What are virtual power plants, and why are they needed? 

Rooftop solar in Melbourne

A single rooftop solar system could never hope to equal the output of a traditional power station – but what if you pooled thousands of rooftop solar systems and batteries together? That’s exactly what you can do with a virtual power plant, an emerging technology that could help shape the future of the energy system. 

What is a virtual power plant? 

A virtual power plant (VPP) is a network that aggregates the capacities of distributed energy resources – such as rooftop solar PV units and battery systems, and electric vehicles with vehicle-to-grid capabilities – across a number of different sites so that they can work together as a single power plant, and be dispatched into the energy grid at the right time. 

Individually, none of these distributed energy resources would produce enough power to have a significant impact on the energy system. But together, they have the potential to match, and even exceed, the power produced by traditional generation assets. 

For a VPP to work, each of the participating households and businesses have to be connected to a central control system, so that they can be monitored and efficiently coordinated. 

Using sophisticated software, the VPP operator can operate each participating distributed energy resource on an optimised schedule, and trade the excess energy aggregated from all of the resources on the National Electricity Market (NEM), collectively dispatching the power to the grid at times of peak demand (or when prices are favourable). 

In a nutshell, the VPP operator is an intermediary between households and businesses with distributed energy resources and the wholesale electricity market. Participating households and businesses can be rewarded for the energy they provide with direct payments, or with credits on their electricity bills, depending on the VPP operator’s approach. 

Why are virtual power plants needed? 

Australia’s energy system is transforming, moving from a system dominated by large centralised plants to one where distributed energy resources exert much more influence.   

Traditionally, the Australian Energy Market Operator (AEMO) has actively managed the dispatch of energy from centralised generators – including large-scale coal, solar, wind, gas and hydro units – to maintain precise supply-demand balance. 

But Australia has become a world leader in rooftop solar, leading AEMO to forecast that by 2026, distributed energy resources could supply up to 77 per cent of underlying demand in the mainland NEM at times. These distributed energy resources are also referred to as behind-the-meter systems, because they’re positioned on-site, on the energy user’s side of the meter, as opposed to the grid side. 

While the environmental benefits of rooftop solar are obvious, the problem is that households and businesses with behind-the-meter systems installed are demanding less energy from the grid – and there are thresholds that operational demand cannot fall below in order for AEMO to operate the system securely. 

And unlike traditional baseload generators that are on all the time, these rooftop solar systems don’t generate electricity when the sun isn’t shining. So without a way to actively manage and coordinate these variable renewable energy sources, it will become more difficult to balance supply and demand as they make up a larger and larger proportion of the energy in the grid and traditional generation assets are gradually retired.  

That’s why virtual power plants, with their ability to harness the collective power of distributed energy resources and dispatch them from a central control room in the same way as a traditional generation asset, are emerging as part of the solution. 

Trials have shown that VPPs can provide generation, demand response and contingency Frequency Control and Ancillary Services (FCAS). By injecting the aggregated power of thousands of individual solar and battery systems into the grid as required, AEMO can actively manage VPPs to help address frequency and voltage imbalances as they arise and stabilise the network. 

It won’t be as straightforward as simply replacing conventional generators with VPPs, but they have the potential to play a role alongside the other solutions recommended by AEMO’s Integrated System Plan to strengthen the system as it evolves, including investments in utility-scale dispatchable resources to firm up the grid, and high-inertia synchronous condensers to replace the inertia currently provided by traditional generation assets.  

What’s the state of virtual power plants in Australia? 

While VPPs are expected to play an important role in Australia’s future energy mix, it should be noted that they haven’t taken off quite as quickly as expected. 

When AEMO announced its VPP Demonstrations project in 2019, it predicted there could be 700 megawatts (MW) worth of VPPs in Australia by 2022 – but the VPP Demonstrations concluded with a total registered capacity of just 31MW. According to the Institute for Energy Economics and Financial Analysis (IEEFA), the total VPP capacity in the NEM from all energy retailers that offer the service is currently sitting at roughly 300MW. 

IEEFA suggests this is because the current margins for VPP operators are thin, as the development costs for the software and hardware required to run these aggregation platforms can be significant, and VPPs are yet to prove themselves as a source of dependable revenue for operators or participating customers. 

IEEFA expects these margins to grow, however, as the number of participating households and businesses increases and the sunk costs of software development are paid off. 

In particular, IEEFA identifies the increasing popularity of home energy management systems that reduce household energy usage, and the increasing uptake of larger solar systems, larger household batteries and electric vehicles capable of exporting power to the grid, as developments that could enhance margins for VPP operators, as the amount of excess energy households and businesses are capable of producing and storing will increase.

In the meantime, traditional generation assets will continue to operate to support energy security and stability as the system transforms and we head towards a renewable future – one in which we might all be energy generators, as well as energy users.

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