Dive Brief:
- Utilities that participate in virtual power plant networks could see positive impacts on their financial stability and business credit ratings while enhancing grid efficiency and more effectively integrating greater volumes of renewable energy, Morningstar DBRS said in a Wednesday report.
- Utilities can integrate VPPs into their existing systems by partnering with VPP operators that have experience managing distributed energy resources, operating VPPs internally through partnerships with third-party IT vendors or creating utility-owned VPPs that leverage customer- or utility-owned energy assets, the report said.
- Although real-world examples of each pathway exist today, “we believe it is premature to consider any significant credit impact on the utility sector at this early stage since the current challenges associated with VPPs pose obstacles to widespread adoption,” Jasper Shi, senior analyst for corporate ratings, energy and natural resources at Morningstar DBRS, said in a statement.
Dive Insight:
Morningstar DBRS sees a “positive trend in the adoption and expansion of VPPs” in the short- to medium-term. Pegging the total global VPP market at about $4.1 billion in 2023, Morningstar cited a Grand View Research projection that its value would grow by 22% annually through 2030.
Broader VPP adoption “could help the utility industry’s energy transformation by enhancing operational efficiency, stabilizing energy supply and demand and reducing the environmental footprint,” while reducing energy price volatility and unscheduled maintenance, Morningstar said.
These findings echo the U.S. Department of Energy’s report last year on pathways to commercial liftoff for VPPs, which said a tripling of VPP capacity to 80 GW to 160 GW could avoid about $10 billion annually in grid costs by 2030.
Broader VPP adoption “can be credit positive for utilities because it enables [them] to reduce operational risks with more stable and predictable electricity loads, leading to operating cost savings and improved grid stability,” Morningstar said.
But these benefits are largely theoretical for now due to “regulatory, technical and market participation challenges [necessitating] reforms and standardization for effective integration,” Morningstar cautioned.
Among the VPP adoption barriers Morningstar identified was outdated energy system regulation “designed for traditional, centralized power systems” that “may not account for or facilitate the unique attributes of DERs, such as energy storage or demand response.” Additionally, Morningstar said, regulation varies by region, creating a “complex and uncertain landscape” that disincentivizes VPP investment and could degrade affected utilities’ credit ratings.
“The big question for the coming couple of years is whether state regulators will prioritize these issues,” said Ryan Hledik, a Brattle Group principal specializing in distributed generation and demand response. “In many states, the sheer scale of the VPP opportunity is underestimated, so VPPs are deprioritized relative to other issues.”
The situation could change as state utility commissioners come to terms with VPPs’ potential benefits for the grid and energy consumers. “Once regulatory innovation facilitates greater VPP deployment, system operators will gain experience with VPPs as a reliable resource and more willingly incorporate them into operations,” touching off “a virtuous cycle,” Hledik said.
Technical and operational hurdles could also slow VPP adoption, Morningstar said, noting the “complexity of coordinating multiple energy assets, each with its own operational
characteristics and constraints,” while ensuring adequate network security. Relatedly, the current “lack of standardization across DER technologies” hinders “the plug-and-play integration of new assets,” increasing costs and complexity, Morningstar said.
These technical and usability issues may prove easier to overcome than the regulatory barriers, Hledik said.
“There’s a lot of progress being made in that area already,” Hledik said. “OEMs and software developers understand the importance of interoperability and creating seamless connections between technologies to make all of this work.”
