How VPPs Reduce Both Costs and Emission in Meeting Peak Demands

New York and Texas Offer Opportunities to Replace Fossil Fuel Peaker Plants


By Peter Asmus

The emergence of virtual power plants (VPPs) as bona fide replacements for fossil fuel peaker plants has been discussed conceptually, but is there data to support this opportunity? Thanks to data and modeling provided by Guidehouse Insights, the apparent answer “yes” in two of the largest states often viewed as being on opposite ends of the political spectrum.

Traditional peaking plants have been relied upon for decades to prop up regional power systems during spikes in demand throughout the U.S. What are the alternatives? Demand response (DR) first and foremost; targeted reductions in demand can have the same impact on the power grid as increasing supply and typically at lower cost (and with lower emissions). But with the right digital platform, a much broader set of distributed energy resources (DER) can be aggregated into VPPs, including rooftop solar photovoltaics, stationary batteries, and the loads and batteries embedded in electric vehicles and supporting infrastructure.

…with the right digital platform, a much broader set of distributed energy resources (DER) can be aggregated into VPPs…

According to a recent white paper published by Guidehouse Insights, there is enough forecasted DER capacity to replace existing gas peakers in New York and Texas by 2024 and 2030, respectively. Of course, this simplistic math does not account for the timing of resources and unique generation or load profiles of the DER assets being rolled in VPPs. Yet this math does show the potential for cleaner DER assets to be aggregated in creative ways via the use of artificial intelligence (AI) to provide much greater value than expensive and polluting peaker plants. The greater diversity of DER assets incorporated into VPPs, the more resilient and cost competitive these VPPs become over time.

In both New York and Texas. combustion turbines burning natural gas or oil meet most of the peak power demands. Deploying VPPs that aggregate clean DER assets during these peak hours would minimize carbon emissions, but how would these two resources compare economically?


What’s the Bottom Line?

The industry standard for comparing the relative costs of different power generation is to use Levelized Cost of Energy (LCOE), in $/kWh, which compares the average cost of a unit of energy, accounting for both fixed and variable costs. Gas-fired simple cycle turbines are considered among the highest cost generation options. This high cost can be largely attributed to their low-capacity factor, which means that the plant must recoup its large capital costs over a relatively small amount of energy sold each year. When considering DER flexibility resources that comprise a VPP, the price is often represented as purely a capacity price, in $/kW, without any variable cost. This makes it challenging to compare VPP costs to these conventional generation options. DER resources are typically dispatched relatively few times per year, too and so energy payments would often be negligible alongside the capacity payments.

VPPs deployed by AutoGrid are tailored to the specific grid profiles, regional customer preferences, and local economic conditions of the targeted utility, grid operator service, or balancing authority territory. A VPP is typically valued on a capacity basis ($/kW) with essentially zero variable cost (though total dispatch hours are capped), while conventional generation is typically evaluated based on an energy basis ($/kWh), to account for the more significant variable cost associated with producing each kWh. Given these dynamics, one can think about the all-in implied price per kW of capacity getting more expensive the more that a gas peaker is operated, but which stays consistent for a VPP. Currently VPPs are typically deployed 200-500 hours per year.

As VPPs become mainstream, their dispatch frequency and duration will continue to increase with minimal additional cost to the operator and/or utility.

As VPPs become mainstream, their dispatch frequency and duration will continue to increase with minimal additional cost to the operator and/or utility. Keep in mind this analysis does not consider factors such as transmission and distribution losses (and associated costs), or other localized benefits of VPP, such as resiliency.

Chart 3 shows the comparison in costs. Note that in most cases, the VPP is lower cost today, with the exceptions being a few peaker plants in Texas.

VPP pricing can range from $100-$150 /kW-yr, depending on the region, the required grid services, and the specific VPP asset mix. In most cases, peak capacity reduction can be delivered for less than $130/kW/yr, and the majority of this VPP cost (as much as 70%) goes directly to the local community in the form of customer incentives.

The bottom line on VPPs is this: They are already at pricing parity with simple cycle gas peaker plants due to their low-capacity factors, and the prices of these two alternatives to meeting demand peaks are trending in opposite directions. As VPPs are de-risked by wider deployments and accommodating market structures, prices are expected to decline.

Over time, the technology components of VPPs will decrease in price as well as they gain scale (such as batteries and EVs), while gas peaker plants will face increasing financial and regulatory risk…

Over time, the technology components of VPPs will decrease in price as well as they gain scale (such as batteries and EVs), while gas peaker plants will face increasing financial and regulatory risk, largely due to fuel prices and carbon emissions. VPPs therefore represent the cheaper and cleaner alternative to meeting demand peaks.

Peter Asmus is now Director of Strategic Marketing for AutoGrid. Previously, he was Research Director for Guidehouse Insights, a management consulting firm. There, he launched the microgrid and VPP research services over a decade ago, forecasting future trends and ranking leading solution providers. He has 34 years of experience in covering and analyzing and writing about emerging energy trends.

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