The Department of Energy under the outgoing Biden administration has long been bullish on virtual power plants.
In September 2023, the Loan Programs Office closed its first loan guarantee for a VPP: $3 billion for Sunnova Energy Corp.’s Project Hestia. Just a month later, DOE released a VPP liftoff report, articulating the technology’s potential to help utilities balance electricity supply and demand, especially as the energy system becomes cleaner and more distributed.
Conversations around the potential of VPPs of course date back decades, with some estimates pegging the theoretical worth of distributed energy resources like EV chargers, smart thermostats, and home batteries, in the tens of billions of dollars.
But it was the context of massive near-term load growth — from electrification, onshoring, and most recently, data centers — that brought VPPs to the forefront of DOE’s proposed solutions for getting more out of the existing grid.
Just last week, DOE updated that initial liftoff report to reflect the dramatic changes to the industry since the first installment. The update emphasizes the Biden administration’s stalwart support of virtual power plants as an essential tool for meeting load growth, maintaining that VPPs could serve as much as 20% of U.S. peak electricity demand by 2030. Peak demand is expected to grow to nearly 900 gigawatts by the end of the decade, up from roughly 800 GW in 2024. And at the same time, utility investments in transmission and distribution systems are on the rise.
But today, as the Biden administration enters its final week, very little of the potential value of VPPs is being realized.
A separate report, from Wood Mackenzie, analyzed 46 utility programs across 14 states and found widespread inconsistencies in how utilities value and deploy DERs. That patchwork of utility approaches is slowing VPP deployment, the researchers found, at a time when rapid solutions are most needed.
The “missing money” of DERs
Ben Hertz-Shargel, global head of grid edge at Wood Mackenzie, explained that DERs are facing a “missing money” problem — a term used to describe the gap between what power plants need to earn and what they actually earn from energy sales.
“DERs could be providing value that is not being recognized, or at least that [asset owners] are not being compensated for, which is putting undue pressure on the VPP market, which could otherwise grow faster,” Hertz-Shargel explained.
For example, while utilities broadly acknowledge the value of DERs for avoiding distribution costs, most aren’t yet using VPPs to actually avoid building specific new distribution infrastructure. That’s despite the fact that several major utilities have demonstrated very significant potential for that exact use case.
Wood Mackenzie’s report points to PG&E’s ChargeForward smart charging program for electric vehicles, which estimates $325 per year per vehicle in active managed charging value. More than $67 of that value is from distribution grid deferrals. Elsewhere in the country, AES Indiana, in a study with Camus Energy, estimated that the distribution value of a managed charging program was 2.8 times higher than the peak load management value.
Those examples demonstrate the magnitude of distribution value, Hertz-Shargel said.
“We are moving to a regime of the grid where already distribution cost outpaces transmission cost in most markets,” he added. “But right now, we have very little, if any, recognized distribution value in these programs and valuations, and whatever does exist is almost never being realized.”
In short, utilities just aren’t utilizing DERs as much as they could be, Hertz-Shargel said. That’s in part because in most cases individual asset types aren’t being recognized for as many value streams as they could be. The broader clean energy market has evolved a lot in terms of value stacking for stationary energy storage systems, but the research would suggest that assets on the distribution grid and behind the meter are more complicated.
Ancillary services, for example, are rarely recognized in standard utility programs. Renewables integration is widely recognized by EV programs, but largely ignored for batteries and thermostats.
Statewide DER tariffs, like those used in California and New York, tend to value DERs most comprehensively, Hertz-Shargel explained. But those approaches differ philosophically from most utility DER programs.
“If you look at the [Value of Distributed Resources tariff in New York], it’s very much based on the value that a kilowatt-hour is providing to the grid,” he explained. That’s compared to incentive programs, like the Solar Massachusetts Renewable Target program, which are structured to subsidize investment in solar and storage, rather than to compensate the value those assets provide.
An additional challenge: there’s a disconnect between the grid services value of an asset and actual customer compensation.
“In some cases, the compensation to customers can be far below what the utility is recognizing itself and claiming to its regulator,” Hertz-Shargel said. He pointed to Massachusetts, where utilities are compensating participants in a smart thermostat program at a tenth of the annual value those utilities recognize.
DOE’s updated report also acknowledged standardization — of every facet of DER adoption, not just of valuation — as a significant barrier to widespread VPP adoption. “New efforts across the industry are designing standards for utility-aggregator interfaces, aggregator-DER interfaces, cybersecurity responsibilities, and other aspects of VPP operations,” the report notes.
As both reports emphasize, the key to scaling VPPs, and realizing the full potential value of DERs to the grid, requires not just technical solutions, but standardization of the foundational value structures. And those are questions that remain largely unresolved.
“I think there should be a discussion about, do we want both types of structures in place?” Hertz-Shargel said, pointing to tariffs versus incentive-based programs. “Do we prefer [a structure] that is sort of values-premised, which allows for us to align the value the customers provide with the compensation that they earn from the utility?”
