Virtual Power Plants: Opportunities, Constraints, and Ratepayer Considerations

Summary: California continues to face an affordability challenge, with electric rates that have risen over the past decade and increased up to triple the rate of inflation. Policy development for adoption of Virtual Power Plants, which are demand response resources with the potential to export energy, must be undertaken in a manner that provides meaningful reliability benefits and does not put further upward pressure on rates.

Understanding Demand Response and Virtual Power Plants

To evaluate their purpose, it helps to first understand how Virtual Power Plants and Demand Response resources work in conjunction with one another and how they differ.

Demand Response programs provide incentives for customers to adjust their electricity consumption to support grid reliability. Demand Response resources do not generate energy, rather they reduce expected demand. In simple terms, they provide incentives to customers to either shift energy usage or use less electricity when it matters most – during peak demand and/or grid constrained periods.

Virtual Power Plants (VPPs) are aggregations of distributed energy resources. Distributed energy resources are a mix of small-scale generation and energy storage that connect to the grid at the distribution level, as well as strategies such as energy efficiency measures. While these aggregations can provide Demand Response reductions, they differ in that VPPs usually have the capability to export additional energy to the grid.

Current California Independent System Operator (CAISO) rules do not allow Demand Response resources to export power after reducing their load below zero.¹

Principles for Demand Response and Virtual Power Plants

VPPs Must Provide Incremental Value

Demand Response resources should only receive compensation for the change in demand that was incentivized by the program. In other words, customers should be paid only for reductions that would not have happened otherwise. Various “what if” scenarios are calculated based on available data to estimate the true load reduction of a program.²

Similarly, VPP must be held to the same standards to ensure that the resource is fully available when needed. VPP aggregators may argue that an aggregation of batteries should receive capacity credit for the maximum amount of energy that the resource can store based solely on total installed battery capacity instead of how much actual energy the resource discharges. However, that assumes that the battery is fully charged and available during all potential Demand Response Program event hours.

Take for example, a battery that discharges energy from 5pm – 7pm every evening to maximize time-of-use (TOU) rate savings. That participant should not also receive an extra incentive on days when VPPs are called upon to discharge energy during peak demand or grid constraint (this is called a VPP event). In this instance the VPP event did not change the behavior of the customer or provide incremental load reductions or exports to the grid.

This would not only provide double compensation, but it would undermine grid reliability because it distorts the potential of the VPP resource by overstating the load reductions and/or energy exports available.

This “value stacking” provides no benefit to the grid or to ratepayers and only serves to drive up costs for Californians.

The California Public Utilities Commission (CPUC) staff have proposed useful Demand Response guiding principles.³ The principles emphasize that resources should be cost-effective, which means they should not cost more than the benefits they provide. The proposal states:

[S]imilar to the established regulatory principle that utility capital assets should be used and useful in order to be eligible for cost recovery, in order for demand response resources to be cost-effective they must result in real, measurable load reductions in response to the economic and/or reliability signals that indicate when the resources are needed. A demand response resource that is not consistently available and doesn’t reliably respond to the appropriate economic and reliability signals is not a cost-effective resource.⁴

VPPs Must Be Least Cost

Like any other resource, VPPs must demonstrate that they are the least cost method to reliably meet the needs of the grid. VPPs are not a novel concept. Utility and third-party demand response providers have made use of aggregations in Demand Response for decades.

What the CPUC must determine is how best to utilize the potential of the underlying distributed energy resources that make up potential VPPs. VPPs should only be preferred when they best satisfy an identified grid need at the lowest cost compared to other reasonable alternatives.

For example, behind-the-meter batteries’ demand response potential might also be accessed through TOU rates, dynamic rates, or long-standing Demand Response programs such as the Capacity Bidding Program.

VPPs Must Be Reliable

The CPUC’s Staff Proposal also identifies “Predictability and Reliability” as a guiding principle and states that “[e]nsuring that demand response resources deliver as expected is especially critical as the State moves toward greater electrification and increased use of behind-the-meter distributed energy resources. Without confidence in its performance, demand response cannot be counted and relied on as a true grid resource.”⁵ Establishing that VPP resources can deliver energy in the quantities promised and during times of grid need will be critical for the VPP construct’s success.

To establish confidence in the performance and reliability of VPP resources, providers must calculate and account for typical customer behavior. As discussed earlier, a battery that optimizes for TOU rates will have no capacity left for a VPP to sell. The Self-Generation Incentive Program (SGIP) provides another example. As part of the generous incentives provided by SGIP, customers are required to utilize their battery to provide grid benefits for a number of years by doing things like cycling the battery.⁶ If a battery is already discharging due to its SGIP obligations, it has no additional energy available for a VPP event. The CPUC must avoid permitting such double compensation. Not only because it pays for the same energy multiple times, but it also overrepresents the capacity available to the grid, which will exacerbate reliability challenges when the grid is constrained.

Furthermore, by seeking to deliver energy to the grid and not just reduce onsite load, VPPs raise questions and concerns about deliverability. Deliverability could be an issue for generating VPPs as they would face the same transmission constraints as other generators. CAISO determines deliverability based on the ability of the resource to export energy under stressed grid conditions, considering whether all resources in a local area can operate to serve local load and export excess capacity to other CAISO areas.⁷ Thus, deliverability ensures that resources dedicated to provide Resource Adequacy do not block one another and that transmission capacity constraints do not occur at system peaks.⁸ This is a novel issue that traditional Demand Response has not addressed since Demand Response only reduces onsite load. If VPPs intend to export energy to serve load, deliverability issues must be resolved before ratepayers can confidently expect them to perform as promised.

VPPs Are One Option Among Many

VPPs should be among the options considered by the CPUC, and other alternatives should not be discounted if they provide more reliable service and at more reasonable cost. The CPUC should continue to consider existing event-based and load-modifying programs.

For instance, the Base Interruptible Program (BIP) is a long-standing utility Demand Response Program that works with large industrial and commercial customers to reduce their load to a predetermined level if an event is called. BIP has shown itself to be one of the most reliable Demand Response programs, especially during emergencies. Take for example, the blackouts that occurred during 2020.

As the chart above shows, most BIP participants delivered their energy reductions as expected whereas third parties delivered less than half to one fourth of what was expected of them. These are often the same third-party companies advocating for VPPs with less stringent oversight. However, the CPUC has an obligation to prioritize the needs of ratepayers over the desires of business and investors.

Ratepayer Protections Must Be Considered

As the CPUC evaluates whether and how VPPs should be integrated into grid planning and programs, protecting ratepayers must remain the central consideration. New resources should only be adopted if they provide measurable reliability benefits at the lowest reasonable cost and do not duplicate compensation for services already being provided.

Ensuring that VPP resources deliver incremental value, perform as expected during grid events, and do not overstate available capacity will be critical to avoiding unnecessary costs for customers. Existing demand response programs that have demonstrated reliable performance should continue to be considered alongside emerging models.

Ultimately, the goal is not simply to adopt new technologies, but to ensure that any resource used to support the grid provides real benefits for ratepayers.

Conclusion

Distributed energy resources such as VPPs will undoubtedly play an increasingly important role as California decarbonizes and electrifies, but how those resources are best utilized is still an open question. VPPs are not a magic bullet and like any other resource, must be shown to deliver consistent performance when needed at the lowest cost consistent with safe and reliable service.