Brattle Q&A: Energy Leaders & Innovators
US Department of Energy’s Jigar Shah on the Future of Virtual Power Plants

Ryan: Jigar, you’re a passionate advocate for greater VPP deployment. What excites you the most about opportunities in this space?

Jigar: We’re on the verge of load growing again through “electrify everything.” Leaning into distributed energy resource adoption and VPPs is the best way – likely the only way – for the grid to handle that electrification at a reasonable cost and on the timeline we need.

Look at electric vehicles (EVs) alone. In the past few years, we’ve been adding less than 5 GW of EV charger capacity annually. In 2025, we’re forecasted to add 20 GW; that grows to 90 GW of charger capacity added each year by 2030. The accompanying addition of storage capacity in EV batteries – hundreds of GWh every year – makes for highly flexible demand that we can shift to follow supply, whether from wind or solar variability or excess nuclear production, to make the grid more efficient and support decarbonization.

Beyond EVs, we’ll see the same accelerating growth with other flexible DERs, like smart water heaters and thermostats.

If we can manage demand through VPPs instead of building new peaker plants that would sit idle 90% of the time, that’s a win for everyone. We’ll make better use of the grid infrastructure we already have, we’ll emit less greenhouse gas and air pollutants, and we can reduce the energy burden for millions of Americans.

There are a lot of benefits to VPPs – as Brattle’s study highlights, Ryan – and what we’re most excited about at the Loan Programs Office is the opportunity for VPPs to advance our energy justice goals. Many low- and moderate-income households buy replacement appliances on an emergency basis, often using expensive credit cards. Our financing can lower the borrowing cost for Americans considering buying a heat pump when their gas HVAC system breaks or considering a rooftop solar-plus-storage system instead of a generator.

By making the VPP-enabled and energy-efficient device affordable to low-income and low-credit score consumers, we’re doing two things: First, we’re saving consumers in disadvantaged communities money while reducing electricity bills through more efficient appliances. Second, we’re giving these specific consumers who buy the DERs access to payments for grid services. We want to reduce energy bills for everyone, but we want to be more intentional to reduce energy bills for those with the highest burdens.

Ryan: Our recent VPP study identified up to $35 billion in resource cost savings that could be achieved through 60 GW of VPP deployment over the next decade. Of course, there are many other benefits. What do you consider to be the most underappreciated advantages of VPPs?

Jigar: Honestly, I start with the baseline. We have gotten comfortable with running our grid less efficiently and are experiencing rate increases that are happening faster than inflation, but people shouldn’t accept that as the norm moving forward. Next is that being able to control appliances and DERs from phones is a feature that people want – regardless of whether they register with VPP programs.

With VPPs, the money saved from reducing infrastructure overbuild is going directly back into consumers’ pockets. And that doesn’t necessarily have to be in the form of payments to participants; for example, we’d encourage utilities to consider using the cost savings to reduce interest rates for DER finance or provide broader savings preferentially on electricity bills to advance energy justice. At the end of January 2023, over 20 million American households – one in six – were behind on electric bills. That’s one million more than the prior year. Those are the people who need to access these benefits first.

From the consumer’s perspective, they are buying heat pumps, water heaters, EVs, and other DERs for many reasons, none of which involve participating in a VPP program. The key is auto-enrolling consumers that use financing into VPPs to discover an additional feature of their purchase, save money, and contribute to decarbonization. VPPs pay participants directly for their contributions to the clean energy transformation while giving folks easy opportunities to opt out. That is extremely powerful.

I’d be remiss if I didn’t mention other benefits of VPPs. The distributed nature of VPPs means they’re less exposed to isolated resource performance issues. And, with some configurations, VPPs can create the ability to “island” sections of the grid in response to adverse events such as extreme weather and other threats. Anyone who has experienced this summer’s heat waves and unusual storms can appreciate that.

Ryan: The potential for VPP deployment is huge. Brattle has identified around 200 GW of cost-effective demand flexibility potential in the US by 2030, yet only a fraction of that potential has been realized so far. What are the most significant barriers to greater VPP adoption?

Jigar: First off, let’s give some credit where credit is due: there are rural electric co-ops that have been controlling water heaters since the 1970s; there are utilities across the country who have rolled out VPPs in the form of managed EV charging; solar and storage VPPs are participating in wholesale markets. But yes, we’re falling far short of the potential – which I think could be much larger than 200 GW in the long run.

VPPs have not been integrated into how utilities plan, procure, and pay for the grid, which has been a challenge. There are a lot of innovative VPP companies out there who are taking advantage of the growing population of Wi-Fi- and Bluetooth-enabled DERs and aggregating them into reliable, utility-scale assets, but they are not clearly part of the base business plan in all states. In particular, regulation-driven grid planning requirements and many cost-benefit analysis frameworks undervalue the potential benefits of VPPs, so they’re not competing on a level playing field with conventional assets. When the full value of VPPs is not comprehensively accounted for, they’re disadvantaged relative to other resource types.

The flip side of the innovation I just mentioned is that there aren’t really industry-wide standards for the tools and protocols necessary for VPP forecasts, operations, measurement, and valuation. Utilities and regional grid operators need commonly accepted tools to integrate VPPs into distribution and bulk power systems and do so much faster than we have in the past. I think some utilities see the complexity or an approach that is very different than what they’re used to, and they lose trust in the dependability of VPPs. In turn, we’ve seen too many pilots that – despite their success – have yet to scale. We need more transparency, standardization, and data sharing.

Ryan: In our view, many key players that are well-positioned to advance VPP adoption are in the regulated utilities sector. What recommendations do you have for regulators and utilities that are looking to enable VPP deployment and overcome these barriers?

Jigar: Everyone has to agree that we need to use our existing assets more efficiently. I hope to see improved alignment of the utility’s regulatory and business model with the cost-effective opportunity that VPPs provide. A persistent challenge is that common capital expenditure (CapEx)-driven compensation schemes create utility financial disincentives for VPP deployment. Currently, a minority of states (about 20) require regulated utilities to file distribution plans that address the integration and utilization of DERs. If we had more detailed and long-term distribution system planning, I think it would force utilities to face the growth in DER adoption – and the opportunity that it creates – and we’d see more VPPs.

Ryan: As we’ve discussed, energy consumers are at the heart of any VPP. What do we need to do to make VPP participation an attractive value proposition for them?

Jigar: Giving consumers a detailed understanding of how VPPs work will be difficult, so we need to simplify messaging around demand flexibility. We need a roadmap that will bring us to automatic VPP enrollment at the point of DER financing, with multiple opportunities for the consumer to opt out. VPP companies have tested single-click enrollment versus a multi-step process, and the single-click process gets four times as many sign-ups. Default VPP enrollment would dramatically accelerate our arrival at the point of critical mass in VPP adoption, which in turn will improve the economics of investing in more advanced and beneficial VPP platforms – a virtuous cycle.

Ryan: What’s next for DOE regarding VPPs?

Jigar: DOE and its collaborators already have over 20 complementary programs underway to accelerate VPP deployment. Existing initiatives include financing support for DER and VPP deployment, developing VPP modeling and planning tools, demonstration projects, guidance on grid modernization strategies, and more.

As a next step, we’re very excited about the upcoming release of the next report in our Pathways to Commercial Liftoff series, which will focus on VPPs. The report will describe the market opportunity, current challenges, and potential solutions for the commercialization of VPPs.

Ryan: Can you give us a sneak preview of what we’ll see in that report?

Jigar: In the report, you’ll see that we are long past the pilot phase, and actually ready for a full rollout of these cost-saving opportunities. We’re focusing on five imperatives: Expand DER adoption with equitable benefits, simplify VPP enrollment, standardize operational models for VPPs, integrate VPPs into utility planning and incentives, and fully open wholesale markets to VPPs. We really want to initiate action-oriented dialogue between the DOE and external actors on charting the path forward. As for the details… well, you’ll have to read the report!

Ryan: Fantastic! Thanks so much for your time. We can’t wait to see the final report and look forward to contributing to the progress that will follow.