After centuries worrying about energy supply, the world turns its attention to demand

Senior Global Correspondent
Outlines of houses overlaid with binary code in white and energy infrastructure — oil rigs, wind turbines, and solar panels in black.
Illustration by Samson Awosan.

Modern energy systems have long focused on supply — essentially how to generate enough energy exactly when it’s needed. But that’s changing fast as the other side of equation, energy demand, expands rapidly.

Beginning this year, two factors will drive increased focus on the ways energy is consumed: new attention to efficiency and the rise of technology allowing fine-tuned, granular control over how and when electricity is used. The most prominent manifestation of these two trends is the Virtual Power Plant, or VPP in energy industry parlance.

With customer consent, virtual power plants orchestrate connections with potentially millions of devices in businesses and homes, from electric vehicles and solar panels to washing machines and water heaters. These systems channel electricity use away from popular hours toward periods when cheap and clean renewables dominate the power supply.

To help sidestep power outages, utilities have traditionally paid large power consumers, like industrial manufacturers, to dial down their energy use during demand peaks for heat during cold snaps or air conditioning during heat waves. Now, utilities are able to also use virtual power plants to dial down or redirect demand from smaller consumers, like households. In the future, VPPs could allow utilities to better control a fleet of devices and leverage that digital network to reduce the need for expensive new power plants and transmission lines.

“Eighty to ninety percent of our customer base could be in a demand response program by the end of the decade,” said Thomas Smith, product development manager at Puget Sound Energy, a utility that operates near Seattle.

That would mean around a million residences and businesses in the utility’s service area, up from just a few thousand early last year, would essentially pool their power resources to substantially transform how the company delivers energy.

That sort of growth reproduced across thousands of utilities in the United States alone could relieve some of the stress the energy transition is beginning to heap onto the nation’s electrical grid as electric vehicles and heat pumps edge into mainstream use.

These virtual power systems are part of a larger transformation of the power sector, and overall energy system, globally.

“This is an opportunity to create a completely new system that doesn’t focus on the market demand side and the asset provision side separately but sees them as a single system,” said Devrim Celal, chief executive of KrakenFlex, a London-based provider of energy technology platforms, part of the Octopus Energy Group.

VPPs are expanding around the world — from Europe, where they were developed during Germany’s early move toward renewable energy in the late 2000s, to Australia, where more than two-thirds of homes have solar panels, to the U.S., where the Biden administration is pushing demand response programs.

A virtual power plant can meet peak power needs at a 40 to 60% lower cost than the alternative of building a large-scale power storage battery or a new natural gas generator, according to the U.S. Department of Energy. Virtual power plants could also obviate the need for about $10 billion in annual transmission grid costs by addressing 10 to 20% of peak demand, the department said.

The department projects the current 30 to 60 gigawatts (GW) of aggregated VPP capacity across the country could grow around three-fold to between 80 to 160 GW by 2030. At that level, VPPs could replace some backup generation capacity by fossil fuel plants at a time when overall peak demand is expected to expand from about 740 to 800 GW.

The number of ways individual consumers can connect with their utility — and the level of automation with which they can do so — is growing exponentially. Meanwhile, machine learning and artificial intelligence are rapidly improving the way consumption is coordinated across these devices to avoid spikes in demand and maximize the use of low-carbon renewable energy.

“It doesn’t need to be poles and wires that you’re putting up and stringing together. You’re able to use existing infrastructure,” said Ruben Llanes, chief executive at Autogrid, a division of Schneider Electric that sells a software platform allowing utilities to coordinate the use of power from what the industry calls distributed energy resources.

The bulk of the growth potential in VPPs comes from a 20 to 90 GW annual expansion of EV charging infrastructure and the addition of 300 to 540 GW hours of battery storage capacity each year between 2025 and 2030, the energy department projects.

How fast virtual power plants grow will rest heavily on how quickly electric vehicles are adopted — which in turn depends on government subsidies and emissions regulations spurring the EV market — as well as consumers’ willingness to participate in budding utility demand response programs.

VPPs will also present new complexity and variability into the grid that will have to be managed alongside variable sources of supply such as solar and wind power. Securing an increasingly connected and digital network against cyber attacks will also be a challenge.

After a series of pilot projects, Puget Sound Energy began enrolling residential and business customers in demand response programs last summer. First, residential customers agreed to receive a text or message on days of high electricity demand requesting they reduce their consumption. Next, customers with digital ‘smart’ thermostats opted to allow the utility access to those devices to automatically dial consumption up or down within bounds set by the customer in exchange for payment.

The utility aims to leverage growing participation — they expect to have at least 600,000 customers enrolled by the end of the year — to go from saving about 5 megawatts (MW) of capacity last year to 40 MW this year and 86 MW in 2025, Smith said.