A Global Tour of Contrasting Microgrid and VPP Markets

Jan. 31, 2020
Peter Asmus of Guidehouse explores the different drivers impacting microgrid and virtual power plant (VPP) uptake.

Peter Asmus of Guidehouse explores the different drivers impacting microgrid and virtual power plant (VPP) uptake. 

The stars are aligning for distributed energy resources (DER) to play an increasingly important role in providing energy services across both retail and wholesale markets. Recent forecasts from Navigant Research, a Guidehouse company, show that the market share of DER options already surpasses new centralized generation capacity on an annual basis in key regional markets (see chart below). Growth in DER stimulates interest in smart aggregation and optimization platforms such as microgrids and VPPs — concepts that may still overlap, despite contrasting goals. To understand why microgrids may witness uptake in one market but not another, let’s investigate Europe, Japan, and Australia. The resources, regulations, and reforms that shape these markets explain differences between the drivers impacting microgrids and VPP uptake. 

Europe leans toward VPPs, away from microgrids

While Europe is often touted as a global leader moving toward a low carbon energy future, the tightly regulated EU markets have several features that severely limit development of microgrids:

  • Policymakers have been focusing on large-scale renewable energy development such as offshore wind, which requires massive investment in transmission infrastructure.
  • DER deployments (such as rooftop solar PV) have primarily been based on feed-in tariffs (FITs), a business model that precludes the key defining feature of a microgrid: the ability to seal off resources from the larger grid via islanding. 

Most microgrids deployed in Europe are on islands not interconnected to the mainland grid. According to Navigant’s Microgrid Deployment Tracker, Europe’s cumulative global market share is 9% today, the smallest of any major region analyzed. By comparison, in a soon to be published 1Q 2020 update to the Tracker, North America represented 36% of total global microgrid capacity, the largest of any region.

A project trumpeted as the world’s first VPP has operated for German utility RWE since October 2008. It has aggregated the capacity of nine different hydroelectric plants that range in size from 150 kW up to 1.1 MW, initially totaling 8.6 MW of VPP capacity. This VPP framework opened new power marketing channels for these facilities. If DER assets still operated as standalone systems, these marketing channels would not have been viable since contract commitments could be easily met if these small facilities responded as a pool of hydro resources aggregated and optimized via software. The VPP expanded over time to include biogas, backup generators, combined heat and power, and wind, reaching 200 MW in size today. 

The European VPP market historically has centered around renewable energy integration. The tightly connected countries in the European Union (and the UK) have an advanced market integration that is taking VPP platforms into a more sophisticated direction, stacking complex use cases. The continent is adapting VPP platforms to provide new, more sophisticated capabilities to maximize the value of flexibility. Perhaps the key distinguishing feature of Europe’s VPP market is the use of advanced software platforms to enable smart energy trading.

Previously a microgrid leader, Japan is now exploring potential VPPs

Japan consists of 6,852 islands. Ten privately owned utilities serve the four major islands (as well as several other smaller islands). Japan is the only country in the world that operates its power grid on two different frequencies. Tokyo and the rest of the eastern Japan installed 50 Hz equipment from Germany, while their counterparts in Osaka and western Japan contracted with American companies installing 60 Hz equipment. The result? A national grid with two separate grids that cannot fully exchange AC power. Each major island is only interconnected to an adjacent island, further fragmenting the grid. 

Japan emerged as the global leader in solar cell production in 1999 and then as the leader in solar power generation in 2004. Though solar PV provided only a small portion of Japan’s overall energy supply, it showed that the country’s regulators were investigating DER well before other global markets. Japan developed microgrid experiments in the early 2000s, but because its grid is so reliable, fully commercial projects failed to materialize. Microgrids, particularly those running on DC, proved their value in 2011 during power outages linked to the Fukushima nuclear accident. Future VPP growth in Japan depends upon the fate of its nuclear fleet, which largely shut down after Fukushima. The government had signaled its intent to bring back this fleet but has since trimmed down this commitment. It is certainly unlikely that the country will return to its reliance on nuclear power for almost one-third of its electricity. 

There are 450 energy retailers active in Japan today. In addition, 2.5 million homes will be coming off 10-year lucrative FIT contracts beginning this November. While attractive, these FIT contracts also prevented solar PV assets from providing customized grid services. Releasing customers from FIT payments will create excess power at the retail level, creating incentives for these homes to optimize production by deploying batteries to store excess solar energy or to potentially buy EVs to soak up excess generation to optimize new forms of self-consumption. These assets all represent potential resources for VPPs. At last count, some 40 VPP pilot projects are underway in Japan, and Autogrid claims to be developing the largest VPP in the world there as well. 

Australia is the world’s DER innovation hot spot

Unlike Europe and Japan, Australia is a hotspot for both microgrids and VPPs. The majority of the continent’s microgrids are deployed by utilities such as Horizon Power. Located in Western Australia, the utility has both the largest service territory in the world and the fewest customers per square meter, for customers are not interconnected to a traditional grid. Australia has long been a leader in wind-diesel hybrid microgrids provided by vendors such as PowerCorp (now ABB) and Optimal Power Solutions

Whether the ongoing wildfires in Australia spur microgrids in the southeastern part of the country remains to be seen. When it comes to VPP energy trading, this part of the country is unpredictable. Recent power outages, high energy prices, and the highest penetrations of distributed solar PV in the world have made Australia a focal point of innovation. Australia consumers also boast one of the highest per capita electricity consumption rates in the world—even greater than the US. These consumption levels translate into flexible load resources ideal for VPP manipulation, aggregation, and optimization. 

While AutoGrid has laid claim to creating the world’s largest VPP in Japan (though the company has declined to provide an estimate of capacity), Tesla has made a similar claim for a project in Australia. Tesla’s project is purported to reach 250 MW in size, aggregating DER assets from 50,000 residential prosumers. Meanwhile, VPP innovators that include Enbala are backing up the proposition that it is better to stay connected to the grid than to abandon it and go solo. similar to some Americans and other prosumers around the world, Australians may be tempted to disconnect from the larger grid with their own small private energy islands. However, the value proposition of staying connected appears to win out. Energy Networks Australia and CSIRO’s 2017 Electricity Network Transformation Roadmap estimated the potential benefit of prosumers staying connected to the grid to be $1.4 billion in avoided network investment, lowering household electricity bills by $414 per year.

Microgrids or VPPs? Both platforms are increasingly relevant as the world shifts toward greater reliance upon DER. Convergence between the two will likely increase as resilience rises in importance due to global climate change and as utilities and grid operators seek to find economic and reliability value in previously ignored DER assets. For microgrids and VPPs, software platforms will hold the key to squeezing more value out of DER assets while also reducing costs for prosumers and the larger grid stakeholders who seek win-win scenarios. 

Peter Asmus is a research director at Guidehouse.

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