And since distributed energy consumers participate in the grid themselves — producing and storing much of their own energy in their homes and workplaces — they often end up paying a lower price than conventional electrical utilities charge.
In other words, virtual power plants serve all the functions of traditional power plants, but better and cheaper — and without the need for a physical power plant facility.
And these aren’t just theoretical advantages. Although a very new technology, virtual power plants already have a record of rescuing the grid during extraordinary situations that traditional power distribution models can’t handle.
Just a week after California’s mid-August-2020 rolling blackout weekend, the state was hit with another heatwave that threatened to stretch power supplies beyond their limits and plunge the state into darkness for a second time.
In a bid to avoid more rolling blackouts, grid operator CAISO made a desperate plea to demand response consumers, battery aggregators, generator owners, and even electric vehicle charging companies to add all the electricity they could spare to the grid — and it worked.
During that third week in August, California’s centralized grid providers technically failed to provide enough electricity to meet the state’s heatwave-driven demand — yet lights (and air conditioners) stayed on throughout the state.
According to subsequent reports by CAISO and the California Public Utilities Commission, the ad-hoc virtual power plant of private assets which was mobilized by CAISO’s distress call made up the difference.
Distributed energy has also seen a flurry of interest from public officials in the aftermath of the Texas energy crisis. Just take this comment from Energy Secretary Jennifer Granholm when asked about distributed energy by the Washington Post:
“I’m very supportive of microgrids, of these small modular nuclear reactors, of the ability to have distributed energy resources, community-based solar attached to a microgrid.
“Those solutions are very exciting and could be, and certainly should be, part of the national system. We should be incentivizing communities to think about that so that they are not so dependent on, you know, poles with wires atop that were constructed 70 years ago.”
But the recent shift toward distributed energy isn’t just a disaster response strategy. Several public and private-sector catalysts had started to draw investor money long before the California or Texas blackouts…
Why The Smart Money Is Betting On Virtual Power Plants
Distributed energy investments have already shown significant momentum around the world. Market research firm Fortune Business Insights projects that the space will grow at a 27.2% compound annualized growth rate (CAGR) through 2027, with especially strong growth forecasted in Europe, North America, and Asia.
In the U.S., private-equity investment in virtual power plant startups has accelerated significantly due to a perception that the Biden administration will introduce favorable policies for it.
In December, Sidewalk Infrastructure Partners, a venture capital arm of Alphabet (NASDAQ: GOOG), announced that it was working with distributed energy startup OhmConnect to build the world’s biggest power plant.
The “Resi-Station,” as OhmConnect is calling it, will be a 550-megawatt project made entirely of batteries embedded into California homes and businesses. The project has received praise from former Obama EPA administrator Carol Browner.
And indeed, distributed energy policy is already changing in the U.S. In fact, it started changing significantly several months before Biden was even elected.
Back in September 2020, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222 — a change which removes regulatory barriers to virtual power plants by requiring grid operators to accept power from them — and to pay them at the same rate as traditional power plants.
The order, which grid operators must implement by September of this year, has been compared by energy economists to the 1993 computer networking regulatory changes which allowed private companies to use the previously-public-sector-only NSFNet telecommunications infrastructure, creating the modern commercial internet.
In the aftermath of those 1993 NSF changes, several entrepreneurs launched startups with the then-experimental idea of selling goods and services on the newly-opened network. Today, we call a few of those startups Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Netflix (NASDAQ: NFLX).