How does a Virtual Power Plant work?

In our current electricity system, the demand for electricity changes throughout the year, and fossil fuel power plants adjust their output to keep the system working. The demand often spikes up during summer, when all the air-conditioners are operating. The additional electricity demand from these air-conditioners is usually met by backup power plants. However, these backup plants are only feasible to operate when the market price for electricity generation goes beyond a certain level. This is because they only operate occasionally and they rely on these few hours of peak price events to make as much revenue as possible. The typical price for electricity generation is below $100/MWh, which can be pushed up to a capped price of $15,000/MWh during peak periods. This is more than 100x the average price. As a result, these back up power plants can make millions of dollars in just a few hours to ensure there’s sufficient electricity supply during periods of peak demand in the grid.

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