Summary

A Virtual Power Plant (VPP) is is a cloud-based distributed power plant that aggregates the capacities of heterogeneous distributed energy resources (DER) to provides a reliable overall power supply. DER includes commercial and residential energy resources from wind farms, solar panels, combined heat and power (CHP) units, and even electric vehicles (EVs) through vehicle-to-grid or vehicle-to-home charging. All distributed resources are aggregated into something akin to a pool of dispatchable energy ready to balance energy demand. VPPs can be considered software-defined energy like software-defined networking in that it uses software and algorithms to efficiently route resources across a network.

Viability (5)

We are in the early stages of VPP commercialisation with vendors working out their business models. SunPower launched the first VPP in 2016, Sunrun in 2020, and Tesla most notably in 2022. The complexity and fragmented nature of the utility supply chain has limited adoption to date, but all viability questions are solely commercial. There are already examples of VPPs in the US, UK, Germany and Australia, with Tesla predominately driving the market. With cars, charging infrastructure, batteries, and VPPs, Tesla is executing a full-stack strategy and it will not be long before competitors join the race.

Drivers (4)

The main driver for VPPs is the growing adoption of residential solar, home electricity storage, and EVs. Utility companies want to utilise this additional energy and storage capacity to balance the grid, and consumers would like to earn income from selling surplus energy and storage. The costs of solar PV and batteries will continue to fall, likely at an accelerated rate due to economies of scale and learning curve over the next decade, making these devices more affordable. The rising cost of gas and electricity globally as the energy market fragments due to Russian sanction will also drive consumer adoption and may force Government incentivisation as a longer-term energy cost reduction policy. As consumer adoption grows, the pain for utilities of balancing demand will grow further incentivising VPP adoption in a virtuous circle.

Novelty (5)

Micro-producers can choose not to sell or utilise excess capacity or to operate within a Microgrids and not connect to the grid. Relative to these options, VPPs are the only solution that can pay consumers. For grid operators, they need dispatchable energy generation to address peaks in electricity demand. VPPs directly compete with natural-gas-fired peakers and hydroelectric plants to respond relatively quickly (in the order of seconds and minutes) to demand. Relative to peakers and hydroelectric, VPPs have much lower capex and opex, being a software solution, and is cleaner than peakers.

Diffusion (3)

The utility sector is notoriously slow moving for a whole host of reasons and there has been talk of a “smart grid” for decades now. VPPs need both the supply and demand side, on the supply side, the installed base of residential solar and batteries are large enough now for grid operators and utilities to take the market seriously. The requirement for relatively expensive hardware on the consumer-side is a rate limiting factor. Although government incentives have proved to be successful in pulling demand forward.

Impact (4) High certainty

VPPs are basically software-defined energy. An increasing amount of energy generation will take place at the edge of the network and it is therefore inevitable that software will manage the supply side to efficiently meet demand. At scale, VPPs combined with Microgrids will create pool of energy abstracting away the underlying hardware (solar, wind, CHP, batteries, etc) creating a fungible market. Efficiently managing supply and demand with machine learning and potentially crypto for transactions, is a vital system optimisation and VPPs allow for scalable micro-generation but this has orders of magnitudes less potential than Nuclear Fusion orDeep Geothermal Energy.

Timing (2025-2030) Low certainty

A pretty small $750 million market in 2021 but with roughly 20-25% annual growth reaching $4.5 billion in 2030. Despite the obvious bull case for software-defined energy, this forecast reflects the slowness of the industry and the high degree of market fragmentation. The decarbonisation push and recent geopolitical need for energy independence will be catalysts potentially speeding up adoption potentially pushing the growth rates up to 30% as Governments around the world subsidise home solar, CHP and home electricity storage. On balance, a 2025-2030 seems marginally more likely than 2020-2025.