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California's plan to let solar panels Voltron together into a "virtual power plant"

"And I'll form ... the head!"
"And I'll form ... the head!"
(Flickr: Shaun Wong)

How can we get more wind and solar power integrated into energy grids?

Meeting the long-term challenge — getting to, say, 75 percent of renewable electricity or higher — will require technological innovation and sustained declines in cost. It's exciting to think about. But in the short term, the barriers facing wind and solar are rather more pedestrian. They are regulatory and managerial, embedded in the rules and customs that now govern the operation of grids and energy markets. (I have written about these boring but important issues before.)

Progress in reforming those rules is going to come in dribs and drabs, here and there, as grid managers and regulators test out new ways of doing things and best practices spread. One interesting bit of progress took shape in California recently, and though it is modest and preliminary, it points the way to some pretty exciting things in the future.

California wants to allow distributed energy to participate in bigger markets

Last month, California became the first state to create a framework that will allow distributed energy to participate in wholesale energy markets. That may not sound like a big deal — indeed, the words probably mean nothing to you — but it is, particularly as a harbinger of things to come. Allow me to explain.

On every building, there's an energy meter that tracks how much electricity the building is using. For the last century, utilities neither knew nor particularly cared what went on "behind the meter," which generally consisted of dumb, energy-consuming appliances like refrigerators and air conditioners. All they cared about is the building's net consumption, for purposes of forecasting and billing, and that's what the meter told them.

Lately, though, there's been all sorts of innovation happening behind the meter. For one thing, customers can now generate power in or on their homes — that's what solar panels do. There are also more and more options for storing energy temporarily, including home batteries and plug-in electric vehicles. On top of that, there's a lot of work being done in intelligent energy management, with Nest thermometers and all the rest.

Collectively, these behind-the-meter technologies are known as distributed energy resources, or DERs.

Here's the thing: If they could be harnessed and managed in a reasonable way, these DERs could, collectively, provide all sorts of value to the grid. That includes the value of the power generated by solar panels, of course, but it could also include other grid services like capacity, reserves, frequency regulation, and demand response.

To date, however, there's been only one channel through which owners of distributed energy could be compensated for that value: net metering, which pays them for their surplus solar energy (when they generate more than they use). Net metering is fairly narrow, though, and crude. It only pays for solar power, not any of the other services DERs could provide. What's more, net metering is under intense scrutiny, in California and elsewhere, and may not be a safe long-term bet for the industries involved.

So it would be nice if DERs could be more fully and fairly compensated for their value. That's the problem that cutting-edge states like California and New York are just beginning to tackle.

California's initial bid is fairly modest — more groundwork for a program than an actual program — but it is ripe with implication and possibility. It could eventually kick-start new markets, boost the spread of distributed energy, and create an energy system that combines the best of both distributed and centralized energy.

But we're getting ahead of ourselves. Let's take a look at what California actually did.

DERPs! Seriously.

One way for DERs to be compensated would be for them to participate in wholesale energy markets, which not only pay for power but also pay for "ancillary services" like power smoothing and demand shifting.

The problem is that an independent service operator (ISO) managing a wholesale market does not have the capacity to keep track of thousands upon thousands of DERs. It is technologically and practically intractable. There are just too many.

The California ISO (CAISO), which manages the state's energy grid, has come up with a solution to this problem. Instead of tracking all the DERs individually, it is going to allow third parties — sometimes utilities, sometimes private companies — to aggregate DERs into "virtual power plants." (Minimum size: at least a half-megawatt.)

A third-party aggregator will act as a "scheduling coordinator," tracking a collection of distributed energy resources and reporting reliable information about their aggregate effects to CAISO. Instead of tracking thousands of DERs, CAISO will interact with a handful of aggregators. Thus may DERs participate in wholesale energy markets. (Here is CAISO's description of the program; Utility Dive has an accessible summary.)

By far the best thing about this proposal is that the aggregators are called "distributed energy resource providers," or DERPs. Go ahead, say it out loud. It's fun.

California will create a new market for DERPs

The idea is that (eventually) hundreds or thousands of solar panel, solar-and-storage, and electric vehicle owners will sign up with a DERP to participate in energy markets. The DERP will know when all its various DERs are producing or consuming electricity, how much, and which ones can be ramped up or down. (All this scheduling and coordination can be done over the internet, though obviously there's tons of room for progress on the software side.)

With good enough tracking, a DERP can predict the aggregate output of its virtual power plant well enough to bid into wholesale power markets. But that's not all. A virtual power plant composed of heterogeneous DERs (a mix of generation and storage) is theoretically capable of more than just producing power. It could bid into capacity markets. It could bid into markets for "ancillary services," providing power smoothing, spinning reserves, or other grid reliability services. It could serve as demand response, shifting demand to times when power is cheaper. At least in theory, a diverse enough virtual power plant could be an electricity jack-of-all-trades, as nimble and responsive as any peaker plant.

Once the door is open for DERPs to participate in energy markets and California's utility regulators work out the details (which could take a while), it could kick off a wave of business innovation, as DERPs compete to aggregate the best mix of resources and fine-tune their services. Software designed to coordinate DERs will advance quickly as well, which will have spillover effects on grid management.

For now, DERPs are pretty limited

CAISO is just cracking the door. The program is limited in several ways. Brace yourself for some acronyms.

The main limit is geographic. California's grid is divided into load aggregation points (LAPs) aligning with the territories of the state's three big utilities. LAPs are further divided into sub-LAPs. Meanwhile, there are some 4,900 market pricing nodes, or pNodes, in the state.

The deal for DERPs is that an aggregation of resources must be confined within a single sub-LAP. If it is within a single pNode, it can be a heterogeneous mix of resources — solar panels, batteries, etc. If an aggregation spans multiple pNodes, it must be homogeneous — all the DERs must be the same variety, either generation or storage.

There won't be a quiz. The broader point here is that the geographical areas over which DERs can be aggregated are, for now, tightly limited. (You can read Herman Trabish's great reporting for much more detail on the stakeholders and limitations involved).

The limitations of the program all have to do with current grid management practices. As grid operators become more familiar with DERPs and iron out the kinks, some of these restrictions are likely to be eased and the program will expand.

Looking ahead to an energy system filled with DERPs

Though CAISO's program is modest for now, and it will be a while before there's an actual DERP market up and running, it does bring into view a whole new range of possibilities for electricity systems.

Especially as they grow larger — in terms of both geography and the variety of resources they aggregate — DERPs could become serious competitors to large, centralized power plants in wholesale markets. Because they are composed of multiple, parallel connected nodes rather than a single large unit, they can (theoretically) be quickly and smoothly ramped up or down, giving them a flexibility that is much prized in modern grids. Their limitations will be about information and coordination, problems that can be solved by information technology, which tends to progress faster than any power technology.

A robust market for DERPs could accelerate the spread of distributed energy by offering a reliable revenue stream. It could help combine the technical and localized economic benefits of distributed resources with the market power and stability of centralized energy. Best of all, it could give energy journalists an excuse to say "DERPs" for years to come.