Today, from 2pm to 5pm, Arushi Sharma Frank, J.T. Thompson, and Jesse Peltan are leading an event in Houston to talk through the Aggregated Distributed Energy Resources program (ADER) within Texas, distributed energy resources, and help entrepreneurs refine their business plans. Frank helped set up the ADER program and previously worked for Tesla. The event is full, but you can join the waitlist and follow Frank’s work on Substack.
The electricity grid was built with flows running in one direction. Generators put electricity in one side, and it was delivered to homes, businesses, and industry on the other side.
The emergence of rooftop solar was one of the first significant challenges to this regulatory system. Now, homes feed power onto the grid at certain times and pull it off the grid at others. As home batteries, smart technologies, and other generation techniques expand, this is a fundamental shift in the system's operations. Instead of just receiving electricity, homes and businesses can also send electricity back to the grid.
Individually, the contributions of any smart thermostat or rooftop solar installation, for example, are relatively small. To create lots of value for the grid, you need to coordinate the activity of these installations. Think about it like an orchestra. A soloist is wonderful, but it’s a different experience to see the entire symphony orchestra.
Where do we find a conductor for our energy instruments? Virtual power plant (VPP) emerged as the catch-all name for these conductors. In basic terms, a VPP is the collection of coordinating energy resources. The actual operation varies based on what is in that collection. These systems collectively generate, store, and sell electricity into the grid.
In Texas, retail electricity providers manage these programs. In other states, they’re overseen through the monopoly utility. Utah, for example, has a VPP using distributed batteries in customers’ homes.
Of course, one downside of VPPs in monopoly areas is that the utility is not always the right person to act. In contrast, a market creates opportunities for the right person to take a chance. The superiority to the monopoly utility model is that, with VPPs and investments in DERs broadly, the person who makes a bad bet pays the costs. In a monopoly utility system, bad bets are placed on our collective backs. In Texas, the person who makes the bet can win or lose according to how they contribute to system needs.
David Energy is a great example of a conductor. The company is a VPP electricity retailer in Texas. Customers sign up with the company as your electricity provider. When the electricity grid is tight, they earn for what you can provide into the system. In one case, on May 8, 2024, this was $4.28/kWh. For reference, the May 2024 average Texas rate was around $0.15/kWh. David Energy creates a way for its customers to earn about 25 times this by participating in the energy market with their energy resources. These skyrocketing moments on the grid are rare, so the average payment for exports is much lower, between 6 or 7 cents. That average varies by season, but the important point is that it reflects real-time prices.
That real-time price for electricity is not just sky high–it’s often rock-bottom low. Customers with electric vehicles can opt-in to the system to charge their cars at those cheaper times. This helps cut down on their monthly bill. It is commonly advertised as moving their car’s charging “off-peak,” which generally means later at night. Still, real-time prices can be cheap in the middle of the day. David Energy’s CEO, James McGinniss, noted that the smart charging program’s participants can still sometimes charge for cheap in the middle of the day because prices are sometimes zero in the middle of the day as well. David Energy still has a fixed rate element of their plan that customers can pay to charge as needed.
Opportunities to smooth the skyrocketing and nosediving to benefit everyone
That power prices both skyrocket and nosedive represents a market opportunity. The basic intuition is simple–find ways to buy low and sell high. These windows are becoming more common. As solar power grows in Texas, so do hours of free electricity. Batteries are also finding their way into more homes through companies like Tesla, Base Power, and Impulse Labs. These all smooth out the highs and lows in power prices.
The benefits of a VPP orchestrating these distributed resources show up on all customer bills, whether or not they participate. To be clear, VPPs can lower everyone’s bills, not just those who are enrolled. That’s because it expands the market of providers of electricity at tight times. The opportunity to earn more than 20 times what you usually pay for electricity encourages homeowners to buy a battery and participate. The emergent result of that will be lower prices for everyone as more people buy at rock-bottom prices and then sell when prices rise. The reason prices skyrocket is because of a shortage. Batteries and the other energy solutions orchestrated by these VPPs solve that shortage. Batteries move electricity from times of plenty to times of scarcity.
VPPs are also used to shape the demand of customers in ways that take advantage of cheaper prices. The thinking here is that VPPs can shift use to off-peak times. This is when an electric vehicle doesn’t charge because real-time prices are $4.28/kWh instead of free or cheap. It’s also when smart thermostats know that prices will rise later in the day, and so they turn on the AC to pre-cool a home. In this way, VPPs aren’t reducing energy use, but advancing or postponing it in time.
It’s important here that VPPs don’t become comparable only to the wrong kinds of energy efficiency or demand-side programs that harm customers. Reasonably, customers want comfortable homes and hot water. They don’t want to get home to a house that is 85 degrees and where they don’t have the hot water for a shower after work. Only a subset of the stingiest customers may be willing to put up with those downsides. The rest shouldn’t have to.
Orchestrating all of these investments is a lot of work. Homes are a conglomeration of hundreds of opportunities to participate, but knowing which provides the best investment is not easy. Texas’ retail electricity providers are the right sieve to sort out which customers are willing to give up and at what prices. They can help customers find smart investments. In other areas, utilities can offer special rates to customers. In every case, no matter the state, policymakers should ensure that they’re only paying for performance.
VPPs are part of an energy-abundant future
With that limit in mind, policymakers wanting to usher in an energy-abundant future should get excited about how entrepreneurs can shave system peaks by involving customers in meeting system needs. Because the entire grid was originally designed with only a one-way flow in mind, there’s a lot to do to unlock the potential for multi-directional flows.
Regulatory rules need reshaping for these new tools and technologies. Arushi Sharma Frank has submitted several ideas in formal rulemaking processes that are worth considering. In a nutshell, reforms should allow the seamless integration of customer-owned resources, ensuring that regulatory frameworks don’t stand in the way of energy innovation. That means straightening out building and fire code requirements to make installations easy. Interconnections and permitting should take hours and, at most, a few days, not weeks or months.
Policymakers should empower innovative companies to unlock the full potential of virtual power plants. By allowing entrepreneurs and customers to collaborate, we can smooth out peaks, reduce costs for everyone, and enhance grid resilience. But this is just one piece of the puzzle. An abundant energy future will combine dynamic, customer-driven solutions like VPPs with new generation sources, storage, and smarter grid management—ensuring we have both the power and the flexibility to meet tomorrow’s energy demands.
For more:
The real story of Texas VPP policy with Arushi Frank, Founder of Luminary Strategies, DER Task Force.
Why are Virtual Power Plant Models so Different Around the US?, Frank’s comments on the different models of VPP integration and why those differences emerge.
Integrating Distributed Energy Resilience Solutions with Arushi Sharma Frank, interview with Doug Lewin.
Innovations and Decentralized Energy Markets, Lynne Kiesling.