Virtual power plants (VPP) & the decentralization of the energy industry

Learn about how VPPs are contributing to the decentralization of the energy industry and take a closer look at the business model of leading European operator, Next Kraftwerke.

With the rise of asset-light business models in the energy industry, it’s clear that the future of the market will revolve around decentralization. While the peer-to-peer grid system is one example of this shift, let’s explore an alternative model: virtual power plants (VPPs).

What is a virtual power plant?

Similar to peer-to-peer grids, a VPP is a network of decentralized, medium-sized energy producers such as solar parks, wind farms, and combined heat and power (CHP) units, as well as flexible power consumers and storage systems. But rather than operate through various self-governing networks, VPPs interconnect their energy assets via one central control room. Pooling these producers and consumers together enables the central control room to directly balance fluctuations in power production in real-time. It does so by increasing and decreasing the energy produced by each asset in the network.

How do virtual power plants generate value?

Unlike traditional power plants, VPPs don’t own the energy assets themselves. Instead, they own the data that is transferred between each asset in the network. VPPs focus on optimizing the way in which each asset is linked in the network. And thanks to the flexibility of a decentralized network, they can effectively balance the grid. Combining a variety of energy sources into their portfolio – such as solar, wind, and hydro – enables VPPs to maintain this balance. Some VPPs are said to have already exceeded the capacity of a few of the world’s largest nuclear power plants.

With the rising energy demands presented by the advent of mass digitalization, VPPs serve as a potential solution to the challenges posed by our increasing energy consumption.

Next Kraftwerke: A leading VPP operator

A prominent VPP example is German-based Next Kraftwerke. The operator captures value by managing, connecting, and creating value for a growing portfolio of over 7,000 units (consumers or producers), with an aggregated capacity of 7 GW. Their client portfolio consists of decentralized assets on the distribution systems operator grid, instead of large centralized assets on the transmission grid. So, Next Kraftwerke does not own any assets. Instead, it generates value via the flexibility of its clients’ assets in different electricity and balancing markets. This creates additional revenue streams for both energy producers and consumers while helping grid operators maintain the balance in the system.

Next Kraftwerke’s business model

Next Kraftwerke’s offerings are interesting for two key groups. The first is B2B clients with flexible energy consumption or production, such as those in the cooling and chemical industries, combined heat and power plants, and biogas motors. Next Kraftwerke analyzes, assesses, steers, and optimizes its clients’ assets to deliver balanced power, or to do price arbitrage in the electricity spot markets. Through this type of energy management, or ‘balancing as a service,’ they can reduce their clients’ energy costs significantly or create new revenue streams.

The second group that profits from the balancing service is grid operators. Since a VPP brings small assets into the balancing markets of the grid operator, it contributes to the stability of the grid and increases competition in these markets (which is usually captured by conventional utilities). Grid operators penalize grid members that cause instabilities and reward those that maintain stability. As a result, Next Kraftwerke gets paid by grid operators for its stabilizing contributions. The organization forwards a share of these profits to B2B clients.

VPPs in Europe

The competition in the international context depends on the market. Germany was one of the first European countries to liberalize energy for smaller players, so that market is in the consolidation phase. Other countries, however, such as Spain and Italy, are slowly opening up so that in the future they can become more attractive for startups and providers with smaller portfolios.

By becoming the intermediary between end-consumers, production assets (e.g. biogas, solar, wind), and grid operators, Next Kraftwerke broke the monopoly of the power plants that held this role exclusively in the past. In that sense, Next Kraftwerke is not only an enabler for its clients, but also for energy transition in general.

Want more?

Download our energy business model guide for this and 4 more business model examples from within the energy industry.

Thanks for reading!
I’m Farid Malyar, innovation consultant at Board of Innovation. Spreading innovation culture is in our DNA – if you liked the read, contribute to our mission by sharing this article.

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