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by Verena Dubois, Aleksandra Radwanska / 22 May 2020
Value of virtual power plants to society expained.

The Top 10 Questions When Planning a Virtual Power Plant

Anyone who wants to aggregate decentralized plants in a Virtual Power Plant is confronted with a whole range of questions during the planning phase: Which business cases are feasible in the regulatory context of my country – and which ones make economic sense in this market environment? How can I connect the technical units in my Virtual Power Plant and which solutions meet the technical requirements of the grid operator? We compiled the top 10 questions each aggregator-to-be need to find an answer for.

1. What is the goal you wish to achieve with the Virtual Power Plant?

A Virtual Power Plant is a tool helping its operator to realize various use cases, which differ significantly in the complexity and can be combined into different business models, according to local market and regulatory conditions. The basic application is the aggregation of distributed generation plants via centralized control system. This enables utilities and other operators of decentralized energy resources to monitor the feed-in values of the plants in real time and - by processing further data, for example weather forecasts – they can forecast the generation of decentralized energy resources more precisely. These forecasts help the aggregators to accurately realise their trading strategies on power exchanges. In case of retailers or vertically integrated utilities, there is also another benefit: The ability to monitor and forecast the behaviour of decentralized energy resources gives valuable insights on possible bottlenecks in the grid. 
In addition to monitoring, the operator of the Virtual Power Plant can also control and steer networked plants, which opens the door to a whole range of interesting applications. These can be dispatching groups of plants to provide control energy, changing generation of steerable technical units to ensure they generate only in lucrative times of the day or curtailing wind power in the event of an excess supply of electricity and negative market prices. The choice of most feasible business case cannot be determined in isolation from other factors, such as the energy sources to be networked.

2. Who will participate in the Virtual Power Plant (power plants, technologies, energy sources)?

The portfolio of the potential Virtual Power Plant operator plays a central role in determining the business case. Here both qualitative and the quantitative factors are important. Luckily, current technology does not limit the operator in scaling their portfolio of networked power plants. For example, our VPP-as-a-Service solution NEMOCS can easily aggregate thousands of plants. On the other hand, the choice of the type of energy source included into the Virtual Power Plant is crucial and influences the choice of possible use case delivered by the Virtual Power Plant. If the aggregator wants to network volatile plants such as wind and solar energy, the focus probably lies on monitoring. Even though the feed-in can be monitored and, with the help of other tools, forecasted, participating in flexibility markets is rather impossible due to the plant characteristics. Therefore, in case of these technologies it is not necessary to equip the systems with remote control units unless we are incentivised by the market or regulation to curtail generation from these technical units.
On the other hand, those who network flexible plants such as biogas units, hydro power plants or CHP plants via a Virtual Power Plant have several options to sell their flexibility profitably. Firstly, they could consider short-term power exchanges and operate flexible plants according to varying electricity prices, so that, using the same resource or fuel, they could generate higher revenues and at the same time act in a systemically beneficial manner. Higher prices automatically mean higher electricity demand - for example, because wind or solar plants fed in less energy into the grid than expected. The mechanism described above also works for flexible electricity consumers from industry and commerce (e.g. in grinding and melting processes, feed pumps, refrigeration, heating and drying processes, data centres, but also power-to-x processes), so that load management and demand-response concepts can also be implemented via the Virtual Power Plant. Furthermore, emergency power generators and storage technologies are well-suited players in the Virtual Power Plant. However, due to higher marginal costs and their speed, they would rather play their trump cards primarily on the balancing energy markets.

3. What market conditions are there in your country?

The market structure of the respective country or region provides the framework for determining which business cases are viable at all. In many countries, the electricity market is still not liberalized, what means that all activities in electricity generation, transmission and supply lays in the hands of one company. Therefore, no independent power producer or aggregation services can be created. Some markets, although liberalized, are managed by vertically integrated utilities that control electricity generation, grid operation, and supply, but allow activity of independent power producers and are interested in satisfying their end customers. They are interested in harnessing flexibility from different decentralized energy resources to avoid bottlenecks in the grid infrastructure they manage as well as to have precise information and control over electricity consumption and generation of their residential customers. Flexibility on the side of the consumer - for example in the form of demand response or peak shaving - is often a sought-after commodity. Especially when grids are older and a warm climate prevails, postponing or suspending consumption processes in the event of power shortages can effectively relieve the grid. In this case, transmission or distribution network operators would be potential buyers of the flexibility that a Virtual Power Plant can provide and manage.
And there are further perspectives: After all, renewable energies are also gaining ground in countries where liberalized markets do not yet exist - and the need to monitor the production of these systems is therefore growing. As the expansion of renewable energies continues, new ideas for their efficient use automatically emerge - and with them the need to bundle them in a Virtual Power Plant. Unfortunately, the existence of potential business cases does not automatically mean that the regulatory framework allows them. Checking this is vital when implementing a VPP solution.
In liberalized and unbundled energy systems, the market design is usually already highly differentiated. A good example is our home market in Germany, where there is not only a state subsidy system for renewables, but also short-term power exchanges and a balancing energy market. In this market design, all functions of a VPP solution - aggregation, monitoring and control - can be fully exploited, thus generating financial benefits both for the plant operator and the operator of the Virtual Power Plant.

4. Is there a win-win situation for the plant operator as well as the aggregator?

If the VPP operator wants to aggregate not only own power plants, but also units owned by third parties, he has to generate enough revenue for all involved actors to benefit. In Germany, for example, owners of renewable power plants receive a bonus if they integrate their plants into the market, usually through an aggregator or any other representative (in Germany called direct marketer). Their revenues can increase even further if their direct marketer is able to sell their flexibility in other markets, for example more lucrative market for balancing services. For each delivery of control energy the grid operator rewards the VPP operator who shares the profit with the owner or the technical units. As a result, the VPP operator and the owners of assets connected to VPP capitalize on supporting energy transition by protecting the grid against the fluctuations associated with volatile energy sources. 
Looking at the costs, the VPP operator has expenses for market access and trading fees, personnel, marketing expenses, and short- and long-term price risks, to name a few. To cover these, a profit-sharing model between the operator and participants of the Virtual Power Plant is an option – another one would be a fixed marketing fee that comes with a more easily calculable income. The amount of this fee depends on the profitability of the system: In addition to plant size and type (flexible/volatile), the plant location is also relevant in the case of power exchange marketing. If, for example, a wind farm is located at a site where there are other numerous wind farms, it will generate less revenue on the markets. This is because its feed-in correlates in this case with the total wind feed-in of the market area - which leads to lower prices on the energy exchange.

5. How are the plants connected to the control system of the Virtual Power Plant?

It is worthwhile to first look at the plants to be networked. In some cases, these plants may already have protocol interfaces that enable a connection to the control system. Our VPP solution NEMOCS supports standard interfaces such as OPCDA, Modbus, Profibus, and IEC 104 and is therefore open to many different technologies. The data exchange with other systems on the side of the VPP operator - such as SAP databases, trading platforms or accounting systems - takes place via an API. 
In most cases known to us, this setup is sufficient to establish a remote control for basic use cases, for example to align the networked systems to the price developments on the power exchanges. If the plant does not yet have its own plant control system to connect via an interface to the VPP control system, or if the provision of system services to the network operator is part of the use case, a separate remote terminal unit (RTU) must be installed. For this purpose, we use the Next Box, with which we establish a bidirectional, digital interface connection of the plant to our Virtual Power Plant. It enables us to control the production of the generation plants - or consumption processes on the part of larger electricity consumers - centrally, precisely and to the highest safety standards via M2M communication.

6. How does the country's grid code work?

Each country has specific grid requirements or guidelines for the operation of the grid (grid codes), which generation plants must meet (and provide a proof for it) in order to gain access to the grid. These include, for example, the required voltage that is to be maintained, mitigation plan in case a plant fails to perform, or the communication interfaces through which the grid operator can access the unit. In addition, the grid code defines the requirements necessary to provide system services. Plants in Germany, for example, must undergo a test procedure, known as prequalification, in order participate in the control energy market.

7. Which IT security guidelines apply?

Energy supply is part of a country's critical infrastructure - in the event of disruptions, the security of supply may be at risk. Therefore, most countries have strict regulations for companies operating in these critical infrastructures. In the case of digital solutions, IT security in particular comes into focus. Because if one central control system networks and controls a large number of decentralized plants, it is crucial that this structure is as safe as possible from cyber-attacks. Accordingly, before a Virtual Power Plant goes online, the required measures and certifications need checking. In Germany, TÜV Rheinland checks that the VPP meets the required standards. Our Virtual Power Plant and the VPP solution NEMOCS are certified according to ISO/IEC 27001 and ISO/IEC TR 27019.

8. How good is the mobile coverage of the country?

This question can be pivotal to the success of a VPP project: when using a separate remote control unit such as the Next Box, communication with the networked systems runs via a GPRS connection established with a SIM card. For example, a sufficiently high connection quality is required for transmitting switching commands to the systems. In case of applying software interfaces enabling connection to the decentralised energy resources, additionally quality of internet coverage plays a crucial role.

9. Which technological platform will the VPP solution be implemented on?

The answer to this depends on your requirements. On the one hand, you can decide on a self-hosted VPP software solution. If you want to keep the costs and personnel expenditure smaller, you can use a VPP Software-as-a-Service solution. Herewith you receive support in the planning and implementation phase and benefit from the experience and services of the VPP operator. A further advantage: With a 24-hour operational readiness, you can be sure that the systems on which your Virtual Power Plant is running is monitored, maintained and continuously optimized.

10. How to enter the VPP business?

In developed markets the paths are usually mapped out - for example with regard to tendering mechanisms, subsidies, and procedures allowing market access. But, establishing a Virtual Power Plant in new markets that do not foresee them requires pioneering work. Pilot projects of the network operators are often the door into this business. Bilateral agreements between VPP operators and larger electricity consumers are also good market niches to start with.
What may sound challenging at first, however, is also the opportunity to open up new markets and to pursue ideas for the electricity market of the future. When Next Kraftwerke started operation in 2009, in Germany no one even has heard of Virtual Power Plants. Renewables were neither traded on power exchanges by private sector players nor were they able to provide system services. Today, with nearly 9,000 plants in our Next Pool, we show what's possible - and what will be possible in the future in many energy markets around the world.


Note: Would you like to know more about our VPP-as-a-Service solution NEMOCS? Here you can find further information: More on NEMOCS

Verena Dubois is marketing manager at Next Kraftwerke.

Verena Dubois

Deputy Head of Communications and Market Research

Aleksandra Radwanska from business development at Next Kraftwerke

Aleksandra Radwanska

International Business Development Manager