power producers enter the scene, solar, wind, and other renewable energy sources (RES) have penetrated the electricity grid all across Europe, opening the transition to a clean and sustainable energy infrastructure. However, the integration of these Distributed Energy Resources (DERs) into the grid is posing a number of challenges related to transmission congestion and/or voltage and frequency stabilities; renewables, in particular, are creating reliability issues due to their uncertain and intermittent nature. This clean power has disrupted the energy grid and created the need for new models and solutions for their integration.

A VPP aggregates many dispersed and independent DERs into a single operating agent that acts like a traditional power plant, with a similar sizable generation capacity, allowing it to participate in power system markets (both wholesale and retail) or sell services to the operator. A VPP thus represents a flexible portfolio of DERs with the aim of enabling smaller power system agents (i.e., consumers, producers, prosumers, or any mix thereof) to engage in electricity markets and provide services to the grid.

VPPs can help the integration of RES by providing both demand- and supply-side flexibility services to the main grid. VPPs can aggregate demand-response resources or energy storage units responding to grid requirements (demand-side flexibility), as well as incorporate fast-response units such as capacitors and batteries, along with CHP and biogas power plants to optimise power generation (supply-side flexibility). Through these two types of core services, VPPs can provide tangible benefits such as (IRENA, 2019):

• Supporting grid operation through various ancillary services
  • Demand-side management and real-time load shifting based on price signals to reduce peak demand – making a business case for deferred investments in transmission and distribution grid infrastructure
  • Balancing services and providing ramping requirements via optimisation platforms to compensate for fluctuations of any variable generation output from RES
  • Increasing local flexibility at distribution system level, if there is a regional local market for flexibility in place
• Decreasing the marginal cost of power
  • By reducing or shifting load during peak demand to avoid the use of large (fossil-fuelled) power plants to meet a small amount of electricity demand at an elevated cost, or
  • By completely replacing the peak power plant with the dispatch of the aggregated DERs and charged batteries
• Optimising investment in power system infrastructure
  • By saving on the costs of new capacity additions and/or grid reinforcement with the provision of real-time operational reserve capacity from already connected DERs, while providing them with additional revenues through their participation in ancillary markets when needed.

Problems to be solved

Value Model

City Context

Local governments can play a key role in supporting the development of VPPs and enabling market access for aggregators and other market players. This can be a complex task that requires institutional changes and regulatory updates. Nevertheless, VPP operators respond to market signals, and local policy can create clarity, communicate priority level and lower entry barriers. In addition, local governments can engage stakeholders and citizens around needs and opportunities and even become a VPP operator themselves in specific municipality-led initiatives, e.g., the municipally owned Energy Service Companies (EsCos) in the UK. Some key factors to enable deployment can be summarised in two themes (IRENA, 2019):

• Regulatory Framework, which should enable aggregators to participate in the wholesale market and in the ancillary services market as well. A liberalised wholesale market without price caps (especially with spot markets in place) is essential for aggregators to emerge and establish themselves. In fact, the main incentives for the creation of an aggregator come either from the difference between peak and off-peak pricing in wholesale markets or from signals from TSOs to deliver control reserve or other ancillary services.
• Enabling technological infrastructure, which should enable real-time two-way communication and data transfer between VPP operators and the connected DERs. Local authorities could promote and support the development of smart grid infrastructure projects, particularly the wide deployment of advanced metering infrastructure, which comprises smart meters, broadband communication infrastructure, grid remote control and automation systems (grid digitalisation). This will help improve grid efficiency, as the data collected can be used to better predict demand. In turn, this would enable the application of advanced forecasting tools and techniques needed to predict power generation from renewables as well as loads in the electricity system.

Supporting Factors

• Deploying enabling ICT infrastructure, such as controllable load and supply DER assets; smart meters, home gateways, and smart appliances for energy management; advanced energy management and forecasting algorithms; and real-time, two-way communication between aggregator and network assets
• Fostering standardisation and common interoperable communication protocols for co-ordination among system operators, grid operators, and prosumers.
• Introducing regulations to allow DERs to provide services to the main grid, as well as aggregators to participate in electricity wholesale and ancillary service markets
• Ensuring clear price signals to guide the operation of aggregators
• Introducing regulations to mandate implementation of smart meters and smart grid infrastructure
• Creating local markets at the distribution level for DSOs to procure services to prevent grid congestion and ensure grid stability
• Setting rules for data collection, management, and sharing for market actors to ensure consumer privacy
• Introducing regulations that set clear roles and responsibilities for market parties, as well as define standardised methodologies –e.g., for computing dynamic prices
• Fostering liberalised well-functioning retail markets that facilitate market entry to new actors as well as innovative products and pricing models, tailored for varying customers needs

Government Initiatives

In European countries, the implementation of local energy systems is supported by many initiatives and policies at the European- or national-level, where many research and development projects, benefitting from national or European funding, are focused on smart grids, energy efficiency, integration of distributed renewable resources, smart network management and much more.

In the context of EU policies, the policy drivers for such projects include increasing grid congestion and energy demand, climate change, depletion of fossil fuels, aging infrastructure of electricity network and internal European energy market; all of these factors pushing for the implementation of local energy systems has been inspired by the latest EU’s climate and energy package ‘Clean energy for all Europeans’, and now the new European Green Deal.

A noteworthy initiative is the establishment of the Smart Grid Task Force (SGTF) as part of the EU third energy package in 2009 to advise on policies and regulations concerning smart grid deployment. For instance, under the development of a common standard for European Smart Grids, several mandates have been issued by the EC to the European Standards Organisations (ESO) seeking to establish standards for the interoperability of smart utility meters, EV charging standards and high levels of smart grid services and operations.

The EU is currently directing member countries to update their electricity market and renewable energy regulations to allow communities to act as aggregators of renewable generation, flexible loads and storage services to the overall grid, paving the way towards community microgrids.

Stakeholder Mapping

Market Potential

The VPP market is being driven by the growing shift towards distributed generation and decentralised market dynamics within the energy sector. This is due to the increasing focus on decarbonisation, electrification, and digitalisation, where rapid advances in digital technologies as well as in energy generation and storage systems offer smart solutions to the world's growing demand for electricity (Navigant Research, 2020).

As a result, the global VPP market size was valued at USD$ 0.87 billion in 2019 and is projected to reach USD$ 2.85 billion by 2027, with a CAGR of 27.2% (Fortune Business Insights, 2020). However, declining investments in energy projects in the wake of the COVID-19 pandemic are expected to dampen market growth. For example, countries in Europe are experiencing a significant decline in investment in IT infrastructure (IDC, 2020), which are essential for the wide deployment of VPP applications. Governments around the world are under budget strains that have forced them to reconsider the transition to renewables and delay power sector reforms.

Europe is considered the birthplace of virtual power plants, where the demand has been driven by a major push for investments in renewable energy and energy storage systems. Therefore, European VPPs have focused more on the aggregation of supply-side DERs and the integration of renewable energy, rather than on demand response applications -which other regions such as North America have built into their VPPs. In Europe, VPP platforms are developing towards more sophisticated capabilities to maximise the value of grid flexibility and enable smart energy trading across borders. Even so, a shift is underway towards more mixed assets, where VPPs include more demand-side resources, as well as energy storage and e-vehicles (Guidehouse Insights, 2019).

Operating Models

Generally speaking, VPP operators -a.k.a. aggregators- seek to manage its portfolio of DER units optimally and to generate maximum revenue for their participants by bidding on the energy trading market or providing ancillary services to grid operators. The configuration of a VPP and its technical requirements depend on the type of market participation, target customers (e.g., small-scale producers or industrial sites) and the types of DERs that make up the VPP portfolio (ABB, 2017). As such, the business and operating models can be broadly categorised in three main “functional roles” in the market: (1) Forecasting, trading, and curtailment of renewable energies, (2) Aggregation of grid flexibility from renewable energies, and (3) Demand response aggregator. However, the boundaries between these models are fluid and depend largely on the structure and regulation of the energy market where the aggregator is active (Next Kraftwerke, 2020).

References: (Next Kraftwerk, 2020), (ABB, 2017)