Texas has a unique electrical grid. The grid management organization, ERCOT, is independent of other states and deregulated, making the state open to business for a market-based approach to energy generation and transmission.
Texel has was a favorite among developers of utility-scale solar PV for a long time, thanks to the business-friendly environment and the lack of substantial local licensing regimes. The state also serves as a testing ground for the development of a more emerging industry: VPPs.
VPPs are defined by their distributed and connected nature. Instead of sending power over long distances from a centralized power plant, VPPs use smart software to control a variety of connected energy assets, such as rooftop solar, battery energy storage, smart heating and cooling, and appliances. Homeowners with eligible VPP assets will be compensated year-round for exporting power or reducing usage during electricity demand events.
A panel of experts from the RE+ Texas Conference in Houston, spoke about the VPP progress in the state. The discussion began when Stuart Page, senior consultant at the Department of Energy (DoE) Loans Program Office, asked the audience if they were currently enrolled in a VPP program. Only two people in a room of hundreds raised their hands. Page then asked how many people in the audience had heard of VPP, and most conference attendees raised their hands.
“I bet each of you has an energy source or use that can be controlled by an app,” Page said. “Yet none of you are registered, despite the fact that there are discounts on your electricity bill.”
Page said part of the problem with VPP participation is the complexity of programs. They often require an opt-in, where the customer must choose to participate in the VPP program. Page said VPP providers should instead opt for an opt-out model, where customers are automatically enrolled in the program when they purchase a smart device such as a thermostat or a home battery. He cited a DoE experiment where an automatic enrollment model with an opt-out option increased participation by 400%.
So why are virtual power plants important? VPPs enable intelligent, local distribution of energy, sending what is needed when it is needed. VPPs typically support reducing electricity consumption during times of peak demand and provide a crucial service that may be one of the most important low-hanging fruits we can reap in the country’s progress toward energy decarbonization and lowering energy costs .
VPP technology has shown immediate promise in replacing natural gas ‘peaker’ plants on networks, and replacing or preventing the build-up of new sources that one of the dirtiest, most expensive and least efficient on the net today.
The virtual power plant commercial launch report released by the Ministry of Energy said that between 2023 and 2030, concurrent peak demand on the electricity grid will increase by about 60 GW, from about 740 GW to 800 GW of demand.
“At the same time, fossil assets are being retired,” the report said. “About 200 GW of concurrent peak demand will need to be served with new sources coming online by 2030. Tripling the current size of VPPs could capture 10 to 20% of this peak demand. This could save approximately $10 billion in annual grid costs, and much of the money spent on VPPs would flow back to participating consumers.”
Even in a room full of energy industry members and experts, almost no one attending the RE+ Texas panel session admitted to being enrolled in a VPP. The biggest barrier to adoption has been the creation and implementation of a standardized VPP program, which is lacking in many states.
To automatically enroll customers at the point of purchase, as Page suggested, there must be a program in place to make this possible. Sterling Clifford, director of government affairs at Sunnova Energy, a VPP provider, said many state-owned regulators have said VPP technology is still “a long way off.”
“But it doesn’t have to be that way,” Clifford said. “The process from beginning to product launch took 12 months (in Texas).”
Texas already has 16 MW of energy resources and 7 MW of non-spin flexible demand enrolled in VPP programs.
Part of what made such a rapid launch of the program possible was necessity. Ryan King, manager, market design, for the ERCOT said so catastrophic Winter Storm Uri in early 2021 forced the grid operator to look for new sources of reliable, controllable supply at the distribution level, while reducing transmission and distribution costs and increasing grid resilience. ERCOT turned to VPPs as a solution.
Another aspect of Texas’ willingness to adopt VPP programs is its electricity-conscious customers. Homeowners and renters in Texas are already accustomed to making energy decisions at home, as they often have to purchase new electricity contracts through a Retail Electricity Provider (REP). Contracts typically last a year or two, similar to how a VPP program allows short-term enrollment.
Texas was also already ideally suited to integrate a VPP program, King said, because ERCOT is already able to rate a kWh of electricity avoided, or a kWh shipped. This type of valuation is made possible by the deregulated market in Texas, which allows various resources to participate more freely in the market than utilities in other major markets.
Texas has only just begun VPP enrollment and already has a combined 23 MW of flexible capacity online. King said VPP compensation for homeowners is “the closest thing to a free lunch,” and that once further program requirements are ironed out, growth will be “exponential.”
As with other states, VPPs may prove more difficult to roll out. While ERCOT has a transparent market where the avoided costs of demand reduction and the value of distributed electricity can be directly understood, other states, such as California, have a highly vertical electricity market, where cost allocation reporting is murky.
“Vertically integrated utilities – we should just call them a monopoly because that’s what they are – don’t always tell the truth about what the exact costs are,” Clifford said.
For Texas, a highly competitive free market has opened the door to the adoption of new technologies such as VPP. In vertical markets like California, “perverse incentives” can close this door.
Stuart Page from the DoE explained how VPPs reduce costs for both grid operators and ratepayers, but investor-owned utilities have a disincentive to properly manage their spending habits.
“We have a rate-based system, which means that instead of reducing the peak of my load, we can just build new things,” Page said. “If I can spend $10 billion on that, I get a rate-based profit margin on that. So I want to spend a lot of money. If I use a VPP approach or some other “smart” approach, I don’t get an increase in my profits. So there is a perverse incentive for utilities to participate, and we need to change that.”
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