• Virtual Power Plants
  • Residential DER
  • Utilities

Retail Programs Are Critical for Residential Virtual Power Plants in the US

Dan Power
Jul 31, 2023

A row of modern terraced houses, with a solar panel on the roof of the house in the foreground

Energy markets around the world are being reformed to allow aggregations of distributed energy resources (DER), or virtual power plants (VPPs), to participate alongside traditional generation sources. These aggregations can include DER from residential, commercial, and industrial customers so long as the total aggregation can meet the minimum bid size specified by the grid operator. By allowing VPPs to participate in wholesale energy markets, regulators and grid operators are creating another potential revenue stream for VPP operators and DER owners. This means DER owners could increase their ROI by decreasing payback time for their assets, and VPP operators could leverage the additional revenue stream to offer new business models to consumers.

Wholesale Participation of Residential VPPs Varies by Region

Wholesale markets in regions such as Europe and Asia Pacific have instituted market structures that make wholesale residential VPPs plausible. In the US, however, residential assets may be more limited in their role at the wholesale level in the near to mid term. The issuance of Federal Energy Regulatory Commission (FERC) Order No. 2222 in September 2020 was meant to lower barriers for DER aggregations to participate in wholesale energy markets. While the six regional grid operators under FERC’s jurisdiction were required to adjust their market structures and rules to accept aggregated DER as a type of market participant, each operator was free to develop its own compliance plan. The order specified that minimum aggregation thresholds may not exceed 100 kW, but no minimum asset size was established. The New York Independent System Operator proposed 10 kW as the minimum asset size to be included in wholesale aggregations, citing its current technical resources and capabilities. This effectively precludes residential assets from participating in wholesale market activities, as most residential DER assets have capacities under 10 kW.

Retail Programs Can Provide Revenue for Residential VPPs

The opening of wholesale energy markets to portfolios of aggregated DER represents a great step forward in creating a more sustainable, affordable, and reliable grid. However, it may be some time before residential DER assets in the US can fully compete alongside other wholesale resources. A retail-level program is one where distribution utilities contract directly with VPP operators or customers to provide capacity as needed. In either case, residential customers are paid in exchange for allowing their assets be used by the utility to provide capacity and other grid services to the distribution system. Utilities like Green Mountain Power, Portland General Electric, Pacific Gas and Electric, and Hawaiian Electric have launched residential VPPs where customers can enroll their battery energy storage systems to help manage the grid in exchange for a financial incentive.

Retail programs create a marketplace where aggregated smaller-scale assets, like those in the residential sector, can demonstrate their full value on the power grid without competing against much larger assets as they would on the wholesale market. These programs can lower the upfront cost of assets for new customers or provide an additional revenue stream for consumers that already own DER. For utilities, residential VPPs can provide capacity and other grid services at a lower cost than traditional generation sources, reduce emissions from the power generation sector, and make the grid more resilient. Creating a dedicated revenue stream at the retail level will help facilitate wider growth of residential VPPs throughout the US.