Virtual Power Plant

What is a virtual power plant?

Global energy markets are facing major changes. We move from a model with centralized electricity generation in power plants operated by large utilities, towards a mix of decentralized and often renewable energy production in small facilities. Those small scale plants are typically owned by small companies or households, who become ‘prosumers’: consumer and producer at the same time.

We experience a true paradigm shift. The further penetration of renewable energy generation challenges the conventional way of operating our electricity system. Business models have to be reinvented and our grids redesigned. The variability of renewable sources like sun and wind do not necessarily endanger the system balance as long as they are dealt with appropriately. And that’s exactly where a virtual power plant (VPP) comes in.

A virtual power plant is a pool of several small- and medium scale installations, either consuming or producing electricity. Individual small plants can in general not offer services as reserve powers or offer their flexibility on the power exchanges as their production or consumption profile varies strongly, they have insufficient availability due to unforeseen outages or they simply do not meet the minimum bid size of the markets. In addition, there are strict requirements regarding the availability and reliability of the flexibility offered in the market. To overcome these barriers, the solution is simple: work together! The combination of several types of flexible production and consumption units, controlled by a central intelligent system, is the core idea behind a virtual power plant. This way a VPP can deliver the same service and trade on the same markets as large central power plants or industrial consumers.

To use the flexible demand and generation optimally, and to equal or even outperform reliability of conventional plants, smart algorithms and forecasting methods have to be developed. The VPP uses weather forecasts to predict thermal and electric demand on the one hand, and production by renewable source like wind or sun on the other hand. The algorithms decide which units to switch on or off or to change the operating point.

The flexibility can be valorized on different markets, like the long- and short term energy OTC and auction markets, as well as the reserve and the imbalance markets. As prices on these markets fluctuate the ideal VPP gives the single installation access to all relevant market in the energy system. A flexible industry process can for instance be offered as a reserve power product in tertiary reserve. But, in some cases it might be more interesting to sell the flexibility on the intraday market, especially when it shows lower availability.

Advantages of a virtual power plant

It goes without saying that the aggregation of distributed units by a central control system offers plenty of advantages. To name the most important ones:

System benefits Benefits for the asset owners of the units
More reserve power offers with high availability (lower bulk risk: service does not rely on the availability of single large units.) Economies of scale: administration and hardware costs to offer flexibility in the market are high for a single unit
More offers on the reserve and short term power markets reducing the overall price level on both. Access to new markets that are not accessible for single installations. New revenue streams for the owner of the installation, without major changes to the unit
Opening the path for a large share of renewable energy generation in our electricity system.
Increased efficiency of grid operation by TSOs and DSOs, possibly longer lifetime of the assets.


The further introduction of VPPs faces some challenges as well, among which:

  • Our current electricity grid is designed with central generation in mind. It does its job well when it has to bring the power from production side to consumption side. Now that energy flows become bidirectional due to local generation, the grid faces operational modes it is not designed for. Although a VPP takes away part of the stress on the grid, but grid operators still need to invest in infrastructure as well to make the transition possible. Underinvestment in grid infrastructure hampers the full potential of VPPs.

  • Communication between the different units and the control system needs to happen flawless and secure. New protocols and standards are under development, interoperability between the standards and devices from different manufacturers is a challenge.