Why Virtual Power Plants are the Future of Electricity Retailing

As Australia surpasses three million rooftop solar installations, households looking to buy a battery storage system or an electric vehicle can be part of a new type of power plant driving faster decarbonization and less expensive.

In the future, so-called “virtual power plants” that harvest distributed renewable electricity and demand response will play a role. major role.

A virtual power plant (VPP) is a network of distributed energy resources – not just rooftop solar, but also batteries, electric vehicles and smart devices – operating as a single power source and aggregated through a software for participating in energy markets.

VPPs create the possibility of cheaper and faster decarbonization than just building large-scale production and storage.

They do this by leveraging consumer investment to benefit the system as a whole, accelerating the payback period for households and businesses, and reducing the overall system cost of new generation and storage of renewable energy.

In general, the greatest value of rooftop solar and battery storage is in on-site behind-the-meter (BTM) power delivery, collocation of generation and load, while avoiding grid costs and sale to detail.

As the capacity of rooftop solar and battery systems increases and the cost decreases – and if electricity demand can be harnessed through smart controllers – the resources behind the meter may provide a significant answer. to supply and demand to meet the needs not only of households and businesses, but of the wider electricity system.

Three years ago Australia’s Energy Market Operator (AEMO) predicted there could be 700 megawatts (MW) of VPPs by 2022 – according to IEEFA’s estimate, the figure is closer to 300 MW for households in the national energy market.

The potential of VPPs is not yet exploited. There is a lack of meaningful revenue for distributed energy resource owners or VPP providers.

Households are currently only paid around $200/year for their battery usage by aggregators to participate in power and ancillary services markets. The margins are thin.

However, VPPs are the future of energy retailing. VPP providers (aggregators and retailers) aiming for future profits will increasingly see the value of investing in VPP software and systems.

The biggest potential – and the reason we think so many retailers are turning to selling VPP products – is that larger batteries, especially in the form of EVs, will unlock capacity behind the meter (BTM) much larger.

Electric vehicle batteries are currently six to ten times larger than standard household batteries and will be able to store an abundant amount of solar power on the roof, making it available at all times.

The other massive and largely untapped opportunity is for commercial and industrial (C&I) VPPs to take advantage of the growing fleet of solar, battery storage and energy management systems on and in factories, offices and businesses. warehouses.

In March 2022, Origin Energy announced its intention to increase its internal VPP tenfold from 205 MW to 2,000 MW in four years, with the aim of meeting customer expectations for cost reduction, decarbonization and autonomy. energy, with less churn, an advantage for Origin.

Origin clearly understands the value of distributed energy resources. To secure their future, retailers should offer the combination of rooftop solar, batteries and managed electric vehicle charging while being a VPP reseller for residential and commercial customers.

VPPs have relatively low establishment costs compared to large producers and transportation, and they are quick to establish.

Origin realizes it can leverage billions of dollars of household and business investment in smart energy to quickly deliver clean capacity to the national electricity market. Twenty other retail and aggregation companies are looking to scale to do the same.

Where in the past the largest distributors owned large generators, with profitability tied to ‘gentailing’, we see the future of retail being in ‘VPP-tailing’.

Inevitably, at least two-thirds of Australian households will buy rooftop solar and either a stationary battery or an electric vehicle or two, or both. This means that most of these households’ supply will be behind the meter and they will have spare capacity available to sell directly and via battery to the rest of the grid.

Unless a retailer has a relationship with households that allows access to these behind-the-meter resources, they will be left with only a small proportion of households to retail, and no access to these resources. valuable distributed energy resources.

We would go so far as to suggest that going forward, retailers without VPP capabilities will struggle to be profitable. Network sales revenue will continue to decline.

At the same time, the export volume of distributed energy resources will increase, creating opportunities for DER aggregators able to leverage this fleet for wholesale market and FCAS participation. Along the way, there will be business opportunities in selling solar panels, batteries and electric vehicles and in financing those purchases.

Unfortunately, Australian energy market institutions do not treat distributed energy resources or VPPs with the same seriousness as companies like Origin.

Consumers and industry need national policy and regulation that prioritizes fair treatment of distributed energy resources with large-scale generation and storage.

You can read a new IEEFA report on this here: What is the state of virtual power plants in Australia? Thin margins to a future of VPP retailers

Dr. Gabrielle Kuiper is DER Specialist and IEEFA Guest Contributor

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