What Is a Virtual Power Plant?

Virtual power plants have the potential to completely change the way we meet our energy needs. Here's how.


Increasingly, some services provided by power plants are coming from devices in private homes.

Bloomberg/Getty Images

The likely future of power generation can be glimpsed in Germany, where in 2022 energy company Next Kraftwerke "passed the 10,000 megawatt mark of networked capacity" -- enough energy to serve about 5 million US homes. 

Next Kraftwerke didn't accomplish this feat by burning fossil fuels, according to Germany's Federal Ministry for Economic Affairs and Climate Action, but by pooling together the generation capabilities of "over 13,000 independent renewable energy plants -- including wind, photovoltaic, hydropower and bioenergy -- as well as the electricity consumers, prosumers and storage units in the network." Most of the energy, 60%, comes from solar. 

This model is called a virtual power plant, which the German agency explains "uses intelligent controls to aggregate electricity from its members and distribute it flexibly, mimicking a central power plant. It's the energy equivalent of drawing processing power from a network of linked-up individual computers versus a central mainframe computer."

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VPPs have big implications across the world, including the US, because they allow the smallest energy producers -- such as the solar panels and backup batteries in your home and your neighbors' homes (and maybe even an electric vehicle battery) -- to provide power to an energy utility's customers, especially during high usage periods. 

Essentially, VPPs could help prevent brownouts and blackouts, and potentially save everyone money. How? Read on to learn more.

The problem of peak demand

The grid goes down if the supply of electricity doesn't meet its demand. That means the grid needs to ramp up supply to power every HVAC and television when everyone gets home from work at the same time.

To meet these peaks, utilities might have to buy energy at a premium on the open market, according to the nonprofit energy consulting firm Advanced Energy. Utilities might propose building a new power plant, like the over 1,000 so-called peaker plants in operation across the US -- according to the Clean Energy Group, a nonprofit that advocates for phasing out peaker plants as part of a larger push toward greater clean energy adoption. The plants run only intermittently and typically on fossil fuels.

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Peaker plant owners are paid to generate electricity but are also paid to be available to utilities as needed. As a result, electricity from peaker plants is more expensive: A 2020 Peak Coalition report (PDF) found that peak electricity in New York City was 1,300% more expensive than the average cost of electricity in the city. (Peak electricity in New York City is also some of the most expensive in the country, the report says.)

Besides climate warming emissions, fossil fuel peaker plants also pollute the air with nitrogen oxides, sulfur dioxide and particulate matter that can harm the respiratory system and cause asthma. For these reasons and others, some utilities are trying out alternatives to meeting peak demand.


This rendering shows one possible setup of batteries and an electric vehicle charger, both of which could be enrolled in some virtual power plants.

Petmal/Getty Images

What is a VPP and how does it work?

Let's first address the "virtual" in the virtual power plant: "What they do is combine a bunch of different renewable energy sources together -- wind, solar, hydro and usually some battery backup," said Joshua M. Pearce, a materials engineer who researches solar power systems at Western University in London, Ontario. "It doesn't matter where they are geographically, but combined, all together, they offer load-following capabilities. If you're a utility and you need X number of kilowatt-hours in this location at this time, this virtual power plant with a bunch of different things working together can provide you that power." 

The technological advances that make this possible are more efficient inverters, smart meters and economical battery systems.

Pearce gives the example of an apartment building, where electricity use is constant because appliances such as refrigerators are always on. When people come home from work and start turning lights on, it creates a lot more demand for electricity.

"A power plant operator's job is to make sure the electricity is there when people need it," Pearce said. "If the plant is incapable of following the load, when you come in and turn on the lights, they start to flicker or there may be a brownout or blackout. What a virtual power plant does is make sure that when the load increases, the electricity supply increases to match that load." 

The strength of a VPP is that if one source can't meet this load, like if it's cloudy in one area or the wind isn't strong, it can lean on other energy sources within its network.

Virtual power plants already exist

VPPs can take different forms, but simple hypothetical examples might look like this.

  • A utility contracts with a third-party company to meet peak demand throughout the year. That company gets the utility's customers to give it limited control over their smart thermostats. The customers agree that, given 24 hours notice, the company can raise their thermostat setting a few degrees Fahrenheit (or Celsius) during a certain number of that year's hottest days. In return for giving up some control over their thermostat, the customer requires less energy for their air conditioner and gets paid for helping reduce demand.
  • A utility pays customers to give up some control of their home battery. During peak events and given a day's notice, the utility can feed a certain amount of energy from your battery back into the grid to meet the higher demand. Batteries raise supply rather than reduce demand, but the end result is the same: Customers who enroll their batteries receive a cash incentive.

Vermont utility Green Mountain Power operates a virtual power plant that's been a success. In 2017, the utility partnered with Tesla to subsidize Powerwall batteries for its customers. Customers got a more affordable source of backup electricity in case of a power outage. The utility got a source of stored power they could draw from during peak demand days. The program has changed over time. In the current iteration, 500 customers each year can lease two Powerwall batteries for 10 years at $55 a month or for a one-time $5,500 payment. (A Powerwall retails for $10,500 from Tesla.)

Green Mountain Power also operates a bring-your-own-device program. Customers can enroll a certain amount of energy from batteries for cash. For every kilowatt of energy storage enrolled, the utility will give a customer $850 if they allow it to be discharged for three hours; it's $950 for four hours. In locations with high need, they'll tack on another $100 (so that's $950 and $1,050, respectively). Customers agree to use the battery only for backing up their home in the case of a power outage.

Green Mountain Power says these payments are the highest of any utility in the US, so you might expect a bit less from your local utility. The programs have enrolled roughly 4,000 customers and about 18 megawatts of energy storage in small batteries, said Josh Castongua, the chief innovation officer and a vice president at Green Mountain Power. It also enrolls other smart devices and personal EV chargers so it can shift car charging away from peak hours.

According to the utility, it saved $3 million in energy peaks in 2020 thanks in part to its VPP efforts. Castonguay said that money reduces "rate pressure" for the utility, allowing it to keep rates lower than they would otherwise be.

According to the US Energy Information Administration, the average residential electricity rate in New England was 22.04 cents per kilowatt. In Vermont, it was 19.60 cents per kilowatt. Green Mountain Power's residential rate was 18.06 cents per kilowatt. 

Who's involved in a VPP 

Nearly any energy generation source can be involved in a VPP. For example, a wind farm, solar farm, a hydroelectric plant and even individual homes with solar panels and battery storage can contribute energy to the VPP.

"You're doing the same thing that the big utility companies do for the whole grid but for your own micro grid," Pearce said. For example, "A university campus that has a bunch of buildings, all different kinds of crazy loads, might purposely pull off the main grid and provide all of its own power. They're usually doing that with a combination of solar, wind, a bit of battery and maybe a generator."

What problems can be solved with VPPs?

Virtual power plants are a fundamental shift in how the energy system operates. They can solve some issues that exist in the more traditional power-plant-to-consumer system.

They can help meet peak demand

The appeal of rooftop solar and backup batteries is not having to rely on your utility's primary means of generating electricity, such as a natural gas plant. Issues arise because everyone the utility serves is pulling from the same source. When you add multiple energy sources to the mix via a VPP, it strengthens the system because it increases the overall energy output. That theoretically means everyone gets the energy they need.

They can help avoid blackouts and brownouts

What causes blackouts and brownouts? When a utility doesn't have enough energy to meet demand. That leads to either a system failure or the utility having to throttle its customers' energy use to get its generation back to a stable level. A VPP can help avoid blackouts and brownouts, because the sources of energy generation are more diverse. If one source fails, like when the sun isn't shining, the utility can instead pull energy from a wind farm and batteries.

They can help keep costs down

Renewables are a growing part of the American energy mix, but many utilities still rely on fossil fuels to generate electricity. Fossil fuels are expensive, especially compared to wind and solar. Adding more renewables to the energy mix via a VPP would help reduce energy costs for everyone served by the utility.

What are the downsides of VPPs?

VPPs can be helpful to the system as a whole, but they limit what you can do with your own energy equipment. Here are some potential downsides.

They could leave you with no storage

Homeowners with backup batteries participating in VPPs have to relinquish control of their stored energy. During peak demand times, the VPP may drain all of the energy in the battery to feed the grid. That leaves the homeowner without a backup in case of a blackout, and repeatedly draining the battery could shorten its lifespan.

Participants cannot take advantage of time-of-use rates

When you opt in to a VPP, you cede control of your battery system to the utility. That limits your options in terms of when you opt to use the battery versus when you pull from the grid. Some savvy homeowners may tap their batteries during peak energy demand, when electricity is expensive, then pull from the grid when prices go back down. Being part of a VPP will likely take away that option.

They could be vulnerable to hacking

Energy utilities are frequent targets of hackers. If you opt in to a VPP, your system is now connected to the utility. That opens a distant possibility of hackers and bad actors having access to your system.

The pros and cons of VPPs

"Doing a virtual power plant is much more complicated than the conventional model," Pearce said. "It involves higher levels of software, smarter engineers and better planning." 

For individual homeowners equipped with solar panels and batteries, joining a VPP does come with both advantages and sacrifices. 

Pros of VPPs

  • The diversity of energy sources in a VPP makes the electrical grid much more resilient, so there should be fewer blackouts and brownouts.
  • Relying more on renewable sources is better for the environment.
  • Adding more renewables to the energy mix should reduce the cost of electricity for all of a utility's customers.

Cons of VPPs

  • For individual homeowners, being a part of a VPP means ceding control of your backup battery. The utility may drain it entirely during peak demand times, potentially shortening its lifespan.
  • The utility may also determine how your system is used (similar to smart thermostats) meaning you have less choice when it comes to taking advantage of time-of-use rates (essentially using your battery backup during peak times and pull from the grid during off-peak).
  • VPPs rely on a lot of technology and could potentially be vulnerable to hackers and other bad actors.

Should I join a VPP?

It'll depend on what you want to get out of being part of a VPP.

"Look at the economics of it," Pearce said. "In general, the utilities that are trying to operate virtual power plants are incentivizing their customers to join. It probably makes financial sense for you, but you might want to be a little bit careful, depending on say, giving complete control of the battery charging and discharging for your electric vehicle. In general, I think it's a good idea. It's better for the environment, better for people's economics, better for the overall electricity grid."

VPPs can also maximize the savings you get from smart thermostats and other smart energy devices by letting them work together.

"I do think it's a no-brainer if you have this kind of device," said Ben Hertz-Shargel, the global head of grid edge for the consulting firm Wood Mackenzie. "When devices just do their own thing, they're not reaching their full potential."

The trade-off for enrolling in a VPP is usually in flexibility, Hertz-Shargel said. "I wouldn't call it a downside," he said. "It's just the other side of the equation."

Members of Green Mountain Power's VPP have to agree to only use their battery for backup power. They can't use it to take advantage of time-of-use rates or use energy gathered from a rooftop solar array at night. If you enroll with a smart thermostat, you agree to be a couple of degrees warmer on some days. 

Virtual power plant FAQs

What is an example of a VPP?

While a standard utility may primarily rely on one source of energy generation to meet its customers' needs, typically fossil fuels, a VPP will rely on multiple sources. The VPP can network together a wind farm, solar farm, hydropower dam and even individual homes equipped with rooftop solar and backup batteries to contribute to its grid.

What is the difference between a microgrid and a VPP?

Pearce said they're mostly the same thing, with one difference. "A microgrid is a virtual power plant, just for itself," he said. "A virtual power plant is serving an outside load of some kind."

What is the Tesla VPP?

It's a program run by the California utility PG&E for owners of Tesla's Powerwall system that will tap the stored energy of homeowners' solar backup batteries in times of peak energy demand. You can read more about incentives and requirements of the program on Tesla's website.

Updated Aug. 7, 2023 2:52 p.m. PT

Written by  Stephen J. Bronner Andrew Blok
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Stephen J. Bronner Contributor
Stephen J. Bronner is a New York-based freelance writer, editor and reporter. Over his more than a decade in journalism, he has written about energy, local politics and schools, startup success tips, the packaged food industry, the science of work, personal finance and blockchain. His bylined work has appeared in Inverse, Kotaku, Entrepreneur, NextAdvisor and CNET, and op-eds written on behalf of his clients were published in Forbes, HR Dive, Fast Company, NASDAQ and MarketWatch. Stephen previously served as contributors editor and news editor for Entrepreneur.com, and was the VP, Content and Strategy, at Ditto PR. He enjoys video games and punk rock. See some of his work at stephenjbronner.com.
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Andrew Blok has been an editor at CNET covering HVAC and home energy, with a focus on solar, since October 2021. As an environmental journalist, he navigates the changing energy landscape to help people make smart energy decisions. He's a graduate of the Knight Center for Environmental Journalism at Michigan State and has written for several publications in the Great Lakes region, including Great Lakes Now and Environmental Health News, since 2019. You can find him in western Michigan watching birds.
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