Key indicators to Identify Suitable Markets for VPPs

Jessica Hernandez, Senior Research Associate

Virtual power plants (VPPs) are moving from concept to broad deployment throughout many countries worldwide, aiming to get the most out of distributed energy resources (DERs) in these regions. Examples of recent efforts include Statkraft's 1 GW VPP in the U.K., Tesla's 250 MW VPP in South Australia, and China's first VPP, the largest VPP project worldwide (for now). However, the question we aim to answer today is: What are the key indicators that will allow us to identify when a market is suitable for and potentially in need of VPPs?

Surveying the examples where VPPs have been successfully deployed, Lux identified four key conditions to look for when evaluating new regions or countries:

Lux Research Key Indicators for VPPs*Icons Sourced from Noun Project

HIGH PENETRATION OF INTERMITTENT RENEWABLE GENERATION

The first factor is the presence of large-scale renewable generation. A country or region that has seen significant growth in wind and solar power generation will be injecting a higher amount of intermittent power into the grid and, consequently, challenging the grid's stability. This creates the need to establish a grid-balancing mechanism, such as through demand response or ancillary services like frequency regulation. A market with large installed renewable capacity can support current grid operations and continue adding more renewable power with the help of ancillary services; in this case, VPPs are often a necessary tool for balancing these electrical grids by enabling grid services. In addition, VPPs can be combined with other solutions to increase grid stability, such as building energy management systems (BEMS), which provide demand-side management.


AVAILABILITY OF DISTRIBUTED ENERGY RESOURCES

For VPPs to provide valuable grid services, the market in which they operate should have considerable penetration of different kinds of distributed energy resources (DERs), such as residential solar, behind-the-meter (BTM) battery systems, as well as flexible loads like building heating systems controlled by smart thermostats. Aggregating multiple small and distributed flexible assets can provide greater support for regular grid operations, maintaining grid stability, and increasing reliability. In addition, owners of small distributed assets can benefit from optimization features of a distributed energy resource management system, which enables VPP aggregations and can provide other value-stacking services, such as energy bill reduction through demand charge management.

WEAK INCENTIVE SCHEMES

Countries worldwide have established feed-in tariffs (FITs) and other incentive schemes to promote adoption of distributed assets by making it economically attractive for consumers; for example, a homeowner installs solar panels on the roof and can profit from the excess electricity pushed back into the grid. However, after a few years of market push, with technology prices decreasing and a considerable penetration of DERs, the incentives decrease. DER owners facing weakened incentive schemes experience lower economic benefits from their DER investments. In this case, VPPs are an option for DER owners to get additional value from their assets despite weak existing compensation structures. For DER owners, VPPs are an attractive option to unlock additional revenue by allowing access to an aggregator to connect and control the asset in order to provide services to grid operators. When FITs and other incentives are not reduced, the revenue that the DER owner receives from grid services is likely lower than the compensation of injecting the surplus electricity back into the grid, making a VPP an unattractive option in this market.

LOW REGULATORY BARRIERS / REGULATORY FLEXIBILITY

While VPPs are meant to enable small DERs to be aggregated and act as large-scale power plants, opening the door for participation in energy markets, there are still changes required from a regulatory standpoint to leverage the full potential of VPPs. Markets with forward-thinking regulators can provide support to aggregators, aiming to identify the value that VPPs can deliver as well as the challenges to overcome.

According to the International Renewable Energy Agency (IRENA), a number of countries have already established regulatory frameworks allowing VPPs to participate in energy markets, including Australia, Germany, and the U.K. These three markets check all the boxes described above, creating opportunities for VPPs to unlock the value of DERs, which are enabling further electrification efforts aiming to lower carbon emissions.

In addition to these and other countries that are already actively deploying VPPs, we can use the key market indicators described above to identify emerging markets that will be in need of VPPs in the near future. For example, Malaysia is an active participant in the energy market liberalization trend in Southeast Asia, and Tenaga Nasional Berhad (TNB), the incumbent electricity company, is already researching the benefits of VPPs in the country. In order to increase the availability of distributed generation, the renewables arm of TNB is offering rooftop solar systems at no upfront cost. In addition, FITs in Malaysia are still seen as a tool to promote adoption; however, these incentives have been decreasing over time (like they did in other markets, such as the U.K.). Finally, regarding large-scale power generation, most renewable power in the country comes from hydropower plants, followed by biomass, with solar photovoltaics taking third place with a cumulative installed capacity of 380 MW, according to the Sustainable Energy Development Authority Malaysia. Nevertheless, the country is racing to connect more renewables to the grid; just this February, the Malaysian minister of energy, science, technology, environment, and climate change announced a tender for 500 MW of PV.

In summary, Malaysia is working on increasing large-scale renewable generation and promoting adoption of smaller DERs, and the energy market is being transformed. Moreover, while FIT schemes are still in place to incentivize DER growth, these are decreasing, which will open the opportunity for VPPs to become economically attractive to the new asset owners.

Energy companies interested in expanding VPPs to new geographies should rely on the above four key conditions when evaluating whether VPPs are suitable and can provide value. Today, markets in Southeast Asia are interesting emerging opportunities for VPP deployments, and players active in the space should seek partnerships in the region to introduce the solution, starting with pilot demonstration projects.

 

 

 

FURTHER READING

- Blog: Cutting Global Emissions is Not as Simple as Greta Thungberg Makes it Sound

- Analyst Insight: Key indicators to identify suitable markets for virtual power plants (Members Only)

- News Commentary: Rocky Mountain Power will operate a 12.6 MWh virtual power plant aggregating Sonnen batteries installed in an apartment complex

- Case Study: China launches world's largest VPP and first of its kind in China, with some caveats (Members Only)

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