Make energy efficiency a real, measured resource that grid operators can rely on, and we can unlock the full potential of VPPs in America’s transition to a sustainable energy system.
From coast to coast, extreme weather as a result of climate change is pushing the electric grids of America close to their breaking points. And the problem only stands to get worse as electric demand continues to grow in response to extreme weather and the electrification of appliances.
While building new supply-side resources, such as transmission and distribution systems, will be necessary to meet increased demand, it is often arduous and time-consuming, especially at a time when we need to figure out our power challenges right now.
And importantly, only focusing on building new supply-side resources is expensive for consumers, who will have to bear the additional costs. For example, a Princeton study estimated that achieving 2050 net-zero goals will require about $2.5 trillion in transmission investments in a business as usual scenario.
Luckily, energy efficiency is the least expensive resource we have. It can help us avoid the need to build as much supply-side infrastructure and reduce the associated costs. After all, the cleanest, cheapest kilowatt is the one not used.
But absent policy changes, peak (and total) load will only increase — and meeting that increase will result in a bad outcome for consumers, electric reliability, and the climate.
Building new supply-side resources can’t be the only solution if we want to manage costs and take full advantage of new technologies.
Luckily, there’s another way to tackle America’s electricity-demand problem: Virtual Power Plants (VPPs). And to fully unlock the potential of VPPs, embracing and measuring energy efficiency is crucial.
Let’s dig in.
Virtual Power Plants have huge potential
In the coming years there will be a surge of distributed energy resources (DERs), such as heat pumps, batteries, electric water heaters, electric vehicles, and other technologies coming onto the grid. When thousands of DERs are combined, they create decentralized and distributed power plants known as VPPs.
VPPs can balance the supply and demand of electricity on the grid like a traditional power plant. During peak consumption periods, VPPs can be employed to optimize electricity demand, lower overall grid costs, and improve reliability.
And the beauty is that many of the technologies that homeowners have already embraced are precisely the types of resources that feed into VPPs.
Getting homeowners to install the DERs that enable VPPs is the new call to arms to mitigate climate change. The Inflation Reduction Act (IRA), signed into law in summer 2022, will make it cheaper than ever for people to adopt these new technologies.
Rooftop solar, heat pump water heaters, and electric heating and cooling systems are all eligible for incentives under the IRA. All of these new machines and technologies are great for the planet and for people’s health, and they can be coordinated to provide value to the grid.
Synchronizing the energy usage from these DERs can reduce stress on the grid during times of peak demand. Case in point: hundreds to thousands of homes outfitted with smart thermostats can make tiny, automated adjustments to their inside temperatures, thereby generating megawatts upon megawatts of peak demand reduction.
In Arizona, for example, smart thermostats helped customers reduce energy usage by 276 megawatts during peak demand this summer. And the potential for smart thermostats is just being tapped into. In Texas, ACEEE estimates that smart thermostats could reduce energy usage by over 3,000 megawatts during peak summer hours.
The surge in DERs that we will see thanks to the IRA is a game changer. While demand response programs have existed for some time, more and more DERs coming online increases the potential of VPPs, especially over this decade.
If we achieve VPPs at scale, the U.S. Department of Energy estimates that $10 billion can be saved annually on grid costs — and that’s not even counting the benefits to the climate.
While the market for VPPs is at a promising tipping point, there’s a crucial element that’s often been left out of the VPP discussion to date: energy efficiency.
Energy efficiency will help fully unlock the potential of VPPs
Energy efficiency, including residential efficiency, is the cheapest resource available to reduce strain on the grid and make crucial reductions during periods of peak demand.
And there’s a big opportunity to improve the efficiency of America’s houses. Residential consumption of electricity is going through the roof — especially as people plug their electric vehicles into their homes, install heating or cooling systems for the first time, and make other household improvements.
Many of these improvements are good for the planet, no doubt. A heat pump water heater will not only save energy and make a home more comfortable; it will also cut down on the use of fossil fuels.
But the numbers for America’s growing electricity needs are pretty stark. The U.S. needs to add 200 gigawatts of new capacity to meet peak demand and offset retirement of old energy resources by 2030, according to a report just published by the U.S. Department of Energy. If the country wants to meet its 100% clean electricity goal by 2035, the gigawatts necessary must double.
Homeowners can take charge here (and policymakers can help).
Households can choose to participate in VPPs (if they’re offered in their area). But policymakers must create incentive structures to ensure that they are compensated for doing so. Put simply, utilities will pay you to optimize energy usage, instead of spending your money on polluting power plants, power lines, and pipelines.
But residential energy efficiency must be embraced to fully unlock the potential of VPPs.
That’s because weatherization, insulation, and other energy efficiency measures like heat pumps play an important role in helping homeowners permanently cut down on their electricity needs.
A weatherized and efficient home requires less power to heat up in the winter or cool down in the summer, which puts less strain on the grid and improves the comfort of homes.
And residential energy efficiency is predictable, reliable, and relatively inexpensive, meaning it can act as the ‘base load’ for VPPs similar to what nuclear power or geothermal is for zero carbon energy supply.
Homeowners should therefore be rewarded for installing devices that enable VPPs and making their homes more energy efficient; their money shouldn’t only go to building expensive power plants, power lines, and pipelines that will only increase pollution.
So why has energy efficiency been left out of the VPP discussion if it’s a crucial element? Simply put, energy efficiency is not seen as real and reliable.
Energy efficiency has historically relied on energy models, even though grid operators need measured results on both the supply and demand sides of the energy coin. To be valued as a true grid resource, energy efficiency must therefore be measured.
Enter the IRA’s HOMES Rebate Program, which can serve as a down payment for robust residential participation in VPPs by every state (and territory) in the country.
IRA’s HOMES Program is essential for quickly scaling VPPs
The $4.3 billion HOMES Rebate Program provides rebates to households for whole-home improvements that save energy. In addition to helping households across the country save energy, the program is one of the best near-term opportunities to quickly scale VPPs. Here’s why:
- The HOMES Rebate Program allows incentives to be provided for annual and peak demand reductions. In setting up their programs, states can decide to value how energy savings impact the grid depending on time, location, and greenhouse gas emissions.
- The measured pathway of the HOMES Rebate Program—which states can implement alongside the modeled pathway—will enable grid operators to be able to actually count on the demand reductions from energy efficiency improvements.
By valuing savings on time, location, and emissions and rolling out the measured pathway, states can create an incentive structure to turn residential energy efficiency measures into essential components of VPPs. This will help cut down on peak usage in states where the electric grid has come dangerously close to the brink of collapse.
Let’s take another look at Texas. A report published last May found that energy efficiency and demand response measures like heat pumps and insulation could offset about 15,000 to 23,500 megawatts of peak load in the state, depending on the season. And these measures would cost the state an estimated $1.2 billion, opposed to $10-$18 billion to build new supply-side resources.
States with favorable market conditions — such as California, Texas, New York, and North Carolina — are the ones where VPPs are currently concentrated. For example, in California, VPPs can compete with traditional supply-side resources, which provides a path toward generating revenue.
But to truly achieve wide-spread success — to reduce energy costs, fortify the electric grids, and protect ratepayers and the planet — residential energy efficiency must become an integral part of every VPP and must be valued accordingly.
Make energy efficiency a real, measured resource that grid operators can rely on, and we can unlock the full potential of VPPs in America’s transition to a sustainable energy system.