The Rise of VPPs: A Grid Solution Whose Time Has Finally Come
Once a solution in search of a problem, virtual power plants are now a solution for modern grid complexities
This piece was completed in collaboration with Equal Ventures & Energize Capital
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A few years ago, virtual power plants (VPPs) seemed like an elegant solution in search of a problem—a technology waiting for the right moment when renewable energy deployment would cause real shortfalls in capacity and grid services. That moment has arrived. In 2024, several European countries and U.S. states are already experiencing critical grid challenges that VPPs are uniquely positioned to address. The real challenge now isn't proving that VPPs work—it's unlocking and orchestrating the vast potential of distributed energy resources at scale.
Right now, the grid is facing historic demand growth and generation variability due to data center growth, an increase in domestic manufacturing, widespread electrification and higher frequency of extreme weather events. This is further complicated by variability in generation driven by the influx of renewable sources. Grid planners have had to reimagine the grid landscape, now projecting 128 GW growth in peak demand through 2029—an increase over 2022 forecasts by a factor of five. In order to address this growing demand and variability, grid planners are racing to improve efficiency—which includes substantial investments in distribution lines, substations, feeders and transformers. But this process is slow—regional permitting requirements, labor shortages, and interconnection queues can delay and derail necessary infrastructure investments. Relying on this alone will not be enough to achieve the level of scale necessary to curb outages. Instead, it is essential that we look to increase not only grid efficiency, but capacity. This is where fleets of distributed energy resources (DERs) must come in.
Fleets of Decentralized Grid Assets
Over the past few years, DERs —behind-the-meter energy resources like electric vehicles, residential solar panels, and batteries—have grown in popularity, boosting flexible grid capacity along the way. Through 2028, DER capacity is expected to grow by 217 GW, nearly matching projected large-scale renewable additions. At this scale, DERs become a powerful part of our power generation stack, no longer simply drawing energy from the grid, but dynamically upscaling or downscaling energy consumption based on power availability by storing energy when needed and pushing power back out to the grid when necessary.
On a small scale, DERs can lead to energy and cost savings for a consumer. But when DER fleets are coordinated on a wide scale—through DER management systems (DERMs) and virtual power plants, they have the potential to make a huge impact on grid stabilization and revenue generation—and we are just beginning to see this come into effect. VPPs have already emerged as solutions around the country, with many starting quite simply, across one or two DER types. For example, one program in California paid 8,500 consumers $750 to enroll in a program to deploy energy from their residential batteries back into the grid for two hours every night, providing an average of 27 megawatts of power each evening—the equivalent of 20,000 homes—during peak consumption hours. Other programs interface with smart thermostats to reduce energy requirements during peak demand. But these programs are rapidly becoming more advanced, combining residential solar panels, heat pumps, electric vehicles, and more to expand capacity.
The Grid Flexibility Opportunity
We’ve been tracking the evolution of VPPs, waiting for two critical milestones: the scaling and monetization of DERs. With the pressing need for immediate capacity, we believe the opportunity to unlock grid flexibility is now becoming a reality.
Distributed energy capacity is growing. Today’s DER resources are far more capable and diversified than ever before. First, we are no longer restricted to only smart thermostats, but with declining costs of solar panels, EVs, and batteries, new technologies are becoming increasingly useful and accessible to the average homeowner. Second, controllable capacity (like batteries) is reaching a new level of scale, with the ability to make a material impact on the grid.
Market-based revenue opportunities are emerging. While in the past, the argument for VPPs had been based around energy saving potential, now, there is an increasing opportunity for these resources to engage powerfully in the market and drive economic value. VPPs have made significant strides in finding profitable engagement in the power markets, with Texas’s ERCOT ISO leading the way.
While VPPs and DERMs have been around for several years, their full potential has largely remained untapped up to this point. We believe we are just at the beginning of harnessing the true value of DERs.
Unlocking Value with Grid Software
The opportunity for demand flexibility is massive. By increasing VPP capacity by 60 GW over the next ten years, the U.S. grid could grow to meet new peak demand while achieving a net cost that is $15 billion to $35 billion lower than alternative, greenhouse gas-intensive options like backup “peaker” plants. However, unlocking the full value of DERs remains a challenge. At its core, demand flexibility hinges on three core pillars—data, energy, and revenue. The key to advancing this space lies in integrating these pillars seamlessly to unleash their combined potential and drive transformative value.
Data: VPP benefits cannot successfully be optimized without granular data—not just 15-minute interval data, but real-time asset visibility. To effectively coordinate a fleet of assets, utilities need to manage trillions of data points across millions of assets to generate clear, quantified insights into energy savings, load management, and overall grid impact. Without this data, it’s difficult to demonstrate the value of VPPs to stakeholders or drive widespread adoption.
Solution: Data Collection for Energy Systems
Centralized data platforms for energy collect and model data to generate the insights necessary to manage grid operations, including grid services. Companies need to be able to have real-time visibility, security, and sharing capabilities to use VPP capacity for grid stability, as well as store, and deploy energy based on changing market signals.
Energy: The growing diversity of DERs, from electric vehicles to residential solar, requires distinct APIs to aggregate assets at scale. Adding to this complexity, each geographic area has unique grid structures, regulatory bodies, and standards, making scaling VPP models across regions extremely challenging - and necessitating the ability to shift, shed, shape, and shimmy distributed assets at scale and in unison.
Solution: Energy Aggregation
Software solutions are emerging to provide transparency and connection across DER asset types, creating a standardized landscape for more effective energy coordination.
Revenue: For DER programs to generate meaningful revenue to recoup their initial investments, a critical mass of assets is essential. Achieving this requires a clear understanding of the dollar value of a DER—encompassing the asset's contribution to the grid, the incentives that reward customers, and the revenue generated to support underwriting investment. Understanding the economic value of a distributed asset is uncharted territory but represents a crucial step in unlocking the full value of DERs.
Solution: Asset Manager Platform
At the core of the VPP solution stack is an asset manager platform, tracking how dollars flow across the ecosystem and transforming fleets of distributed energy resources into a valuable (and novel) asset class. Platforms that not only oversee the real-time flow of energy across the grid but also manage financial transactions and revenue predictability of resources in energy markets, will be crucial to turn DER fleets into a trustworthy asset class for investors.
After almost a decade of monitoring the space, we believe the time for VPPs has arrived. What was once a solution searching for a problem is now a challenge in need of a comprehensive set of solutions. Ultimately, a VPP is not just a single solution, but a series of several solutions collaborating with each other. To unlock their full value, a coordinated approach across data, energy, and revenue is essential—a challenge that modern technology is now ready to tackle. As the grid undergoes a historic transformation, VPPs are no longer just a theoretical concept but an economic imperative for building a more resilient and sustainable energy future. It’s time to finally use VPPs for the purpose they’ve always been intended for—providing grid capacity as a virtual (digitally-powered) power plant.
If you’re building in the space, we’d love to dig in. Please reach out to Equal Ventures (grace@equal.vc) and Energize Capital (tlancaster@energize.cap).