Silver linings in the energy cloud – how a practical, pragmatic approach can realize the benefits offered by Virtual Power Plants

I wrote in my previous article about the growing influence of Distributed Energy Resources (DERs) and Virtual Power Plants (VPPs) and how they could positively and negatively impact established utilities players and private equity. Wrestling with the opportunity and threat posed by digital tools and accelerating technology is front of mind for business leaders, with 60% of CEOs who contributed to the 2022 AlixPartners Disruption stating that they had concerns in this area.

According to a 2020 report by Fortune Business Insights, the global virtual power plant market size by itself was $0.87 billion in 2019 and is projected to reach $2.85 billion by 2027, exhibiting a CAGR of 27.2% during the forecast period. In a more aggressive scenario, a number of sources forecast that global VPP revenues could exceed $10 billion during the same period, presenting a sizeable opportunity for VPP players to capitalize on.

Flexibility, resilience, and reliability

The big advantage of a VPP is its ability to control demand through the management of energy storage and connected devices. What is more, a VPP can also postpone the introduction of an energy supply source into the power grid.

Such features are crucial to retaining the stability of the power grid at a time when renewables are spreading widely. A VPP also has strong potential to cover constantly growing demand without unnecessarily increasing power grid capacity to cover future needs. However, DERs need to be added continuously, at a reasonable pace and with adequate capacity. To work properly, a VPP solution uses Information and Communication Technologies (ICT) in conjunction with Internet of Things (IoT) devices. Thanks to these technologies, it can efficiently manage energy production, storage, and consumption.

From a legacy angle, fossil-fuel power plants require constant investments into the modernization of the power grid (due to the ever-growing consumption of energy), yet traditional utility operators can cost-effectively access DER resources without the big price tag. VPP solutions allow companies to overcome the chasm of the financial and physical models for Independent Systems Operators (ISOs) and focus on the actual physical topology of the customers in the utility distribution model.

In addition, consuming energy closer to the place where it was produced not only lowers the transmission losses but also creates fewer burdens on the power grid. Investments into the grid upgrades are no longer needed, which immediately translates into lower energy prices for end-customers and higher revenue opportunities for producers.

Key business impact considerations

With all of these potential benefits in mind, the overall demand for a VPP offering is expected to continue to rise. But before jumping in, the following business impact considerations should first be thoroughly considered.

Which government regulations might challenge the status of key regional markets?
How will the emerging political and economic scenario affect opportunities in key growth areas?
Which regulations will be most helpful/most disruptive?
Which regions might see demand maturing in certain segments in the near future?
What are some of the value-grab opportunities in various segments?
What are some of the best cost optimization strategies with vendors that some well-entrenched players have gained success with?
What is likely to be the future business environment for DER?
Will there be third-party service providers for DER services and technologies?
Will third-party service providers be collaborative or competitive in their approach?
How do we evaluate the current and future benefits (and costs) of DER?
Are there key partnerships and collaboration opportunities to consider? Who are the leaders?
What value propositions should businesses aim at while making new research and development funding?

A practical, pragmatic approach

The complexity and technical challenges of a virtual system built from a number of disparate parts must be considered when defining communication, control protocols and security systems as part of any retrofit or new greenfield deployment leveraging VPP. A VPP fleet using equipment from different vendors may have systems with different functionality, use different protocols for communication, and have different levels of cyber security. Additionally, government policy and market forces in different parts of the world will accelerate impact technology solutions and their overall adoption.

Accordingly, the overall approach on how to leverage opportunities and generate additional revenues should be a basis for an ongoing technology dialogue between key sponsors and systems developers. At a minimum, the overall program plan should include identification of all technology needs, maturity level requirements, insertion points, dependencies, timelines and required investments.

Appreciating the varying business stability and maturity levels across any enterprise, a program driven by common, yet “fit-for-purpose” solutions would likely represent the most pragmatic and practical way forward. Some efforts may already be underway and require acceleration, while others may require more significant step-changes in process effectiveness and enabling technology. All efforts must, however, integrate and support foundational core business needs.

Our approach would typically establish those common end-to-end workflows across the lines of business, mapping “what to do” (process) with “how to do” (interfaces) and “how to manage” (stakeholders). At each stage, it's important to ensure that the approach is accounting for the dynamic interaction of the distributed infrastructure management dimensions and answer key questions along the way.

My final post in this series will identify and assess the specific technological pitfalls for players to be wary of when looking to build their own VPP, and the key IT considerations they need to factor in before attempting to harness the silver linings in the energy cloud.