We’re currently seeing three critical energy trends across the state of California.
First, energy affordability is an urgent crisis. California's success in reducing the cost of clean, renewable power means commodity energy prices during much of the day are lower than ever, but replacing our aging and fire-prone infrastructure has driven electric bills to unsustainable levels, especially for the state’s poorest and most vulnerable.
The second trend we’re seeing is the huge need for California to bring more energy capacity online to meet our economic growth and replace old fossil generators while avoiding energy shortages. This challenge will likely increase as summers get hotter and as we see increasingly severe wildfire seasons.
Lastly, and luckily, Californians across the state are already embracing new energy technologies, from electric vehicles (EVs) in their driveways to solar and battery storage at the grocery store, that are faster, cheaper, and better than the old, unreliable fossil-fueled versions. These new technologies can communicate with the electricity grid in real-time and, depending on the needs of the grid at any given moment, can shift, store, and deliver electricity to where and when it is needed the most.
The confluence of these trends points to an exciting opportunity: leveraging private investments in distributed energy resources (DERs) to add capacity to the grid without requiring lengthy permitting, environmental battles, or supply chain delays; save money for all customers by avoiding the overbuilding of new power plants; and compensate individual asset owners to put money back in the pockets of everyday residents who have invested in DERs. This opportunity can be realized through a new approach: the "virtual power plant” (VPP).
VPPs can meet our energy demand
It's no secret that California has been a national and world leader in developing energy efficiency and demand response. In recent years, VPPs have emerged as a new model for activating these resources to work together to meet grid needs as well or better than traditional power plants. This new model has been developed and is being embraced by utilities across the country.
A new study from The Brattle Group examines how California can use VPPs to quintuple its existing peak demand response capacity. The findings highlight ways VPPs and DERs can quickly add power and capacity to the grid, strengthen its resilience, and enable more value for investment decisions by consumers.
VPPs offer an affordable and efficient way to reduce or shift demand and deliver electricity when needed by harnessing consumer power to keep the lights on. The study highlights five technologies – smart thermostats, EVs, behind-the-meter batteries, grid-interactive electric water heating, and automated demand response – that can deliver energy back into the grid efficiently and reliably.
Not only can VPPs deliver energy to the grid faster and cheaper than current methods, but with the right policies in place, California residents who have DERs can get paid to send power back to the grid. VPPs are an affordable way to modernize our grid and provide energy capacity that’s significantly larger than the capacity of any single power plant in California, while also offering benefits directly to participants.
It's like adding the capacity of three Diablo Canyon power plants (the state’s largest), but instead of paying PG&E, we’re paying everyday Californians.
Report findings show the many benefits VPPs offer consumers
This report shows that everyone would benefit from VPPs. Californians with (increasingly accessible) VPP technologies like smart thermostats and EVs would get direct payments for their participation, and, as a whole, all ratepayers would benefit from more affordable rates and increased grid resiliency.
The majority of the costs for implementing a robust VPP program would be returned directly to California residents and businesses in the form of participant incentive payments. Individual households participating in all four residential VPP options mentioned in the study could potentially receive participation payments of $500-1,000 per year.
VPPs can reduce the need for new power plants, outdated fossil fuel power plants, and upgrades for poles and wires, avoiding added investment costs of $750 million or more per year and reducing energy rates for years to come. VPPs also have the potential to create direct-to-consumer benefits and ratepayer savings of $550 million per year in California, of which $500 million would flow to VPP participants (consumers and businesses) and $50 million per year would flow to ratepayers from the avoided costs of power plants and transmission lines.
These savings also account for roughly $200 million in program costs, including investments in the VPP management systems that can be used to manage this future “distributed grid” well into the future. Overall, VPPs will lower rates for customers, lower energy demand, and offer flexible ways to alleviate strain on the grid.
A VPP Pathway for California
Based on the study, we know the massive potential and benefits VPPs offer California and its consumers. California has emphasized the importance of VPPs in its SB 100 report and the SB 846 load flexibility report, but there is a challenging regulatory landscape that makes achieving these benefits difficult. Our recommendations are as follows:
1. Incentivize substantial demand pull.
California utilities are the ultimate buyer of VPP services, but utility incentives may not be properly aligned to pursue these innovative programs. That’s where state and local policymakers come in. The PUC can require the procurement of VPPs and require that they be fully and appropriately considered in resource planning. Like any market, it is essential that there be strong demand pull to incentivize supply.
2. Clarify capacity value.
We need to continue to implement smart programs to recognize the value VPPs provide to the grid at any given time. Multiple overlapping rules at the California Public Utilities Commission, Energy Commission, and Independent System Operator create regulatory barriers to properly counting the very real capabilities of VPPs. Important progress is being made, and success demonstrated, through such programs as the Demand Side Grid Support Program that are showing the value of VPPs in enabling a resilient and reliable grid during emergency weather events when the grid is under stress. As technologies and programs are more standardized, we can create better programs that benefit all.
Utilities and regulatory authorities must re-double their efforts to resolve these regulatory barriers and recognize the resource adequacy (RA) of VPPs. These include standardizing and simplifying the RA credit utilities receive for flexible load-modifying DER programs, and calculating the market value of consumer battery exports to the grid just as we do power plant exports.
3. Make it easy for consumers.
California has been a leader in letting consumers have their own autonomy by giving them access to their energy data. Consumers can use this data to make their own informed decisions and engage with programs like VPPs. However, these rules need to be updated to reflect more modern privacy standards and methods to present customers with an informed choice, not a roadblock.
As the study shows, VPPs are a viable solution for enhancing grid reliability, reducing energy rates, and supporting the state’s clean energy policies. Policymakers and regulators can establish policies to facilitate their rapid deployment in order to unlock their full potential and maximize their benefit to all Californians.