A Virtual Power Plant is a network of decentralized and medium-scale power generating units like wind farms, solar parks, and CHP units. It also includes flexible power consumers and storage systems. The units are connected through a central control room but remain independently operated. The objective is to relieve grid load during peak periods by smartly distributing power generation. The combined output is also traded on energy exchanges.

1. Virtual Power Plant

2. A Virtual Power Plant is a network of decentralized, medium-scale
power generating units such as wind farms, solar parks, and Combined
Heat and Power (CHP) units, as well as flexible power consumers and
storage systems.
The interconnected units are dispatched through the central control room
of the Virtual Power Plant but nonetheless remain independent in their
operation and ownership.
The objective of a Virtual Power Plant is to relieve the load on the grid by
smartly distributing the power generated by the individual units during
periods of peak load. Additionally, the combined power generation and
power consumption of the networked units in the Virtual Power Plant is
traded on the energy exchange.

4. Virtual is a word we’ve come to hear more frequently in recent years.
There’s virtual reality, which simulates interactive environments, and there
are virtual currencies, like Bitcoin, unregulated digital money.
Now virtual is reaching into the world of energy, and we are seeing the
development of virtual power plants, VPP as they are known. And they are
attracting a lot of attention.
So, just what is a VPP ?
By its very nature, the amount of electricity generated is the same as the
amount consumed. That means that the power companies that handle the
generation, transmission and distribution of electric power are constantly
adjusting output levels to meet anticipated consumption, and to maintain a
dynamic balance between supply and demand. If those efforts fail, and supply
becomes unstable, power outages result.

5. The participants of the Virtual Power Plant (VPP) are connected to the VPP’s
central control system via a remote control unit. This way, all assets can be
efficiently monitored, coordinated and controlled by the central control
system. Control commands and data are transmitted via secured data
connections which are shielded from other data traffic due to encryption
protocols.
In addition to operating every individual asset in the Virtual Power Plant
along an optimized schedule, the central control system uses a special
algorithm to adjust to balancing reserve commands from transmission system
operators, just as larger conventional power plants do.
The bidirectional data exchange between the individual plants and the VPP
not only enables the transmission of control commands. It also provides real-
time data on the capacity utilization of the networked units.

6. For example, the feed-in of wind energy and solar plants, as well as
consumption data and electricity storage charge levels, can be used to
generate precise forecasts for electricity trading and scheduling of the
controllable power plants.
What is the objective of a Virtual Power Plant?
The objectives of a VPP depend on the market environment in which it is
operated. In general, the aim is to network distributed energy resources (often
renewable energy resources like solar, wind, hydropower, and biomass units)
as well as flexible power consumers (also called demand response or demand
side management) and storage systems in order to monitor, forecast, optimize,
and dispatch their generation or consumption.
By being aggregated in a VPP, the assets can be forecasted, optimized, and
traded like one single power plant.

7. That way, fluctuations in the generation of renewables can be balanced by
ramping up and down power generation and power consumption of
controllable units.
Integrating renewable energy sources into existing markets is another
primary objective of a VPP. Individual small plants can in general not
provide balancing services or offer their flexibility on the power exchanges.
This is because their generation profile varies too strongly or they simply do
not meet the minimum bid size of the markets.
In addition, there are strict requirements regarding the availability and
reliability of the flexibility offered in the market. By aggregating the power
of several units, a VPP can deliver the same service and redundancy and
subsequently trade on the same markets as large central power plants or
industrial consumers.

8. Of course, utility companies are adept at managing supply—but it comes at
a cost. To keep the grid up and humming at all times, utilities operate with a
reserve margin of capacity—power plants that exist to provide power at
times when peak demand exceed capacity (think hot summer days or winter
storms). In the US, according to the U.S.
Energy Information Administration, most utilities target a reserve margin of
13 to 15%(*1), and most have more than that. That’s a lot of capacity that
goes unused most of the time but that must be maintained and ready to
come on line, and as a result, maintaining supply at the margin is an
expensive and inefficient process.
For many of the people grappling with the problem of how to secure stable
energy while also mitigating the effects of climate change and reducing
costs, renewables are the way forward.

9. Wind turbines and their almost hypnotic blades are today a familiar sight, as
are glittering solar panels on the roofs of residential streets; reminders of the
efficiency improvements and cost reductions renewables have achieved in
the last decade. More recently, storage batteries and heat pumps have found
wider use, and the number of e-vehicles on the road grows every day.
As a result, mechanisms for generating and storing electricity are scattered
all around us, and this is blurring lines. Consumers no longer just use
electricity, they can also generate it—and even produce a surplus for sale.
For proponents of renewables, that surplus points the way forward.
Harness surplus renewable energy, the argument goes, and bring it into the
grid. Improve efficiency and lower costs with a green solution. However,
power has to be fed into the grid when it is needed, and that is the downside
to renewables.

10. Solar doesn’t work at night, and its output falls on cloudy days, and when
the wind doesn’t blow, wind turbines are still. The output of renewables is
uneven and uncertain, factors that have held back their adoption. But now
there is a way forward, the VPP.
A VPP brings advanced energy management technologies to dispersed
energy generation sources. It bundles them together in a network—that’s
the virtual plant—and applies IoT and AI to aggregating output and
controlling their connection to the grid.
In combination and managed by a VPP, small, isolated power generation
points can be used in load-leveling, to absorb excess supply from
renewables, and to deliver supply during shortages. The VPP is a solution
that solves problems on both the generation side and the demand side.

11. To carry out these management functions, a VPP has to be capable of smooth
control of numerous distributed power generation facilities and power storage
facilities in real time.
That’s achieved with IoT technologies to monitor and remotely control the
equipment and devices, and AI know-how that can deliver accurate forecasts of
power generation from renewables and of consumer demand. These are the building
blocks. Used to realize fine adjustments and no-waste generation, they will also
contribute to one of our most pressing concerns, the decarbonization of society.
The capabilities of VPP extend even further. Used in combination with energy
management systems at consumer sites, VPP can create and support innovative
services. For instance, power that is not consumed as a result of incentives on the
demand side, is seen as having the same value as power that is generated, and is
measured as a “negawatt.” VPP can stimulate realization of negwatts, and manage
them.

12. How to turn data into actual use cases
The central control system of the Virtual Power Plant processes a wide range of information. This
includes data of all networked plants, current prices at the power exchange, weather and price
forecasts as well as grid information of the system operators. By using weather data and static
system data as location or inclination angle of PV modules, the feed-in of the networked assets can
be forecasted. On the day of the actual feed-in, live data continuously improve the forecast and
enable the adjustment of deviations. Using intelligent algorithms, the control system can create
individual schedules for steerable plants. This enables production to meet demand – with higher
revenues for the plant operators.
Based on price signals, flexible power generators such as CHPs can be ramped up and down
precisely to the quarter of an hour. Flexible power consumers such as industrial pumps can also be
operated on optimized price schedules by consuming their electricity when it is cheap and demand
is low. Thus, the central control system helps stabilizing the power grid even before the use of
balancing services become necessary.
If an imbalance of the grid is already imminent, the signals from the system operators are also processed in the
central control system and directly converted into control instructions for the pre-qualified units. This way, the VPP
effectively helps to keep the grid in balance by delivering frequency control reserves, for example. In the event of an
unexpectedly high feed-in, it is also possible to shut down assets within seconds and thus avert critical grid situations.

13. In 2021 a New VPP Market will be Created
Like VPP, negawatts are attracting attention, not only because megawatt incentives encourage
consumers to use less electricity, but also because the reductions they secure can be traded as
commodities; companies that realize negawatts can sell them to other companies on an exchange.
Pilot schemes are underway around the world, in the US and the EU, and Japan, where test
projects were initiated in fiscal year 2017, aims to have a full-scale market up and running by
2021. As the 2021s progress and this new energy supply market grows, VPP will play the role of
managing and using widely distributed power sources. The potential of numerous small-scale
generation facilities, widely dispersed in offices, factories and homes, and even electric cars, is
immense. In the new future, VPP will have an indispensable part to play in realizing a
decarbonized society.
Invisible
Power Plant in Action

15. A VPP is a new way to build a power station. Rather than one big facility, a VPP delivers energy
supply by installing a large number of rooftop solar panels and battery storage systems across the
state, and then using technology to link them so they can be controlled remotely.
South Australia’s cutting edge VPP involves 50,000 homes, and is estimated to provide at least
250 megawatts of clean energy, powering households and delivering energy to the grid on
demand – just like South Australia’s Tesla big battery.
The households who host the VPP
will see their bills fall by 30%.
But the benefits of the VPP stretch
way beyond this – improving the
reliability of the grid, cutting
pollution and reducing annual bills
across South Australia by around
$90 million a year.

16. Single assets forming a swarm of Power Plants
One single unit cannot transition our energy system single-handedly. But joining forces,
renewable energy producers can really make a change. At the end of the 1990s, a time when the
power markets started to liberalize, the first concepts for Virtual Power Plants were born – but
mostly only in theory. Computer and network technology at the time and the prevailing
regulatory conditions were not yet well suited for projects to take shape at the necessary scale for
a systemic and economic development of a Virtual Power Plant.
Two events occurred in 2010, though, that helped make Virtual Power Plants become reality.
Firstly, computer technology had improved substantially, opening the door for a readily available,
high-performance control system operating in real time.
Secondly, the German government announced the country’s exit from nuclear power together
with new structures for the energy market, and modified the Renewable Energy Act. These
changes provided the economic and legal foundation for Germany’s energy transition: The time
for Virtual Power Plants had come.

17. The VPP in a Nutshell
In a Virtual Power Plant, decentralized units in a power network are linked and operated by a
single, centralized control system. Those units can be either power producers (e.g. wind, biogas,
solar, CHP, or hydro power plants), power storage units, power consumers or power-to-X plants
(such as power-to-heat and power-to-gas).
When integrated into a Virtual Power Plant, the power and flexibility of the aggregated assets
can be traded collectively. Thus, even small units get access to the lucrative markets (like the
market for balancing reserve) that they would not be able to enter individually. Any
decentralized unit that consumes, stores, or produces electricity can become a part of a Virtual
Power Plant.
Additionally to operating every individual asset in the Virtual Power Plant, the central control
system uses a special algorithm to adjust to balancing reserve commands from transmission
system operators and to grid conditions – just as a larger, conventional power plant does.
Furthermore, the Virtual Power Plant can react quickly and efficiently when it comes to trading
electricity, thus adjusting plant operations according to price signals from the power exchanges.

18. Decentralized Units create Collective Intelligence
A virtual power plant is a pool of several small- and medium scale installations, either
consuming or producing electricity. Individual small plants can in general not offer services as
balancing reserve or offer their flexibility on the power exchanges as their production or
consumption profile varies strongly, they have insufficient availability due to unforeseen
outages or they simply do not meet the minimum bid size of the markets.
In addition, there are strict requirements regarding the availability and reliability of the
flexibility offered in the market.
To overcome these barriers, the solution is simple: work together! The combination of several
types of flexible production and consumption units, controlled by a central intelligent system, is
the core idea behind a Virtual Power Plant. This way, a VPP can deliver the same service and
trade on the same markets as large central power plants or industrial consumers.

19. Virtual Power Plants can reach a total capacity equal to one or several nuclear power plants,
though due to the volatility of renewable energy sources it changes constantly. If the wind isn’t
blowing or the sun isn’t shining, solar and wind assets contribute less to the Virtual Power Plant.
Combining a variety of energy sources in the VPP’s portfolio is vital in order to prevent uneven
power balance. Due to the grid’s limited storage capacity, only about the same amount of power
as is being consumed can be fed into the grid (within a certain tolerance). Assets integrated into a
VPP can be power producers, power storage units, power consumers, and power-to-X plants,
such as power-to-head and power-to-gas. Some of these units are due to their flexibility
especially valuable to the portfolio: The flexible assets can compensate for variations in power
feed-in caused by a lack of wind or a set of clouds – in both negative as positive directions.
VPPs bring flexibility into power markets
The flexibility, meaning the quick and versatile ability to balance the grid, is among the greatest
strengths of Virtual Power Plants and their most notable difference compared to conventional
power plants. VPPs can utilize the aggregated power to react to changes of the electricity price
on the exchanges, quickly adapting to the existing supply of power in the grid, and thus execute
trades. After all, the price of electricity changes constantly, up to 96 times per day in intra-day
trading on power exchanges. A price difference of two or even three digits per megawatt hour is
no surprise here.

20. The price for electricity is not always the same
Big power plants with a consistent output of several hundred megawatts reach their technical
limitations relatively quickly. You can picture a lignite power plant like an aircraft carrier: It
needs a certain distance until the breaks fully kick in, meaning that it takes quite some time until
the plant’s turbines are slowed down enough to accommodate an increased wind power feed-in
during a storm. The climate-neutral wind power would instead be taken off the grid, though, to
prevent the grid from overloading.
A Virtual Power Plant, per contra, would simply reduce
the output of connected hydro and biogas plants to react
to a surplus of wind power. And if there’s too little power
on the grid, the control system can increase hydro power
or biogas plant power production.
Thus, the VPP promptly balances fluctuation in power
production in real time without straining the public grid.
To submit the commands that lower or raise feed-in amounts
the control system uses an API or remote-control units
installed on each asset.

21. Interface and network connection in a Virtual Power Plant
The Virtual Power Plant uses a secure, tunneled data connection to transmit commands and data
between the redundantly designed and highly secure control system and the individual assets.
Even though these tunneled connections do use the public communication infrastructure, there
are protocols in place separating information pertaining to the VPP from the general data flow.
Buzzwords such as “the internet of things,” “industry 4.0”, and “M2M” might come to mind, but
it really refers to a specially secured and shielded mobile and hard-wired data connection.
The bidirectional connection between the Virtual Power Plant and each asset not only facilitates
the execution of commands, but it also enables a real-time, permanent exchange of data on the
capacity of the networked assets and therefore the VPP as a whole.
The data includes the reported feed-in capacity of solar and wind assets, consumption data, and
storage capacity indicators, and thus is vital to a precise forecasting for operational planning of
flexible power assets and power trading. The data is processed and evaluated automatically for
the most part within the VPP’s software, which also takes on many of the tasks that are
associated with initiating and executing trades on the power exchanges.

22. Balancing reserve delivered by Virtual Power Plants
Renewable power producers such as biogas, cogeneration units (CHP), hydro, and emergency
power generators are flexible and therefore have one additional advantage: They cannot only
reduce or cease power production when there is a surplus on the grid (i.e. negative balancing
reserve), but also feed-in additional power to the grid when there are electricity shortfalls (i.e.
positive balancing reserve).
In order to provide balancing reserve, an asset must have a capacity of at least one megawatt.
Several assets can be linked together in a Virtual Power Plant to reach this threshold. Thus, the
cluster of assets responds to balancing reserve controls by the Transmission System Operator
collectively, sharing the profits among all asset operators.
Power consumers can furthermore provide negative balancing reserve: For instance, an industrial
plant that is part of a VPP can receive the command to increase production and thereby remove
surplus power from the grid.

23. Power consumers in Virtual Power Plants
Industrial and commercial power consumers can profit from price signals coming from the
power exchanges thanks to the data collected in the Virtual Power Plant.
They can limit their power consumption to times when electricity is readily-available on the
market and therefore cheap – in total, companies can thus reduce their power costs by up to a
third.
This consumption optimization can be fully automated by the Virtual Power Plant, if desired.
The VPP’s control system then sends commands to the company’s machine control room,
complying with the individual restrictions, of course, and only intervening as much as needed.
A power meter with consumption metering is required for this, though, and they are only
available to consumers with an expected power consumption that exceeds 100,000 kWh
annually.

24. The hope for Smart Meters on the horizon
Private households in Germany and other countries are far from reaching this level of power
consumption. Their integration into Virtual Power Plants therefore will have to wait until smart
meters are a standard part of every home.
Smart meters will hopefully soon replace the old three-phase meters of the 1920s – roughly a
hundred years after those were introduced. When the usage of appliances such as ovens, heaters,
refrigerators, washing machines, and hot water heaters can be optimized intelligently in order to
align with low electricity prices, power consumption can become more cost-efficient at home,
too.

25. Digitalization of the energy sector by Virtual Power Plants
The energy sector is no exception when it comes to the fact that the future is digital. The supply of
electricity is – like many areas of our society – undergoing a fundamental shift, not only on a
national, but also on a global scale. We are finally moving away from large and fossil-fueled power
plants towards smaller and decentralized units that are linked together through the opportunities of
digitalization – and those are constantly expanding.
Similar to car sharing services without a car fleet and hotel booking platforms that do not own
hotels, Virtual Power Plants are agents of a democratic shift in power supply: Responsibility is
shifted back to society. VPP operators don’t own power plants; they just optimize the way in which
every linked asset – still owned by a third party – is used. In doing so, today’s largest Virtual
Power Plants have already exceeded the aggregated capacity of the largest nuclear power plants by
far, and in the process, they produce climate-neutral power from the networked assets and address
challenges that the power markets will face soon.
These challenges include the rising numbers of electric vehicles in the transportation sector and the number of network
hubs and computer centers in response to digitalization, which is growing exponentially – and they all require huge
amounts of electricity. With conventional power supplies and/or a single source of power, these demands cannot be met
in accordance with climate protection goals. The hybrid and decentralized approach of a Virtual Power Plant, which
utilizes a wide range of technology and energy sources, is a vital tool that will shape the energy landscape of the future.

26. What’s the difference between a Virtual Power Plant and a Microgrid?
Microgrids (and minigrids) also often involve a mix of distributed renewables, storage,
flexible demand and fossil-fuel plants. But there are important differences, as well:
1. VPPs are integrated into the grid. Microgrids are often off-grid, and in an on-grid
setting, they are designed to be islanded so they can carry on working independently
if the grid goes down.
2. VPPs can be assembled using assets connected to any part of the grid, whereas
microgrids are usually restricted to a particular location, such as an island or a
neighborhood.
3. The two concepts use different systems for control and operation. VPPs are managed
via aggregation software, offering functions meant to mimic those of a traditional
power plant control room. Microgrids rely on additional hardware-based inverters and
switches for islanding, on-site power flow and power quality management.
4. Another difference concerns markets and regulation. VPPs are aimed at wholesale
markets and do not usually require specific regulation. Microgrids, on the other hand,
are more focused on end-user power supply.

27. What’s the difference between a Virtual Power Plant and Demand Response?
This one is a bit trickier, and it's tied up with the semantics of the energy industry. The
term “demand response” dates back decades to programs that enlisted factories or
commercial buildings to manually shut down loads in order to combat grid emergencies.
While the industry has gotten much more sophisticated in the past decade or so, it does
still include those manual programs alongside more automated and flexible ones. Another
semantic difference is which side of the demand-supply curve it’s considered to be on.
According to a document cited by the Institute of Energy Economics in Japan, demand
response is a demand-side initiative; a VPP is a supply-side initiative.
But in practice, this doesn’t equate to much of a distinction. VPPs such as the one being
operated by Enel X in Taiwan are essentially based on demand response, with loads
forming the majority of its megawatts. For this reason, it is probably easiest nowadays to
think of demand response assets as simply one type of flexible unit that can be
incorporated into a VPP.

28. How are Virtual Power Plants Making Money?
Traditional thermal power plants supply capacity when needed and also deliver a range of
grid-stabilizing ancillary services, from voltage stabilization to frequency response. VPPs
can potentially make money from both types of operations as well.
On the capacity front, for example, VPPs have already been deployed to sidestep the need
for grid strengthening. In one case in Australia, a utility called Evoenergy was able to save
around AUD $2 million (USD $1.6 million) by using a VPP to avoid a substation upgrade.
And in Oregon, Portland General Electric is assembling a 4-megawatt VPP as a precursor
to 200 MW of distributed flexibility. Households taking part in the VPP experiment get a
battery purchase rebate or are paid $20 or $40 per month for use of existing batteries.
Lastly, in a sign of how VPPs are becoming commodity items, Redwood, California-
based AutoGrid, which is operating VPPs in 12 countries with 5,000 MW under
contract, is offering its management systems for purchase through the Amazon Web
Services marketplace.
Try doing that with a combined-cycle gas turbine.

29. Don’t you need fancy software to put a Virtual Power Plant together?
Yes. Technology is one of the key ingredients in VPP design, and trailblazers have
tended to be companies that have had to build software platforms for the monitoring and
control of customer-premises
-based assets such as batteries.
By 2016, there were already
at least half a dozen energy
storage companies working
on VPP concepts in Germany
alone.

30. Which companies are creating Virtual Power Plants?
Most VPP pioneers have been snapped up by larger groups in recent years, bringing the
virtual power plant concept into the mainstream. For example:
•Geothermal and renewable energy company Ormat Technologies picked up Viridity
Energy at the start of 2017.
•The same year, Greensmith Energy was bought by Finnish power giant Wärtsilä.
•Italy’s Enel has gone on a distributed energy technology spending spree, purchasing Demand
Energy, EnerNOC and eMotorWerks to lay the foundations of its VPP offering.
•Engie bought a stake* in Kiwi Power of the U.K. in 2018 and Tiko of Switzerland in 2019.
•Shell bought sonnen, a German home battery maker which is developing VPPs in Australia,
Germany and the U.S., in 2019.
•Hanwha Q Cells acquired San Francisco-based VPP technology provider Geli in August this
year.
•Generac Power Systems bought Enbala Power Networks for an undisclosed sum in October.
•Also in October, grid-scale energy storage leader Fluence acquired AMS.
•Spain’s largest oil and gas company, Repsol, last year invested an unspecified amount into
Ampere.

31. That’s just a sample of VPP-related deal activity. And aside from acquisitions:
•Green Mountain Power of Vermont is working with software developer Virtual Peaker to dispatch customer-
premises-based Tesla Powerwall batteries into the New England grid.
•Germany’s Next Kraftwerke is bidding electric vehicle battery capacity into the Dutch secondary reserve
market, and startup Tibber is doing the same in Germany.
•Residential solar giant Sunrun has established solar-plus-storage-based VPPs in U.S. markets
from Massachusetts to California and Hawaii.
•Tesla claimed the world’s largest VPP in 2018, with a deal to install 50,000 solar-plus-storage systems in
South Australia, and is involved in a slew of other projects worldwide.
•U.K. smart storage player Moixa orchestrates 22,000 storage systems in Japan, along with smaller VPP
deployments elsewhere.
•Centrica has assembled a VPP in Cornwall, western England, in association with sonnen, Belgian software
firm N-Side, Western Power Distribution and National Grid.
•Centrica-backed GreenCom Networks is assembling "energy communities" in Germany with software that
can provide VPP services.
•General Electric has investigated building VPPs using blockchain technology and sells digital systems for
VPP development alongside traditional power plants.
Again, this isn’t an exhaustive list, but it does capture the vitality of the VPP space. Expect more acquisitions
and consolidation in the space, as energy giants contend to put together the pieces that can meet future grid
needs.

34. Virtual Power Plant