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Journalist Markham Hislop interviews leading energy experts from around the world about the energy transition and climate change.
Welcome to episode 291 of the Energy Talks podcast. I'm energy and climate journalist, Markham Hislop. In episode 244, I interviewed US Department of Energy analyst, Jennifer Downing, about her report, Pathways to Commercial Lift Off for Virtual Power Plants. According to a new study about VPPs in California from the battle group and grid labs, VPPs could save utilities and consumers $750,000,000 annually in traditional power system investments by 2035, and most of that money would stay in consumers' pockets. Given all the benefits that VPPs can provide to the California grid, why aren't they being adopted much quicker?
Markham:To answer that question, I'll be talking to Ryan Leduc, a principal with the the Brattle Group. So welcome to the interview, Ryan.
Ryan:Great. Thanks for having me. It's a pleasure to be here.
Markham:Pleasure to have you here. I knew I was gonna say battle group. I just knew it. I every time I read it, I first time I read it, battle group, no, it's battle group. I know that.
Markham:And, so, anyway, I knew I was gonna do it. I'm not even gonna edit it out. We're gonna leave it in there for well, look. This is a very, Jigger you mentioned in our pre interview comments about Jigger Shaw at the Department of Energy and running their loan program. He is an evangelist for VPPs.
Markham:He's absolutely convinced that these are critical to the integration of renewable energy in, the US power grids, and maybe we could start there. Why why are VP VPPs as important as he thinks they are?
Ryan:I think there are several reasons for that. The first is what we found in a lot of our analysis is that they're a highly cost effective opportunity and resource for the power grid. What you're able to do with VPPs is basically tap into and use technologies and resources that customers have already adopted and get some additional value from those resources without having to go out and build a bunch of new infrastructure, build a bunch of new power plants. So the first big advantage that that we see is that this is really low hanging fruit in terms of cost savings. And then the other big piece of this is this is just an area that is positioned for really rapid growth when we look ahead over the course of the next 5 or 10 years.
Ryan:There are a lot of customers that we're expecting or households that we're expecting to adopt electric vehicles, to start to convert to electric heating, to adopt behind the meter batteries, smart thermostats. And as more customers adopt those technologies, the potential for this resource could could grow really significantly.
Markham:Significantly. What do we have to do to the grid itself? And I don't mean at the the customer, the the household end of things, but at the operator end of things, on the transmission side, the distribution side, to enable us to take advantage of all of those innovations that are happening down at the residential side of things?
Ryan:So it it depend the answer that to that question depends on where you are and how you're planning on using the virtual power plant. On one end of the spectrum, there's not a lot that we need to do. I mean, the system operator does need to have some way of communicating with those end uses, those devices, or with the owner of those devices to tell them tomorrow we're gonna need to to manage your energy consumption to help keep the lights on. That level of communication is not extremely complicated or a barrier that for which, or a a requirement for which solutions don't already exist today. So if we're using the virtual power plans in that day ahead basis to provide what we refer to as resource adequacy or kind of reliability benefits at the bulk system level, There aren't major technological hurdles that we need to overcome, and a lot of utilities are equipped to address that already.
Markham:I interviewed couple years ago, I interviewed, a woman who, I think it was a company she had, though it might have been a cooperative. Anyway, what they were doing was setting up VPPs in multifamily dwellings, so like an apartment building. And she said that the technology that they had, because it was built into the into the building, you know, they could control right down to the individual unit what their HVAC was doing, what their appliances were doing, you know, that sort of thing. And it seems to me that one of the impediments to VPPs is people saying to the utility, yeah, I don't wanna give you that power. I don't wanna give you that authority to mess with my appliances, but you know what?
Markham:If I had a VPP here that maybe had a 100 or 500 or a 1000 people like me, somebody I could actually talk to if I had a problem, then I would do that. I don't want this big faceless utility, but somebody that I know, and maybe is it, what I'm imagining here, Ryan, is a hue a big collection of these VPPs, which almost act like regional grid management or demand management demand response units that so that the grid operator doesn't have to talk to 10,000,000 customers. He talks to a 1,000 VPPs. And that seems to me to be much more manageable from the utility from the system operator's point of view than try to do it the other way, which, you know, is what what we were talking about a few years ago. I don't know.
Markham:What what do you think of that?
Ryan:Yeah. No. There there definitely is a role in all of this for what we refer to as aggregators. And these are companies that would come in and recruit the customers, the households, the apartment buildings that you were just describing. Aggregate all of those customers into from the system operator's perspective, what is one single resource.
Ryan:And then come to that system operator and say, we have 10 megawatts, 50 megawatts of capacity that we can sell you. You only have to interact with us. You don't have to worry about interacting with all of those different households and technologies that are on the other end of the line. So that that aggregator can serve a pretty important role in terms of simplifying things from the system operator's perspective.
Markham:How far away are we from being to the point where we can have control of that demand and shape it to the needs of the grid?
Ryan:So in some ways, we're there today. I mean, we have been relying on demand response historically in in fairly large quantities in some markets to help keep the lights on and and maintain a reliable grid. What we're talking about now is moving on from using demand response as a very conventional capacity resource that we really only rely on in emergency situations to using it as a resource that, we depend on for round the clock services to the power grid. And there, I mean, we're getting there quickly. I think what we're finding is with some consumer technologies like smart thermostats and air conditioners, there's really only so much you can do to manage or mess with the customer's air conditioner until they say, alright.
Ryan:That's enough. If you keep chain messing with my thermostat, I'm gonna drop out of the program. But when you think about some of the new technologies that our customers are starting to adopt, like electric vehicles, behind the meter batteries. You have a lot more flexibility in terms of your ability to manage those technologies on a frequent basis. Because as long as the car has juice in the battery when the customer goes to drive in the morning, that's really all that matters.
Ryan:And so I do think that our ability to sort of transition to this next generation of demand response, virtual power plants, where we're using these resources more regularly, it will, to an extent, need to track with consumer adoption of these technologies.
Markham:How fast is that happening? I mean, I know we know the the big numbers around electric vehicles, for example, in in California and which is leading the nation. And we know that the power grid has got a lot of storage in it now, and we think that there's a lot of storage behind the meter, in households. Give me a sense of how, you know, is it big enough? Do we how much do we need a lot more of it?
Markham:Where are we at?
Ryan:Yeah. So in some research that we did last spring, we reviewed different analysts' forecasts of adoption of these different, residential, you know, home energy technologies. What we found was between essentially now and 2030, analysts were forecasting that adoption of these technologies would increase to a level that's between 3 times and 10 times the level of adoption that exists today, depending on which technology we're talking about. And that is an increase in adoption that is organic adoption of these technologies. It's it's in the absence of any new VPP programs that would provide additional financial incentives that can encourage more customers to adopt these technologies.
Ryan:And what we've seen, for example, in Vermont with Green Mountain Power's residential behind the meter battery program, they've already gotten about 1 percent of their residential customers to adopt batteries behind the meter through their battery VPP program. And they're forecasting that they could get to somewhere between 4% and 8% over the course of roughly the next decade once they expand that program. So I think kind of the short answer to your your your question is we'll see a lot of organic growth, and we could see that growth increase further if these programs are rolled out with incentives that really further encourage adoption.
Markham:What role will the falling price of battery storage play in this? I interview a lot of battery experts, and one of the things that's been clear over the last, you know, 4 or 5 years is the tremendous amount of innovation that's going on in the battery space, the significant number of different chemistries, coming onto the market that are designed for different applications. So we're not just talking about lithium ion with MNC anymore. We're talking about sodium ion and zinc ion and iron ion. Goodness.
Markham:Redox batteries. I mean, there's just so much now, and the cost curves, I are just falling off a cliff. We I I don't think we expected that, you know, between now and 2030. What role does battery storage and falling cost of battery storage play in in California's power grid between now and 2030?
Ryan:Yeah. Great question. So it definitely plays a role. You know, 10 years ago, it would have been comical to think of individual households buying batteries as a form of backup power, and now it's increasingly common. The cost definitely matters.
Ryan:Buying a battery is certainly an an economic decision that customers are making. And in many states, batteries are competing with lower cost alternatives like, you know, backup backup diesel generators that that you can turn on during during distribution outages. So falling cost of batteries definitely will help. What I think is also interesting and could maybe even be a bigger driver of adoption than the cost of the battery itself declining are new models for participation in these programs. And one interesting model that is really appearing to to be pretty attractive is a model where the utility actually owns the battery, and then leases the battery back to the customer at a discounted price in return for that customer enrolling the battery in a VPP program.
Ryan:And that has 2 big benefits. 1 is the utility is able to offer the customer a discount on the cost of the battery in return for for those grid services. The other is by leasing the battery, the customer can pay the utility a monthly payment on their bill and avoid having to incur that large upfront cost that's associated with purchasing the battery themselves. So even even if batteries don't continue to decline in cost the way they have historically, there are ways to make this more palatable and and feasible for a broad range of customers.
Markham:That's a very good interesting, an interesting observation, because what you're talking about is a business model innovation, not a technical innovation. And I've often wondered why we don't see more of that. I mean, if I was, selling electric vehicles or selling heat pumps or many of these other, new electric technologies, they all seem to have the same cost profile, which is that their capital cost is higher than
Ryan:the existing fossil fuel technology, but their operating
Markham:cost is a lot impediment because, you know, if you can't finance it, if you're, you know, you're not making a quarter $1,000,000 a year or whatever it happens to be, then you're kinda stuck. And by leasing it, by coming up with longer loan payment terms, by, you know, government stepping in and derisking some of that, That it that's a a business model adaptation that I think would help speed up a lot the adoption of a lot of these technologies. I don't know your thoughts.
Ryan:Yeah. No. I I totally agree with that. They're also you know, often when we talk about VPPs and their potential benefits, there are sometimes concerns about the equity implications of that. And it's you know, if if only the if the only customers who can really benefit from this and the the incentive payments from participating in these programs are customers who, as you were saying, have the the income to afford an electric vehicle or behind the meter battery, then then VPPs aren't going to be good for everyone.
Ryan:They're only gonna be good for those more affluent households. So models that do turn the economics of this around and make this an opportunity for everyone, I think, in addition to just accelerating technology adoption, also will increase technology technology adoption among those customer segments that otherwise just wouldn't even be able to participate.
Markham:Yeah. Good point. I mean, that's and that's an important issue in California. Let me give you a hypothetical. So you've got a we'll call it a middle income home, and there's 2 electric vehicles in the garage, and there's a zinc ion battery as big as the as big as the freezer next to the freezer, and there's a a smart thermostat and a couple of smart appliances and a and a heat pump in the house and a heat pump hot water heater and you've got an electric hose.
Markham:We've that that's kind of where we're we're headed towards, and everybody's got one. Everybody in that neighborhood, in that distribution, hub, has got one, does that strain the existing distribution network, or does it actually help it? Can we make do with what we have by being smart about all of this?
Ryan:I think the answer to your question is yes and no. It could absolutely strain the existing distribution system. When we're, you know, talking about adding 2 EVs to every home on a on a cul de sac, If we're not careful about when and how those EV EVs are charging, you're gonna see the lights going off in that neighborhood pretty quickly. But because, as we've been discussing, the charging load of electric vehicles is pretty flexible, if you also, in addition to the EVs, have a battery that can serve some of that home's load, from energy that was stored during other times of the day, Those absolutely are solutions that can help you at least mitigate the increases in load that we're gonna see from achieving decarbonization policy goals through electrification. We actually did a study for Pepco in Washington DC where we said if all of the districts pretty aggressive decarbonization goals were achieved through electrification, what would that do to PEPCO's electricity demand forecast?
Ryan:And we saw that even in the absence of more energy efficiency and demand flexibility, that that demand forecast would grow, but it would grow it would return to rates of growth that the utility has dealt with in the recent past. So nothing that was totally out of the ordinary from utilities perspective. And then we actually found that with demand flexibility and virtual power plants and energy efficiency, you could actually bend that curve down and bring annual demand growth to within 1% a year, which is what the utility has has faced over the course of the last 10 to 20 years. So huge opportunity for VPPs to make this more affordable and and more reliable when it otherwise could present some pretty, significant challenges to the distribution system.
Markham:Yeah. It's interesting you would say that. Couple months ago, the, British Columbia BC Hydro, which is all almost all hydroelectric here in British Columbia. It came out with its 10 year capital plan. And in the past, up to about the financial crisis in 2008, 2009, it had grown at 2% a year.
Markham:Then the financial crisis knocked off a bunch of bloat, you know, sawmills, pulp mills, big big, industrial customers, and demand was flat. Flat on a pancake for up until recently. Now they're back to forecasting 2% a year growth again. So the utility has had experience handling that kind of load growth. This is not unknown, and they're smart.
Markham:I mean, they said, look. We're gonna spend $36,000,000,000 over 10 years. We're gonna build some transmission. We're gonna put some money into distribution. We're gonna do all these things, and that should basically, you know, be able to, cope with the increased the forecast, increase in in our load.
Markham:And and I wonder if it sounds like that is going to be common across the board. Is it possible some utilities do this really well and some of them do it really poorly?
Ryan:Yes. That that's that's absolutely a possibility. And I think, you know, I think, historically, what we have seen is in states where utilities have been given more of a financial incentive to pursue this opportunity, It tends to go better or be done at a at a greater level than in you than in states where utilities just don't have the regulatory model. It doesn't give them the financial incentive to pursue demand flexibility in the same way that they would have a financial incentive to go out and build out conventional grid infrastructure. So it's it's almost inevitable that we will see different utilities across North America doing this at different levels and with different levels of success.
Ryan:But my hope is, particularly given kind of the uptick in load forecasts that we've started to see among utilities just over the past even just 6 months, that a lot of utilities are gonna start appreciating demand flexibility and virtual power plants as something that will actually enable that load growth to occur rather than as as something that's competing with their ability to go out and deploy capital and earn a return.
Markham:It's funny. I just finished an interview this morning with, a cooperative in Alberta. The first they're bringing the first solar farm online, and they they he he talked about how the the, utility that owns the distribution system in their region sees, solar as a competition, and they're very much a gatekeeper. But you're talking about assist a situation in which the utility says, this serves my self interest, and I do a better job at a lower cost by incorporating a VPP than otherwise. And then that make that ins incentivizes the utility to go out and do more of these things, and the the question then becomes like a a regulatory issue or a policy issue.
Markham:How do you incentivize that behavior?
Ryan:Exactly. That's exactly right. Yeah. We we we do utilities are in such a central role in all of this. They have a relationship with the customers.
Ryan:They have visibility into the distribution system. They have a resource adequacy obligation. They're in the middle of all of it. But we aren't always giving them the right signal financial signals, financial incentives to go out and pursue this opportunity. And so that's I don't have the the silver bullet that solves that problem on on this interview.
Ryan:But in terms of areas where I think we still need to see innovation, that's near the top of my list.
Markham:Yeah. It seems like and and it's interesting we're talking about VPPs in California because, you know, as I mentioned earlier, California is seen as an innovator. You know, everybody looks to Casey and goes, oh, what did they what are they doing today, and what mistakes have they made so I don't have to make them? And, you know, the famous duck curve and how that's changing, all of those kinds of questions. And that leads me to a question about the, investment required because your report argues that VPPs could avoid over $750,000,000 a year in California's traditional power system, investment by 2030, and roughly $550,000,000 of those savings would be retained by consumers.
Markham:That caught my attention. Maybe you could expand on that for us.
Ryan:Sure. Yeah. So so when it comes to deploying VPPs, I mean, there are some costs that the utilities will need to incur. There'll be program administration costs, you know, general marketing. You know, you need staff to run these programs.
Ryan:To an extent, you're gonna need to have billing systems in place that allow you to offer customers incentives. And then kind of going back to, I guess, your your first question in in this discussion, you do also need to have the software in place that allows you to communicate with either the aggregator or with the batteries and the EVs to manage them, in a in a way that provides a good services. That actually, when we looked at this, is a relatively small chunk of the the total cost associated with the virtual power plant program. The bulk of the cost, and I'm putting cost cost in quotes, is the incentive payments that you give to customers to attract them to the program and to allow you to manage their the charging of their EV or manage their their thermostat. And those those payments to customers represent about $500,000,000 per year in our study by 2,035.
Ryan:What's really attractive about this is that is a cost from utilities perspective, but this is the only grid resource where you're actually paying customers to provide services as opposed to to other parties. So while the $500,000,000 is a cost of the VPP, it's actually money that's going directly back to participants in the program and to consumers who are who are, you know, customers of that utility.
Markham:We were having an inner Energy Circle, meetup. Now Energy Media has the this Energy Circle idea where we we get readers and listeners together and we virtually, and we have, conversations, you know, every Thursday afternoon at 2 PM Pacific. You can click on a link and join us and talk about all sorts of things. And lately, we've been talking a lot about grids and the best way to modernize grids, and it helps that we had about 6 electrical engineers around the table, which is highly entertaining if you like engineers. So one of them brought up this fascinating idea that I had not heard of before, it's called recabling, reconductoring.
Markham:And whereas you just take the old cables that are now there's transmission cables and not maybe distribution cables, and you replace them with much more modern cables that can that can handle a lot more electricity and do more things than the old ones could. And with a relatively small investment, you've really, empowered your grid. You've changed your grid. And I wonder it seems like, you know, based on your previous answer that VPPs kind of fall into this. You're just we're just being really smart here.
Markham:You know, we've got all this new technology. Now we're just being smart in how we deploy it.
Ryan:Exactly. Yeah. That's that's what attracts one of the things that attracts me to virtual power plants is the efficiency. Right? There's no new technology, for the most part, that we're even talking about buying or deploying.
Ryan:This is about tapping into resources that are already sitting right at the edge of the grid where they can provide value in a lot of different ways. And and to me, you know, being able to get more out of existing resources is so much more attractive than going out and building a new gas peaker that you know going in, you're only gonna need to operate for maybe a couple 100 hours of the year.
Markham:Yeah. You know, this building of new infrastructure, I I mean, that's gotta be an impediment. Right? That's you know, somebody has to come up with 1,000,000,000 of dollars of capital, and then there's the NIMBY problem, you know, getting permits. And and so the the build out of the electricity of the power grid and electrifying the economy can run into all sorts of of speed bumps if we're not careful.
Markham:And being smarter with what we have just seems like such a no brainer that we should do a a lot more of it. And I'm kind of wondering about grid resilience. So how does a VPP increase grid resilience?
Ryan:Yeah. Let me, I'll answer that question just really pick up on pick up really quickly on your reference to to speed bumps. I think another underappreciated aspect of VPPs, which ties into resilience, is the fact that you can basically build a virtual power plant as quickly as you can get customers to enroll and sign up in the program. Whereas, large scale resources increasingly are facing delays associated with getting connected to the transmission system. So to the extent that we are concerned about our power supply being able to keep up with growing electricity demand, VPPs aren't facing the same type of, constraints as large scale resources are in terms of the timeline of getting connected and and built.
Ryan:So that's part of the answer to your question. You know, the other part is because behind batteries in particular are sitting behind the meter of the customer's home. If the distribution grid does go out, those batteries can can serve the customer in the form of backup supply. So you're able to tap into that value. And on top of that, then provide during other times of the year, other times of the day, services to the grid to avoid, as we've been discussing, investments in the distribution system.
Ryan:So stacking all these different sources of value is really only possible when you have a resource that's located close to the customer, and that's another benefit of of virtual power points.
Markham:How close are we to vehicle to grid integration, which it's you know, we've talked about EVs a lot in this interview. And so the ability to plug in my f 150 lightning and my Nissan, LEAF and actually have them, operate in the way we're talking about on the grid. We've we've been working on this for a while. Lots of pilots. Are we getting pretty close to a a scale up?
Ryan:I don't know is the short answer. We are still at the pilot demonstration phase. We we don't see this being broadly commercially available or deployed at this point. The opportunity is is huge. I was just looking the other day.
Ryan:I saw that that Ram the Ram the electric version of the Ram 1500 is coming out at the end of the year. One of the models is gonna have 500 miles of range, which means that that truck is gonna have 230 kilowatt hours of battery Wow. Energy storage capability just in the truck. That's a massive amount of energy storage. And that's, you know, that's that's that's enough to fully power your typical home's load for for well over a week.
Ryan:So when you think about all of that battery capacity being connected and and online, you know, this is much greater than any forecast of, you know, utility scale transmission connected storage that's gonna be online over the course of the next decade or so. So it is from a technical potential perspective, absolutely a huge resource. And I for that reason, I do think we're gonna continue to see progress in this area. But we are not today yet at the point where this is considered, you know, a primary use case for for virtual power plants.
Markham:If I were to put you on the spot and ask you for a timeline on the rollout of vehicle to grid integration, are we talking short term, a year or 2? Are we talking medium term, 2 to 5 years?
Ryan:I'm giving it just personally on the spot because you asked, 5 5 to 10 years. Not because I don't think we could get there more quickly from a technological perspective, but because there are a lot of other issues that we'll need to work through related to battery warranties, vehicle performance, and then also behavioral considerations. You know, we we do need to remember that customers are buying electric vehicles because they want to drive their car, not because they wanna have a battery on wheels. And so working through some of those behavioral considerations around customer willingness to have their batteries actually discharged to the grid, often underappreciated in these types of conversations, but something we're gonna need to figure out as well.
Markham:Okay. So even if we took the worst case scenario and said 5 to 10 years, I mean, goodness gracious, we're only talking about the late twenties to the, you know, early to mid 20 thirties. I mean, in the grand scheme of thing, that's a blink of an eye.
Ryan:It's yeah. And it's it's too it's definitely it's too big to ignore is how I would describe it. But there yeah. There's still a lot to figure out for sure.
Markham:Well, too big to ignore, which leads me to the question of how big can the VPP market in California be in 2035?
Ryan:Sure. In in our study, we estimated 7.5, gigawatts of VPP capacity by 2,035, which is about 5 times larger than the Doctor capability that's being used in California today to provide resource adequacy. So that's our base case estimate. And, you know, there definitely are conditions under which that number could be larger. One of the examples we just discussed, vehicle to grid.
Ryan:In our analysis, we only looked at the ability to re to reduce and shift electric vehicle charging. We didn't consider the ability to actually push electrons onto the grid. So in a lot of ways, that the 7.5 gigawatts that we estimated are conservative.
Markham:Wow. So if I were to wager, looking down the road to California in 2030, I would say the grid's gonna look a lot different than it does today. Source of generation's gonna look a lot different than it does today. And California may reach that utopian goal of the resilient, flexible, low cost, you know, better operating grid, more opportunities for consumers and producers and prosumers. It's gonna get there pretty quick by the sounds, particularly in places like Los Angeles.
Markham:Is that a is that a fair guess that that'll happen by 2030?
Ryan:I think we'll we will fairly quickly get to the point where a lot of the potential that we've identified could be realized. That doesn't mean it's gonna happen on its own. We are, I think, still going to see new policies, new innovations, particularly in the area of customer engagement, to actually turn the potential that we've analyzed in our study into a reality on the grid.
Markham:We'll wrap up our interview with this question, Ryan, and that is bill 1305 in California. Could you explain that for us, please?
Ryan:Sure. And I'm I'm not closely plugged into the details of that bill, but but my understanding is that it is essentially the equivalent of a renewable portfolio standard for VPPs. So it would require that, utilities, load serving entities in California, have a certain amount of their resource adequacy requirement met by VPPs, and that that target escalate would escalate over time.
Markham:So that's the part of the, like, the the policy and regulatory response that is needed to realize the vision we were just talking about. Exactly. Gotcha. Well, Ryan, this has been fascinating. I just you know, because I've we've been we started doing these kind of, interviews 5 years ago, and it's astonishing to me how much the conversations have changed.
Markham:You know, things that we were talking about in 2019 that were, you know, that we're gonna see them in 10, 15 years. You know, they were far enough out. And since 2020 in particular, maybe even since 2022, really, man, these things things are just accelerating at a terrific rate. You wonder how everybody keeps up. You know, if I was a system operator, if I was a a utility, I I just feel like I was overwhelmed all the time.
Markham:And, interviews like this help our listeners understand, kinda sort out what the issues are and timelines and all of those kinds of things. So thank you very much. Really appreciate this.
Ryan:Well, thanks for having me on. It was a great conversation.