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The State of the Art in Virtual Power Plants (VPPs)

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Explore how Virtual Power Plants (VPPs) and Home Energy Management Systems (HEMS) are transforming energy systems. Learn why they’re critical to managing rising demand, cutting costs, and enabling decarbonization—plus insights from real-world case studies and strategies for utilities and consumers.

Power systems and Transmission and Distribution (T&D) grids are facing accelerated peak demand growth driven by state and federal decarbonization policies, electrification, and new major loads (e.g., data centers and manufacturing facilities). Figure 1 below shows CO2 emissions for states leading the decarbonization effort broken down by sector, implying associated future electrification loads.

Figure 1 – Leading States Emissions per Capita by Sector, Source: Energeia Modeling

Electrification as well as data centers are driving forecast growth in generation, transmission, and distribution investment, along with higher prices and bills. Orchestrated distributed energy resources (DERs) via virtual power plants (VPPs) are a key strategy to avoid and/or reduce whole-of-system costs and with shorter lead times than many utility-scale alternatives.

The following sections summarize Energeia’s latest research, analysis, and insights into the evolving landscape of VPP’s value-add, business models, and implementation considerations.

The scope of this research and analysis focuses on:

  • Drivers of distributed energy resources,
  • DER value and flexibility,
  • A virtual power plant case study, and
  • A home energy management system case study

Drivers of Decentralized Energy Resources

While the United States has withdrawn from the Paris Agreement, individual states, such as California, Colorado, Massachusetts, and Maryland, have outlined comprehensive CO2 abatement roadmaps and continue to make progress towards their climate action goals. Meeting these targets requires significant investment in direct and indirect (hydrogen) electrification, along with increased adoption of DER (solar, batteries, and electric vehicles). Decarbonization is therefore the principal driver of decentralized energy resource deployment.

At the same time, data centers are projected to contribute between 120 TWh to over 600 TWh[1] of new electricity demand by 2030. Combined with the potential development of additional domestic manufacturing facilities, regional planners are forecasting as much as a doubling of peak demand within the next decade.

To meet this expected load growth, U.S. renewable capacity would need to expand by 100%-250% as seen in Figure 2, alongside significant investment in bulk supply and transmission infrastructure (with these upgrades coming at substantial costs).

Figure 2 – U.S. Generation Capacity Outlook by Scenario (GWs), Source: U.S. Energy Information Administration, Annual Energy Outlook 2023

However, large-scale cost savings are possible with the implementation and optimization of VPPs. Figure 3 illustrates potential savings of up to $40 billion that could be realized with VPP orchestration for the Australian National Electricity Market (NEM), whose peak demand of 33,716 MW in 2024 is comparable to California’s (48,353 MW).

Figure 3 – Up to $40 Billion Savings in Bulk System Benefits and Distribution, Source: Energeia Modeling

DER Value and Flexibility

Energeia has identified key VPP services and use cases, with benefits varying by utility and region. Our comparison of decentralized residential energy storage against centralized utility-scale storage shows that residential VPPs can deliver more than via distribution services, in some cases as lower cost and with shorter lead times. Retailers that successfully harness VPPs can therefore achieve a competitive advantage over those relying primarily on utility-scale assets.

Figure 4 shows the impact of DER on system demand flexibility and per-unit capacity while Figure 5 highlights the relative value of DER in the residential sector. Together, this analysis demonstrates that DER adoption expands opportunities for related VPP services.

Figure 4 – Load Demand Flexibility by Device Type, Source: Energeia Modeling
Figure 5 – Estimated DER Value by Device Type on Peak kW Basis, Source: Energeia Modeling

With the uptake in DER, two primary business models for managing distributed resources are emerging:

  • Virtual Power Plants (VPPs)
  • Home Energy Management Systems (HEMS)

The following case studies summarize and explore each of these business models.

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Virtual Power Plant Case Study

Under a VPP model, participants are guaranteed payment, while resources are aggregated and managed by the VPP operators. The VPP operator delivers services to utilities such as peak demand reduction, and assumes the associated market risks and/or rewards.

In the Australian market, most VPPs are battery-based, offering consumers value in addition to retail bill savings. Typical VPPs orchestrate DER for 400-500 hours per year, with varying levels of incentive structures as seen in Figure 6.

Figure 6 – Hours of DER Orchestration per Year, Source: Energeia Modeling

Notably, fewer hours of VPP orchestration can result in higher per-kWh incentives for customers as can be seen in Figure 7.

Figure 7 – VPP Payments per kWh, Source: Energeia Modeling

Home Energy Management System Case Study

In contrast, participants under a Home Energy Management System (HEMS) model are directly exposed to market prices and outcomes, while operators provide optimization services for consumer resources. Consumers typically pay a to access wholesale market pricing.

This model exposes customers to both risk and reward but provides fast response optimization to price signals. Figure 8 illustrates an example of customer-level device management under an HEMS agreement. In this case study, the optimization service is showing forecast prices and associated resource schedules on the customer app.

Table 1 - Key Workforce Barriers, Source: Energeia Research

Key Takeaways and Recommendations

Energeia’s key takeaways and recommendations for tackling the skills gap in the workforce and implementing decarbonization are summarized below.

Key Takeaways:

  • Decarbonization will drive substantial investment in peak demand, utility-scale resources, and T&D costs, which will increase bills substantially
  • DERs, effectively planned, delivered, and operated, are estimated to reduce investment costs by $100 billion in California alone
  • DERs (including flexible loads, rooftop generation, and battery storage) can offer a lower-cost alternative for customers
  • VPPs and HEMS are the two main business models emerging to develop, operate, and manage distributed energy resources
  • For VPPs, the trend appears to steer away from locked-in contracts and towards bring-your-own-device, with 100% managed and multiple services delivered
  • Current VPP positioning is wide-ranging, with some consistency in the value paid per kWh, if not the hours reserved
  • The VPP market is just now emerging but growing rapidly, with players evolving their strategies, business models, offers, products, and services
  • It remains to be seen if the low-risk, low-reward VPP or high-risk, high-reward HEMS model, or a hybrid of the two, will be the most successful longer term

Key Recommendations:

  • Understand the long-term cost-of-service and DER potential to enable targeting of the best (i.e., material) opportunities
    • Consider trials of VPP and HEMS business models to keep options open
    • VPPs can be difficult to convey to customers, and there can be social license issues
  • HEMS requires real-time wholesale and, ideally, T&D prices
  • Monitor best practices and lessons learned as the industry matures, and ensure offers keep pace (e.g., multiple services, 100% management)
  • Ensure utility organizational capability and capacity in place to enable and support DER integration and monetization
    • Ensure impacts and controls are included in operations, forecasts, and plans, to lock in the benefits
    • Early lessons learned show DER is much less likely to be seen as viable or desirable by T&D planning, engineering, and operational personnel

[1] The Future of Data Center Electrical Grid Impacts – Energeia

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