A Distributed Paradigm - How Utilities Can Prepare for VPP Operations
Paul Sayour | February, 2023
The market for DERs is booming. According to the EIA, residential solar and storage capacity deployed in the US have boasted 34% and 45% increases respectively between 2020 and 2021. As this trend accelerates, we are also seeing the deployment of advanced software and communication technologies that enable real-time monitoring, control, and optimization of the overall electrical system. In combination with these developments, new regulations are paving the way for grid services that balance supply and demand while reducing the need for traditional centralized power plants through Virtual Power Plants (VPPs). Primarily, these VPPs will provide a way for customers to manage their own energy consumption and potentially generate income by selling excess energy back to the grid. However, benefits will accrue to all industry stakeholders: VPPs are expected to reduce system energy production costs by 10% and reduce emissions by 8% compared to a future with no flexible assets on the grid. While power industry players such as FERC, utilities, investors, and vendors all recognize VPPs as a major disruptor, they are also cognizant of the presented opportunity. Across the sector, resources are being poured into aggregation technologies, residential VPP programs, and improved ability to secure funding for residential DER installments. To capture the impending opportunities, leading utilities are also preparing themselves for the operational impacts of these new business models.
In this piece we examine the steps a utility can take to successfully develop the capabilities required to implement VPP operations. First, we examine the regulatory environment for insights into these flexible markets and overview an increasingly sophisticated supply side for VPP & DERMs software. We then examine a set of guiding principles and operating model considerations that a utility can implement to prepare for this new future.
Track the Regulatory and Vendor Environment
Regulatory Commission’s (FERC) Order No. 2222 that was passed in 2020 that required all RTOs/ISOs to develop a models for allowing DERs to participate in wholesale markets in the form of aggregations. While the complete compliance with the new ruling is ongoing and is set to last a number of years, we are already seeing utilities, aggregators, and developers deploy VPPs and, in some cases, actively participate in wholesale markets. The introduction of Order No. 2222 will unlock trapped value in residential DERs for both customers and grid operators by properly compensating DER owners for leveraging flexible assets during times of grid stress and instability. As such, a utility’s ability to maintain lockstep with the regulatory environment and various working groups is central to knowing how and when to scale VPP operations.
As the regulatory environment matures, so does sophistication in the vendor space. The race to maximize MWs under capacity is well underway: there has been a marked increase in public and private funding, significant progression in AI/ML technology, and regulatory incentives that have enabled a vibrant supply side market. Core drivers are catalyzing financial activity from both startups and Original Equipment Manufacturers (OEMs), with a series of high profile acquisitions from GE, Schneider Electric, Generac Grid Services to name a few. These acquisitions are only a slice of over $1 billion in funding for VPPs and DERMS markets that we have tracked since 2020. This influx of cash will accelerate the development of aggregation software that can better control DERs in concert, bid them into wholesale markets, and reduce grid stress and carbon emissions. In addition to funding, we are seeing heightened vendor collaboration with Google, Ford, General Motors, and a series of solar power producers joining Rocky Mountain Institute’s Virtual Power Plant Program (VP3), an industry partnership to enable policy change and document best practices for future VPP deployment. As this market continues to mature, innovative regulation, capital inflows, and vendor alliances will all contribute to unlocking value from DER participation in wholesale transactions.
Leverage a Set of VPP Guiding Principles
Once establishing a pulse on regulatory and supply side developments in the VPP market, utilities should turn their efforts to their own internal VPP program requirements and operating conditions. And while there are a myriad of jurisdictional and operational variances for a utility to consider, there are universal best practices to adhere to for optimal VPP program creation. Below is an example set of guiding principles a utility can leverage to build out their own VPP operations.
Create a distinct pilot/POC program in order to test VPP/DERMS technology and develop a mature set of technical and business requirements.
Leverage existing utility or ISO/RTO processes and, where possible, streamline and minimize legacy process waste.
Continuously scan the market for insights and leverage relationships with suppliers, emerging commoditization of solutions, and maturity of DER and VPP/DERMS vendors.
There is no one-size-fits all answer for utility operating models. The operating model must serve a utility’s strategy and organizational context.
Integrate existing flexibility and DER products and services where appropriate.
For a Go-to-Market operating model, consider outsourced commodity capabilities and insourced differentiation capabilities.
As the VPP program evolves, capabilities map to, but are not the same as, business units, business process, or value streams. The initial iteration and final iteration may differ in ownership.
Create ownership, not just buy-in for the final operating model.
Ensure the solution is robust and flexible to accommodate change; be open to autonomous operating models.
As far as is possible, digitize the VPP customer experience and day-to-day operations.
Conduct a VPP Implementation Impact Assessment
In addition to these guiding principles, leading Utilities are seeking to understand how this new technology and service will impact their organization. One way to strategize, is to build a technology aligned capability model into the VPP Operating Model in order to envision resource allocation, procurement requirements, and overall organizational interaction charts down the line. A first step in understanding and preparing for the impact of VPP’s on a utilities operating model is to assess and build the right internal capabilties. VPPs will complement and impact existing capabilties across sales, operations and IT. The diagram below is an illustrative example of such, each utility and entity will have their own unique operating variances.
In this example, Sales and Marketing departments will have a heavy hand in VPP program development and enrollment specifications. This involves sizing the customer base, evaluating existing DER data, building marketing personas, and assessing customer value for participation. Using the existing market conditions as precedent, ensuring high enrollment early on is essential to the longevity of the program. Assuming the aggregation technology is not developed in-house, departments must work together to procure a DERMS/VPP that matches the needs of their program and customer base.
As the program is built, the utility Delivery Ops and IT Delivery Ops must work with the vendor to integrate the aggregation software into existing systems, build in-house software operation capabilities, and leverage regional RTO/ISO trading expertise. As many utilities have experience participating in wholesale markets from a grid-scale perspective, they are likely to own capabilities such as trading, settlement and billing, and optimization with the support of a highly automated aggregation software. To ensure compliance, utilities VPP teams should remain up to date on the latest regulations for their regional DER wholesale participation models that are developed by the RTOs/ISOs.
Overtime, the impact of the VPP service will shift to reflect an increasingly utility-centric ownership model. Early on, it is essential for utilities to lean into their expertise in customer management and RTO/ISO interfacing while simultaneously procuring less mature capabilities from trusted vendors and 3rd parties. Building a sound operating model that includes a capability maturity model will enable proper resource allocation and an overall successful deployment of a VPP program that delivers high value to customers.
Looking to a Distributed Future
As decarbonization drivers, regulatory initiatives, and advancements in technology move the needle towards a distributed grid, leading utilities are evaluating their flexibility needs, zero-carbon goals, and customer demands in order to prepare for success VPP operations. Significant regulatory support, public and private capital inflows, and the proliferation of customer DERs all point to a robust future market. As such, preparing for this new distributed paradigm now will serve utilities well in the future.