Doubling the capacity of the U.S. electric grid is not just an energy challenge, but also an economic and national security imperative. The rapid rise of data centers to support cloud services and generative AI, combined with a historic-level resurgence of domestic manufacturing, is creating an unprecedented demand for electricity in the U.S.
Echoing the electric power grid’s role in periods of rapid industrial growth in the past, unlocking the economic potential of onshoring manufacturing and generative AI is largely a function of how much electric power infrastructure we can build, and how fast we can build it.
Considering electric power’s historic role, utilities need new ways to deploy capacity at a large enough scale and at a fast enough pace to support a growing economy. However, centralized generation is not the only tool.
Virtual power plants (VPPs), which bring together distributed energy resources (DERs) such as solar panels, batteries and electric vehicles to generate, store and manage electricity, can play an essential role in meeting demand quickly while also maintaining affordability. But to do so, utilities should bring VPPs into the heart of their planning and rapidly take it to grid scale—a model for which did not exist until now.
Limitations of the traditional VPP approach
The current model of VPPs, led by third-party aggregators, heavily relies on customer investment and opt-in, and limits the speed and scale at which DERs can be deployed. Several utilities and energy companies have launched VPP pilot programs, but to date, it has felt like VPPs are stuck in pilot mode, with slow rates of customer adoption and deployment levels that are too small to impact grid planning at the system level.
At the same time, the Department of Energy estimates that the U.S. will need to add 200 GW of flexible capacity by 2030 to meet peak demand growth. VPPs will only be able to step up to that task if the pace and scale of deployment is significantly accelerated.
A new utility-led and funded model to scale VPPs
To successfully scale up VPPs in the U.S., utilities will need to take the lead and meet this moment in energy and economic history. The regulated utility model was created to support economic development and industrial buildout.
Now, if utilities pick up the tool of VPPs and deliver grid-scale DER deployment where they’re needed most, they can meet customer demand and support economic development on a one- to five-year timescale. Centralized generation often can’t achieve this due to construction timelines, and permitting, interconnection and supply-chain constraints. Simply put, given those constraints, it’s often faster to build a lot of small things than it is to build a few very big things. If you build enough small systems, they add up to grid scale resources.
Distributed capacity procurement (DCP) is a new model for utility-led and funded VPPs. Through DCPs, utilities plan for, site, dispatch and deploy DERs as capacity resources at scale to increase value to the grid and ratepayers. Innovative utilities like Xcel Energy in Minnesota are already picking up the DCP toolset, with proposals to install hundreds of megawatts of networked solar and storage over three years.
Benefits to economic development, local communities and the grid
A utility-led VPP model would have far-reaching benefits, but I’ll focus in on some highlights. Utility-led DER programs can deploy assets at a much larger scale and faster pace compared to the piecemeal, customer-driven adoption of aggregator-led VPPs. Utility-led DER programs have a higher rate of customer acceptance to host utility-owned, utility-paid-for assets compared to asking customers to buy their own assets and participate in grid programs. Customers get a more cohesive and positive experience without being pitched by multiple companies to sign up for programs.
A utility-led VPP model also enables utilities to decide where DERs should be placed, which means they can enhance resiliency and flexibility by targeting constrained areas of the grid. Putting DERs where the grid needs them most can avoid costly distribution upgrades and even reduce the need for new transmission into cities. DERs’ ability to offset these significant infrastructure investments, and improve overall system utilization and efficiency translates to lower costs for consumers.
According to a Brattle report, VPPs also have net costs that are 40% to 60% lower than highly polluting gas-peaker plants. By building capacity faster and at scale where the grid needs it most, utilities can support demand growth and help capture economic development benefits in their territories, all at a lower cost to ratepayers compared to growing the grid without a utility-led VPP strategy.
At the community level, a utility-led VPP model promotes energy equity and democratize access to clean energy resources. By removing the first-cost barrier to DER adoption, this approach enables participation from a more diverse range of consumers, helping to level the playing field in the energy sector compared to models that require credit checks, financing agreements or upfront cash.
A DCP model does not put the burden of asset investment and upkeep onto residents and businesses when it expands access to distributed energy technologies and deploys them within underserved communities. This utility-led system allows households and small businesses that might otherwise be unable to afford renewable installations to benefit from DERs and the energy transition.
Some DCP models can offer customers risk-free annuities with a monthly payment that compensates them for having the utility-owned asset on their premises. This approach creates value for the host, their neighbors through increased reliability, and the grid through a lower cost, faster way to achieve infrastructure deployment and support demand growth.
The road ahead
In many states, DCP allows for a tenfold increase in the annual deployment rate of installed capacity compared to aggregator-led VPPs. DCPs unlock benefits for affordability, reliability, and support the core utility charter of enabling economic growth and shared prosperity for their communities. Now is the time for utilities across the U.S. to embrace distributed energy as a route to maximizing efficiency, deferring costly grid upgrades, and quickly building new capacity at scale.
In a moment of historic economic growth and technological change, our electric power infrastructure will either transform into an economic accelerator or into a limitation on economic growth. To achieve the former, many tools and approaches will need to be deployed, and at scale. Models like the DCP can contribute to a world where utilities support economic development and create a sustainable, resilient and affordable future.
Pier LaFarge, is co-founder and CEO of Sparkfund, an energy transition partner providing program management, project implementation and financing services for utilities and building owners.
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