With limited flexible resources available on the power generation side, an energy system with variable renewable capacity cannot effectively handle real-time load balancing. Therefore, it is necessary to tap the potential of flexible resources on the demand side.

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Compared with traditional demand-side management, VPPs can realise two-way interaction between user and grid, and adjust supply scheduling according to signals from the grid supply, and electricity spot prices.

At one end of the system, VPPs can combine clean power generation resources, controllable loads, and energy storage systems to coordinate the supply. At the other end, they can adjust the electricity load without the need to cut the power supply to users.

In this sense, VPP relies on the applications of advanced communication technologies, artificial intelligence (AI), edge computing, blockchain, and other emerging technologies.

They are expected to promote electricity market reform as they allow distributed power owners, power grid owners, power service providers, and end users to all engage in electricity market trading. Operators and users at all stages have the opportunity to gain revenue.

The VPP, as a single entity, can participate in market transactions and provide auxiliary services such as assisting in the operational safety of the power system. The profits earned by the whole VPP are then distributed based on the contributions of various internal resources.

VPPs also have greater economic benefits. According to a November report by sustainable data provider MioTech, which quoted State Grid, in order to meet the 5 per cent peak load demand in its operating area, the investment in building new thermal power plants and supporting grid systems is about 400 billion yuan (US$57 billion). In the case of a VPP, the capital expenditure is only 40 billion to 57 billion yuan for the setup, operation and costs.

The resources available for VPP operation are rapidly expanding. The total installed capacity of distributed power generation is expected to reach 270 gigawatts (GW) by 2025, according to MioTech. If these scattered resources can be effectively aggregated, the capacity would be equivalent to the construction of about 270 new power plants.

Additionally, the resources with adjustable loads in the construction, transportation, and industrial sectors also have great potential, according to MioTech. By the end of 2021, there were 6.4 million electric cars on China’s roads which, assuming an average battery capacity of 60 kilowatt-hours (kWh), equates to around 400 gigawatt-hours (GWh) of capacity, almost seven times China’s total energy storage capacity expected in 2025, according to MioTech.

China’s VPP industry is getting increasing attention from central and local governments. In January, the National Energy Agency (NEA) mentioned in its annual highlights of China’s energy regulation work that the country should develop VPPs to provide auxiliary services to the energy system.

The NEA issued a policy with the National Development and Reform Commission (NDRC) the same month, to strongly encourage investment in and construction of VPPs.

China opened its first virtual power plant management centre in Shenzhen in August, which connected data centres, charging stations and the subway with a total capacity of 0.87 GW. The State Grid and China Southern Power Grid have developed several VPP demonstration projects in provinces such as Jiangsu, Zhejiang, Hebei, and Shanghai.

The market size of VPPs is forecast to reach 96.8 billion yuan in 2025, and to exceed 450 billion yuan in 2030, with an annual growth rate of more than 35 per cent, according to Chengdu-based Huaxi Securities.

However, the industry still faces several challenges before it actually takes off. For example, the definition of VPP and its functions haven’t reached consensus yet, according to the State Grid Energy Research Institute, a think tank.

“Without a solid and unified understanding, the subsequent design of the market mechanism and management around virtual power plants will grow in separate ways and bring unnecessary costs in future grid connection, transaction, and innovation,” the think tank wrote in an article in November.

In addition, as a market entity, the positioning and responsibilities of VPPs in the power market are still unclear, and their commercial value is yet to be discovered.

“The ambiguity of responsibilities and rights of VPPs will make investors, operators, and grid companies reserved about investing in the development of VPPs,” it noted.

Analysts have urged China to issue more specific regulations to guide the construction of VPPs. Shanghai, Guangdong, and Shanxi have issued policies targeting VPPs at the provincial level, but no special policies have been issued on a national level.

“Currently, China’s VPP industry is still in the exploration stage of its business models,” Liu Zejing, an analyst at Huaxi Securities, wrote in a report in November. “We expect the introduction of a national level policy targeting VPPs will become an important catalyst for the development of the industry in the short term.”