IRA Creates Opportunities for VPPs in the US

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

Though the term virtual power plant (VPP) is not mentioned in the IRA, many of the provisions outlined in the legislation will help advance the VPP market in the US. The wide-ranging spending package includes numerous climate investments in renewable energy generation, building decarbonization and efficiency, and clean transportation. The provisions aim to lower energy costs for consumers and help the US reduce its greenhouse gas emissions by 40% compared with 2005 levels by 2030. That would nearly put the US in compliance with its Paris Agreement pledge of reducing emissions by 50%-52% compared with 2005 levels by 2030. 

Lowering the Cost of Distributed Energy Resources Broadens VPP Participant Base 

Although the costs of some distributed energy resources (DER) have decreased significantly over the past two decades, high upfront costs remain a barrier to adoption for many Americans. The extension of the investment tax credit for distributed solar PV systems, creation of an investment tax credit for standalone energy storage systems with a capacity of at least 5 kWh, and amendments to the federal tax credit for EVs aim to make these products more affordable for consumers to encourage adoption. Once deployed, DER can be linked through an energy management solution such as a VPP to amplify their effect and provide essential grid services. Customers can also use rebates in the IRA for electrification to purchase things like heat pumps for space heating, space cooling, and water heating to decarbonize their residence. Electrification allows customers to reduce operational emissions and increases the potential for load flexibility in grid operations. 

Clean Energy Development Leads to Lower Electricity Prices and a Need for Flexibility 

The clean electricity tax credits outlined in the legislation also encourage grid-scale renewable energy and energy storage deployment by incentivizing utilities and private developers to invest in new projects. The framework outlined for the investment and production tax credits make clean energy projects more financially attractive to utilities, especially those in fully regulated markets. Accelerating grid-scale renewable energy development will insulate customers from the effects of volatile fossil fuel prices that result in higher energy bills. However, increasing renewable energy generation also means a greater likelihood of oversupply, something VPPs can mitigate by shifting demand to off-peak times when renewable energy generation is abundant. This reduces curtailment, increases economic benefits of renewable resources, and reduces strain on the grid.  

Environmental Justice Funding Bolsters VPP Effectiveness 

The IRA includes funding specifically for addressing the disproportionate environmental and public health damage that air pollution and climate change have done to disadvantaged communities. An additional bonus to the investment tax credit is available for solar and wind projects as well as solar plus storage projects in low-income communities. Deploying renewable energy plus storage capacity in low-income communities expands opportunities for VPPs in those areas as they look to firm up clean energy supply. VPPs can replace fossil fuel power plants by linking clean DER to deliver constant power. In doing so, VPPs would remove significant sources of air pollution in disadvantaged communities given fossil fuel plants are typically disproportionately located in those communities. Allocating funding for renewable energy development in low-income communities expands the potential VPP customer base, strengthening the role VPPs will play in a zero-emissions energy sector.

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.