The Department of Energy predicts that up to 160 GW of new resources will be needed by 2030 to meet U.S. electricity demand. At the same time, Wood Mackenzie reports that the U.S. will add 262 GW of distributed energy resources between 2023 and 2027 — an amount nearly equivalent to the construction of all new centralized generation. These two factors, accelerating load growth and greater DER adoption, have set the stage for virtual power plants to transform the power sector. 

VPPs are software platforms that facilitate the aggregation of DERs like smart thermostats, solar panels, batteries and electric vehicles into robust networks that can be managed in real time. Unlike traditional poles and wires solutions, VPPs can be built quickly, in months not years. Moreover, according to the Brattle Group, they could save utilities up to $35 billion in capacity investment over the next 10 years. Similarly, VPPs provide electricity customers with new financial and energy savings opportunities.

Realizing these benefits, however, depends on utilities and regulators aligning on a robust market development model. Furthermore, the success of the VPP market depends on proactive utility leadership. In fact, the most effective VPPs today are those that are embedded within utility operations, providing utilities with direct insight into and control of the DERs in their network. 

This article provides an overview of the most successful VPP program design models and describes VPP best practices that utilities and regulators could implement to cost-effectively improve grid reliability and increase customer satisfaction.  

Overview of VPP program design models

Two program design models predominate today: the utility-led VPP and the third-party-managed VPP. 

In a utility-led (centralized) VPP, the utility competitively procures a software vendor to aggregate and manage DER assets. In this case, the software vendor works as an extension of the utility to design the VPP program, engage customers (via utility-branded marketing), dispatch assets, conduct measurement and verification, and compensate participants. This model adheres to the historical role of a utility as the single grid operator for all customers, wherein DERs also become a valuable grid asset managed by the utility (just as it would a substation or transformer).   

By contrast, in a third-party managed VPP, multiple aggregators within a utility territory independently develop customer relationships and bid aggregated capacity into the wholesale market, respond to a standard-offer utility tariff, or compete in a distribution marketplace. Here, aggregators compete for customers and have much greater latitude to manage and dispatch DERs, so long as they adhere to offtaker (utility) contracts or wholesale market rules. This model adheres more closely to a competitive retail model, assuming that consumers are motivated to compare competing VPP offers and that competition will drive down costs. 

While both models can work, the utility-led program model affords a number of critical benefits to the grid and customers, especially residential customers. This model has been the successful approach in the Connected Solutions program across Massachusetts, Connecticut, New York, New Hampshire and Rhode Island; for Georgia Power’s program; and for Pacific Gas & Electric’s programs in California, among many others. 

By embedding the VPP into the utility’s operations, the centralized VPP model offers the grid operator greater insight into the impacts of DERs on their network and affords more control of those assets. This is especially important to enable management of DER assets on the distribution network. According to the Brattle Group, one-third of the value generated by VPPs accrues directly to the distribution grid. 

Put another way, the distribution utility, which is responsible for planning and operating the system for an increasingly distributed and flexible future, requires control of those distributed assets. For this reason, it is critical that they have access to centralized software systems that facilitate analysis, planning and management of DER assets.  

In addition, unless residential customers are subject to very high electricity costs, they tend to lack motivation or sophistication to compare aggressively marketed VPP offerings. The simplicity of a single VPP offering, managed by the local utility, reduces customer confusion and the potential for false or misleading advertising that has, at times, plagued the DER market.

With this in mind, the following explores best practices that regulators and utilities may consider to develop successful utility-led VPPs, focusing especially on applications in the residential and small commercial sectors. 

VPPs should align with utility’s operational needs

Regulators and utilities should consider developing VPP programs that give utilities real-time visibility into DERs and the operational flexibility to adapt to evolving grid needs. 

Utilities are responsible for planning and operating the grid to provide reliable and affordable power to their customers. Utilities therefore require the data, tools and insights to analyze and manage the impact of DERs. Passively managing DERs is insufficient.

Investment in the Edge Distributed Energy Resource Management Systems that underlie VPPs is critical. Edge DERMS facilitate engagement, enrollment and performance tracking for DER participants. They standardize customer and device data flows, provide visibility into real-time VPP capacity and centralize dispatching and control for utilities. For enterprise applications, the DERMS bridges the gap between customer-facing programs and grid operations. 

Utilities can also pursue integrations between Edge DERMS and backend grid systems, including Grid DERMS, Customer Information Systems, and Meter Data Management Systems. This is often necessary to fully unlock the complete value stack that VPPs can offer.

In short, centralized VPPs can provide utilities with software integrations to best manage distribution-level constraints. They can also help utilities dynamically manage assets across both wholesale and distribution systems. By doing so, the centralized VPP can future-proof utility investments and harmonize management of bulk and local grid impacts.

VPPs should be built for scale

Regulators should consider providing utilities with the financial incentives needed to scale investment in Edge DERMS. 

To achieve scale, it is necessary for regulators to create a mechanism that aligns a utility’s financial interests with the implementation of VPPs. One way to achieve this alignment is through performance-based ratemaking, or PBR, which allows the utility to earn by achieving certain performance targets (which could include, for example, meeting VPP capacity targets). States such as California, Hawaii, Illinois, Minnesota, Massachusetts and New York incentivize electric utilities via PBRs. 

Another approach is to allow the capitalization of VPP software and associated implementation costs. Allowing the capitalization of intangible software assets for VPPs can benefit both utilities and ratepayers by accelerating the adoption, and spreading out costs, of grid management tools. Updates to accounting rules over the years have made capital investments in software financially viable for utilities and states like New York, Pennsylvania and Arkansas allow the capitalization of certain software assets. 

VPPs should provide comprehensive value

Unlocking VPP value streams across generation, transmission and distribution should be a priority for regulators and utilities.

Today, most programs do not fully value the benefits of DERs. As VPPs expand and integrate multiple DER types, and peaks in the distribution system start to differ from those in the transmission system, valuation frameworks must also evolve. Valuation frameworks should capture the full range of benefits that VPPs provide for both distribution and transmission systems. Distribution utilities play a central role in determining this value. 

In addition, effective FERC Order 2222 implementation requires VPP models that provide value for both the wholesale market and the distribution system, further emphasizing the role of the utility in orchestrating DERs. Aligning the needs of ISOs with distribution utilities to provide the right market signals at the right time is no easy task, but is much easier for utility-managed resources. Better visibility and alignment with wholesale market operators will be critical for utilities to deploy DERs and compensate VPPs effectively at scale. 

VPPs should be simple for customers   

Regulators and utilities should ensure that utilities and their partners develop a unified marketing approach to simplify enrollment for customers.

To maximize awareness and participation, it’s crucial for customers to receive consistent and trustworthy information. This, in turn, requires close collaboration between utilities, Edge DERMS providers, and original equipment manufacturers on program marketing. Utility leadership in program marketing offers significant benefits thanks to the customer and meter data, regular customer touchpoints, brand awareness and marketing expertise. Utility-led programs can drive higher enrollment rates, building VPP capacity faster and with less friction, than alternatives. 

Moreover, utility-led Bring Your Own Device programs maximize customer choice. The grid benefits from allowing customers to seamlessly enroll the DER devices they have already purchased into VPPs. Edge DERMS providers facilitate BYOD programs by providing a turnkey network of eligible device partners, which allows customers to enroll their devices of choice in exchange for compensation.

By leveraging the best practices described above, utilities and regulators can maximize the visibility, insight and control needed for reliable operations and customer satisfaction. They can also address demand growth at greater speed and lower total cost than traditional infrastructure investments.The future of energy demands greater levels of flexibility, and utility-led VPPs are an effective, proven approach to unlocking the power of DERs at the grid edge.