By Betsy Longendorfer • Building Electrification Committee
Across the country, consumers have seen a dramatic rise in electricity prices driven by increased power demand, mostly from data centers. Data centers increase energy use but more importantly, they increase peak demand on very hot days. One solution being developed by states, including the New Jersey Board of Public Utilities (BPU), is allowing customers or aggregated groups of customers to flexibly manage their energy usage and even sell power back to the grid. This is called a “virtual power plant” (VPP).
When she took office this year, Gov. Mikie Sherrill ordered the BPU to develop rules for power purchase between utilities and third-party aggregators of customers by July. Senate Bill S3399 complements this groundwork by requiring utilities to create a VPP program to reduce peak demand.
VPPs and Why We Need Them
For New Jersey, electricity costs are determined by periodic auctions, where suppliers offer energy at different prices and regional transmission organizations (PJM Interconnection for NJ customers) purchase energy from cheapest to most expensive until demand is met.
If energy use can be lowered during peak demand—when costs are highest—the most expensive energy does not need to be purchased. Peak usage usually occurs for only a few hours in the mid-afternoon to early evening. VPPs can reduce peak costs by supplying energy during these periods and lowering demand, as more customers generate their own power. They can also reduce the need for costly upgrades to power lines and substations.
Managing energy supply and demand is increasingly necessary. More than 140 million people in 40 states faced calls to conserve power in 2022. VPPs have been proven to work—distributed solar from homes, schools, and businesses reduced peak load in New England by almost 1.5 GW, the equivalent of a large power plant.
How Do VPPs Work?
For many years, utilities offered programs that gave participants reduced rates in exchange for allowing utilities to control their equipment to reduce energy demand. Now, smarter technologies have enabled two-way communication between customers and utilities.
There has also been growth in customers generating their own power with solar and batteries. They may have EVs or home batteries whose power can be shared with the grid, or whose charging can be delayed until off-peak hours. These customers act as distributed power sources that the grid can use when needed. When coordinated for use as a single resource, these become a VPP.
In the past, energy management programs focused mainly on large users reducing demand or centralized plants generating more energy. Today, homeowners, businesses, and institutions can reduce load, use energy flexibly, and supply power.
VPPs offer advantages for both utilities and customers. Customers can reduce costs and potentially earn revenue by selling to the grid. Utilities can rely more on distributed resources and avoid building centralized infrastructure, which often takes years to permit and construct. Distributed energy sources can be deployed more quickly.
Legislation/Policies for VPPs
As of last year, 34 states had programs using smart devices, batteries, EV chargers, and energy management systems to enable VPPs. Several states, including New Jersey and Pennsylvania, are considering legislation to expand them.
Federal Energy Regulatory Commission Order 2222 (September 17, 2020) created a foundation for this by requiring small energy resources to participate in wholesale markets through aggregation. Rising energy prices have increased the urgency of implementation.
The Business of Aggregation
Participants in distributed power do not need to be from the same community. The residential solar and battery company Sunrun is actively pursuing aggregation, as a company spokesman, Thad Culley, recently told the Building Electrification Committee of the New Jersey Chapter of the Sierra Club. Tesla is also working in this area.
VPPs being developed by companies like Sunrun and Tesla can supply power reliably while allowing customers to opt out when needed. Culley noted that customers are more likely to participate when they are paid for supplying energy at times of real grid need.
There have been notable successes. In California, more than 70,000 customers generated enough extra power (670 MW) to match a centralized power plant. Aggregators also helped prevent rolling blackouts in Puerto Rico.
Lastly
VPPs and demand reduction programs can reduce strain on the grid and help control rising costs. They provide both private and public benefits, can be built quickly, and offer flexibility. Participate in a VPP if you are able and become an energy entrepreneur yourself.
Resources
Energy Auctions: https://shorturl.at/kLumx
Individual States: https://shorturl.at/uH0B5