Storage Leads the Way for Mixed-Asset VPP Models

In 2Q 2020, the US storage market saw its second-largest storage deployment despite economic challenges from the pandemic. Reports show decreases of commercial and industrial deployment storage; however, residential segment growth is increasing from incentives in key states. Utilities will continue to deploy front-of-the-meter storage. Beyond incentive programs, the ability for storage to augment other distributed energy resources (DER), including solar PV and demand response, will add considerable value to this asset and help accelerate market growth. Guidehouse Insights’ new report, Market Data: Mixed-Asset Virtual Power Plant Models, finds that combinations of DER can participate in distribution and wholesale electricity markets, or mixed-asset virtual power plants (VPPs). These combinations will likely drive growth of DER across customer segments. 

A VPP is a system that relies on software and smart grid technologies to remotely and automatically dispatch DER flexibility services to a distribution or wholesale market. VPPs do this via an aggregation and optimization platform. Such platforms help to achieve the greatest possible profits for DER owners while maintaining a proper balance of the electricity grid. They best fulfill this goal by integrating assets that serve a variety of grid services. Given the synergistic benefits of VPPs, Guidehouse Insights finds that the mixed-asset VPP capacity likely comprises 51% of 2020 capacity market share. Mixed-asset VPP capacity is anticipated to scale up to 83% of VPP capacity share by 2029.

Partnerships Drive the Market

Falling DER costs drive the growth of mixed-asset VPP models. Recognizing this opportunity, legacy energy players have strategically engaged in partnering with, investing in, and acquiring startups for a few years. Startups deliver innovative technology while legacy energy companies simultaneously evolve to stay relevant during the Energy Cloud transformation. This market dynamic has led to a rapidly evolving vendor landscape, where platform providers and battery manufacturers are sought after by deep-pocketed energy companies. Examples include the following:

• 2017: Minority investment in VPP platform provider Next Kraftwerke by Eneco
• 2019: Acquisition of battery solutions and VPP software provider sonnen by Royal Dutch Shell
• 2019: Acquisition of battery producer Saft by Total

Investments and acquisitions allow companies with distinct core competencies to bring end-to-end, combined solutions to prospective clients. They will no longer need a time-intensive buildout of new platforms and services.

Falling Cost Does Not Equate to Low Cost …Yet

Despite the falling costs of energy storage and other DER, advanced software systems such as mixed-asset VPP models require extensive investment and integration. In 2020, the large number of integration points across a variety of DER types and vendors make mixed-asset VPPs the most expensive per megawatt of any of Guidehouse Insights’ three VPP classifications. Guidehouse Insights also tracks demand response-based and supply-side VPPs.

Per-substation, per-contracted megawatts, or per-device pricing models can make deployment of these projects a challenge, particularly for grid operators with long investment cycles. However, as DER penetration increases and effects on the grid become more severe, solution investments will prove necessary. Given that VPPs optimize dispatch of DER for sale into energy markets, the revenue earned from such systems will outpace implementation spending. This is particularly true as more markets open to DER capacity.

The mixed-asset VPP market will likely reach more than 36.9 GW by 2029 globally. While economics are a driver, regulation like the Federal Energy Regulatory Commission’s Order 841 and Europe’s COVID-19 stimulus package and Green Deal will also bolster mixed-asset VPP model growth.