For deregulated markets, VPPs aren’t just a tool — they’re a necessity

Much has been written recently about the significant growth in electricity demand that will come with the increased use of both artificial intelligence, and electric vehicles and other distributed energy resources. However, a critical factor that distinguishes this period of demand growth from previous spurts has been largely overlooked: electric market deregulation.

The last time the United States had electricity demand growth comparable to what is expected over the next few years was during the mid-20th century when vertically integrated utilities simply built the generation they needed as demand increased. By the time the industry’s restructuring began more than 25 years ago, demand growth had flatlined.

Today, the responsibility for providing generation, transmission and distribution of electricity is often divided among multiple entities. For instance, in deregulated New York, the New York Independent System Operator (NYISO) runs the grid while private companies provide generation, and investor-owned utilities handle transmission and distribution. In such markets, grid operators need new tools to balance supply and demand because they no longer centrally control the provision of generation, transmission, and distribution. 

Now, only one-third of electricity demand in the U.S. is served by vertically integrated utilities, largely markets in the West and Southeast. This means that two-thirds of electricity demand is in regions that are at least partially deregulated. These include states projecting some of the greatest demand growth, such as Virginia, New York, California, and Texas.

That means that customers are now at the mercy of market forces, rather than a single utility, to ensure that sources of supply are available to meet demand. This has largely been positive for consumers due to the benefits of competition making supply decisions more cost effective.

However, the division of responsibility for electricity generation, transmission, and distribution among multiple parties has complicated an already challenging moment for the grid.

Fortunately, there is an efficient way to balance the grid using customer flexible load and DERs: virtual power plants. While VPPs can provide value in any type of market, they are essential for deregulated markets, especially those anticipating demand growth. 

An affordable reliability solution

The Brattle Group has found that utilities could save $15 billion to $35 billion in capacity investment over 10 years by using VPPs. A VPP would provide the same reliability that a conventional resource such as a natural gas peaker or transmission-connected utility-scale battery would during a grid emergency — but at 40% to 60% of the costs.

VPPs composed of customer sites and assets from a diverse array of sectors that also harness larger DERs like commercial and industrial loads and grid-interactive efficient buildings can be especially helpful given the wider availability and variety of assets they draw from and their greater collective capacity.

All told, the U.S. Department of Energy has found that deploying between 80 and 160 gigawatts of VPPs by 2030 — or tripling the current scale — to help address national capacity needs could save $10 billion in annual grid costs. Those savings could direct grid spending back to electricity consumers.

While electricity in deregulated markets is largely supplied by independent power producers in response to price signals and distributed by utilities, VPPs can provide flexibility (and a range of grid services) by utilizing the demand-side resources of independent energy users in response to price signals and dispatches by utilities or third-party aggregators. In December 2022, for example, it was customer DERs that rescued the grid and kept the lights on in the nation’s largest wholesale market, PJM Interconnection, by reducing demand when much of the grid operator’s generation fleet failed during Winter Storm Elliott, causing supply to plummet. 

Furthermore, VPPs improve visibility into the capacity and operational status of customer DERs. When a customer enrolls its DER in a VPP, the VPP operator assumes control of when and how the resource interacts with the grid, like by monitoring for demand response events. This oversight helps to reduce risk, as fluctuations in energy generation and consumption can be monitored and managed more efficiently in times of need to ensure grid stability.

When we stop framing VPPs as a new technological solution and instead look at how they mimic the current ways in which most energy markets operate, it becomes clear that they are a natural solution for the demand growth problems facing the grid, particularly in deregulated markets.

Not only can markets get the supply they need without the building of new large-scale generation, but grid operators and utilities can keep the grid balanced even when generation, transmission, and distribution are divided among entities.

We can’t simply build ourselves out of our present challenge of meeting exponential growth in electricity demand as we did before deregulation. We are in a new era that requires new tools, as well as new generation. 

By leveraging existing customer DERs, VPPs immediately provide clean, affordable and dependable energy without the long build times required for new generation resources or the costly expansion of associated transmission infrastructure.

In today’s largely deregulated world, we all play a part in keeping the lights on as demand grows. VPPs can point the way.

Michael Smith is the CEO of CPower, a national DER monetization and virtual power plant provider. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.