Virtual power plants: a story of market rules and smartgrids
by Eric Marx, March 14, 2019
Access to the grid-balancing market is competitive and carefully regulated. Green electricity from distributed and behind-the-meter renewable assets is already being traded on wholesale and balancing markets. The assets come in all shapes and sizes: roof-top solar, farmyard biofuel installations, EV and home battery systems, community energy projects, wind installations and heat pumps to name but a few. When they are pooled, by aggregators, they can be presented as one, utility-scale, virtual power plant (VPP). Green competition for traditional power plants you might say. VPPs success will depend on consistent rules, the roll-out of smart controls – at both distribution and transmission levels – and price competitiveness. According to Eric Marx they are being squeezed on all fronts…
As the European power system transforms to rapidly integrate more renewables, regulators can empower VPPs to develop flexibility platforms that enable producer/consumers (“prosumers”) to play a more central role. An EU-level agreement passed in December combined with the increased penetration of renewables should help in this regard.
Nonetheless, VPPs are busy merging or expanding internationally and across Europe whilst they are being held back in some regions by a patchwork of inconsistent regulatory policies, lack of digital infrastructure and fierce competition.
Next Kraftwerke, a VPP based in Cologne, for example, recently successfully licensed its virtual power plant software to a solar energy company in South Korea. Furthermore, following the addition of storage to its portfolio last year, it is now offering enhanced frequency control to the Belgian grid operator. But on its home turf the story is quite different. The company has seen its business model upended since the cost of primary control reserve prices went plummeting.
Next Kraftwerke put this down to the fact that, under current rules, coal-fired power stations can also bid for grid reserve. Unwelcome competition for Next Kraftwerke’s CEO, Jochen Schwill, who noted that allowing them into “the balancing market contributes to their preservation [and] is absolutely not in the spirit of the energy transition…”. But there are other factors that may come to their help.
Analysts expect better times ahead for companies like Next Kraftwerke on their own soil, when old coal-fired units and nuclear power stations are taken off line and whenever smart meters are rolled out and market access rules clarified – although they will probably still have to contend with relatively cheap, gas-fired power at least. In the meantime they are faring better in regions and markets where conditions are more favourable.
New Energy Companies and Virtual Power Plants (VPPs) – explainer
The electricity grid needs to be kept in balance. Just like a water system where the network needs to be maintained at a constant workable pressure, the electricity grid needs a certain voltage to be maintained throughout.
New energy companies, including VPPs, that use software controls to provide energy on short notice to the electricity system come in many shapes and sizes. There are demand-response (DR) aggregators which manage flexibility of industrial energy users and those on the Virtual Power Plant (VPP) side which typically control generation units. The business model consists primarily of pooling and marketing generation facilities, flexible consumers and storage systems.
By sending signals to participating members, a VPP can save them money by lowering their energy costs while they also get paid by the grid operator for providing energy on short notice to the electricity system. Direct VPP operators – sometimes called “direct marketers” – scale small plants to a tradeable volume.
Utility companies and grid operators are also considered VPP operators. The distinction is that they manage their own generation units – be they biomass and wind to solar and various cogeneration facilities – for sale into grid-balancing and spot (electricity as a commodity) markets.
The Kombikraftwerk experiments carried out in 2008 showed that renewables could provide an adequate supply of constant energy and ensure a stable voltage frequency – in real-time and even when compensating for changes in output from geographically-distributed generators.
Yet not until 2012 did theory translate into full-scale market reality. That’s when Germany amended its Renewable Energy Law (EEG) to allow the direct sale of green energy by producers themselves. And in the last three years EU countries began specifying aggregator frameworks that gave legal certainty about the relationships and responsibilities among aggregators, Balancing Responsible Parties (BRPs) and suppliers, and the consumer.
Ultimately, VPPs are simply another type of platform business (like Über or Airbnb) bringing buyers and sellers together in an electronic marketplace.
Regulatory obstacles and regional inconsistencies
The introduction of variable “dynamic” pricing could help extend the business model to the lower-voltage distribution network – where smart consumer devices and distributed renewables, like rooftop solar panels and electric vehicles, reside.
But the “starting point” right now is on the industrial side, said Patrick Adigbli, a vice president for Regulatory Affairs at REstore, a demand side management firm which sells flexible energy from large production processes to Transmission System Operators (TSOs). In most countries, aggregators are restricted to the higher voltage levels – to the transmission, rather than distribution networks – because their technical infrastructure allows a close monitoring of their use.
But even there, where several studies indicate there’s significant peak demand that could be covered with demand response (upwards of 15 GW in Germany alone) it comes mainly from the industrial sector which, according to Adigbli, has yet to be allowed in to the German market.
In Europe, France is probably the best country when it comes to demand-response policy. It currently has the highest number of independent aggregators, and yet it doesn’t allow independent parties to bid into the market through pooling of different assets.
In fact, the country risks a “stalemate” if no further steps are taken to open up its balancing market, according to a new report issued by smartEn, a trade association promoting digital energy efficiency solutions.
Switzerland is one of Europe’s leading countries, write the authors of the smartEn Map, which analyses the opening of balancing markets in 16 EU countries. Switzerland procures bids in all three power reserve markets, allows aggregators to pool assets, and is technologically agnostic in a way that does not de facto exclude new participants.
The biggest flaw, write report authors, tends to be in the area of transparency, owing to procurement methods and capacity payments which place reserves outside the market, and thereby create a barrier to entry for new participants.
“What’s problematic – and what the report points to – is the fact that tech rules still differ among member states,” says Adigbli. “Are all assets allowed to participate in a given market? Can you combine different, smaller assets to build larger ones which are able to satisfy all technological criteria? How are prices determined and is it tech-neutral and transparent?…None of this is harmonised on the EU scale” he added.
But that may soon happen, thanks to new European Network Codes for cross-border electricity-balancing, and owing to the Clean Energy for all European Package finalised in December, an EU-level agreement which sets a framework for independent aggregators and dynamic price contracts for consumers.
Both Italy and Spain are said to be aligning themselves with the new network codes. Compliance is foreseen by 2021, alongside several initiatives for standardised European products which have already helped prod countries like Belgium, Germany and Estonia to further lowering entry barriers.
As for the Clean Energy Package, which was agreed to in December after two years negotiation, analysts say it could very well enable aggregators to enter the electricity market en masse.
Incumbent suppliers can no longer block aggregators. Doing away with prior consent was “key,” said Michael Villa, a senior policy adviser at smartEn.
Another important rule concerns bidding size. The threshold for participation in day-ahead and intraday markets is now 500kW or less.
Last, is the provision on dynamic price contracts allowing consumers to react directly to price signals based on information provided by smart meters. These kinds of flexible contracts are already widely offered in Spain and Scandinavia, but in actuality, most European countries are still far from implementing real-time price signals. Germany, for example, hasn’t yet started its smart meter rollout.
Still, the very idea that a customer can choose an independent provider is a fundamental starting point. “It re-orientates the system towards customer choice”, said Villa “and for that, you need to open the market to different providers and allow competition”.
Oil and gas giant Shell certainly thinks a customer-focused energy system is coming. In February it announced plans to buy German home battery storage company sonnen, which claims to have built, with rooftop solar customers, the world’s largest platform for power-sharing. Could a platform for auctioning electricity flexibility services on congested distribution networks – say, with heavy concentrations of electric vehicles and battery-connected solar panels – be far behind? It’s the kind of bet that made platform operators Über and Airbnb hugely successful once they established massive scale. Watch this space…