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.

Fig1: ​Example peak price event in Victoria (Source: AEMO)

A more cost-effective solution to provide these backup power during peak events is through the use of Virtual Power Plants (VPPs). A residential household or apartment building with battery storage can sign up for a VPP, which allows the VPP operator to tap into the excess energy stored inside your battery to be discharged back into the grid during peak events. As the VPP operator aggregates this excess energy from thousands of participating batteries, it forms a “virtual power plant”. These battery systems are coordinated remotely by a central control software system run by the VPP operator. The VPP can bid in the energy market at a much lower price in comparison with the backup fossil fuel plants, lowering the costs for all consumers. The revenue generated will be shared between the operator and participants of the VPP.
A VPP can be used to generate earnings from the spot price energy market, as well as providing services to stabilise the grid, known as Frequency Control Ancillary Services (FCAS). The power system requires the supply and demand of electricity to be in balance in order to operate safely. If there is a variation in supply without a corresponding variation in demand, this can lead to grid instability, or at extreme levels, blackouts. Put simply, FCAS provides a fast injection of energy, or fast reduction of energy, to manage supply and demand. This service is traditionally provided by fossil fuel generators such as coal and gas plants. However, the use of batteries is a lot more suitable as they can discharge energy into grid in seconds, in comparison with the traditional gas plants which can take minutes (e.g. takes time to burn more gas to increase energy output). As more and more renewable energy generation is integrated into the electricity grid, there is expected to be more variability as these power sources are weather dependant. The use of VPP’s will become an important part of the grid in the future to provide an alternative for FCAS services and allow for more renewable supply in the grid.

Fig.2: Balance of Supply and Demand for Energy

​Due to the success of a VPP pilot in South Australia, there are now a large number of VPP offerings available in New South Wales. The link below provide further details on the available programs offered by different VPP operators. (https://www.aemc.gov.au/news-centre/data-portal/retail-energy-competition-review-2020/vpp-offers-available).