How Does a Virtual Power Plant Work?

Michael Tobias
3 Minutes Read
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    When we think about power plants, we tend to visualize large facilities that produce an output in the scale of megawatts. This power is then delivered to consumers through high-voltage transmission lines, transformers, and distribution lines. However, this century-old concept is being challenged with the adoption of distributed energy resources (DER) like solar photovoltaic arrays and smart batteries. It is now possible to link multiple small systems using information technologies, operating them in coordination like a utility-scale power station - this concept is called a virtual power plant (VPP).

    Conventional power plants use a single generation technology, and some examples are hydraulic turbines, photovoltaic panels and steam turbines. Combined-cycle power plants are an exception because they use both gas and steam turbines, but the heat source for both is gas combustion. On the other hand, a virtual power plant can be configured with any mix of energy resources, combining their strengths and neutralizing their weak points.

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    Although the concept of virtual power plants is relatively new, projects are already being deployed in many parts of the world. In particular, one VPP project that will operate in South Australia has received plenty of media attention:

    • The system covers 50,000 households, focusing on low-income and affordable units.
    • Each household gets a 5-kW solar power system, adding up 250 MW.
    • In addition, participating homes also get a Tesla Powerwall 2 unit, adding up 250 MW of dispatchable capacity and 650 MWh of storage capacity.

    The project is getting a grant of AU$2 million and a loan of AU$30 million from the Australian government. The first stage only includes 1,100 homes, gradually expanding to 50,000.

    Advantages of Virtual Power Plants

    As mentioned above, a virtual power plant can combine different types of generation systems. However, there are also many operating advantages over conventional power plants, which are summarized in the following table:

    Virtual Power Plant Advantages


    Flexible Configuration

    A virtual power plant can be expanded by simply adding new distributed energy resources to the virtual platform. Conventional power plants do not offer this flexibility, since equipment is normally rated in megawatts.

    Power Grid Load Reduction

    When conventional power plants are used, their full output must be carried by power lines, to then be distributed by substations and smaller distribution lines. With a VPP, energy flows are also distributed, which reduces the load on individual power lines.

    Higher Reliability

    A conventional power plant can be brought offline if a key component suffers a fault, but a VPP does not have this weakness. If a fault affects one of the generation systems connected to the VPP, there is only a very small loss of capacity.

    Both the NY state government and New York City have ambitious plans for energy storage, which has very promising applications in virtual power plants. The NY-Sun incentive program for solar power has already been very successful, helping develop distributed generation capacity that can complement batteries in a VPP.

    Virtual power plants can eventually reduce electricity bills thanks to their distributed layout. Conventional power plants normally require grid upgrades to handle their concentrated energy output, and these upgrades are normally reflected as power bill increases. On the other hand, distributed energy resources are much less dependent on the network.


    Since virtual power plants depend on energy systems located at client premises, there are opportunities for interesting business models and financing schemes. From the end user standpoint, a key benefit of generating electricity on-site is spending less on power bills. However, these energy systems are also useful for utility companies if capacity can be aggregated and controlled through a smart platform.

    • Since both parties get benefits, the investment can be split.
    • For instance, utility companies can offer an incentive for clients planning to install their own generation and storage systems, in exchange for some control over these systems.
    • Distributed energy resources can perform many functions of conventional power plants if they are aggregated into a VPP.

    New York has the right conditions for many VPP projects to emerge in the near future. There are ambitious plans for both renewable generation and energy storage, and plenty of capital available for research and development. Finally, electricity rates in the state of NY are among the highest in the nation, and any project that lowers power bills is attractive for electricity consumers.


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    Tags : Batteries Energy Storage Energy Generation virtual power plant

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