Why virtual power plants are struggling to scale

Posted: March 21, 2025

Imagine that, instead of a traditional power station, your electricity comes from your neighbor's rooftop solar panels, the nearby university's microgrid, or even the electric vehicle in your own garage.

This is the promise of virtual power plants, or VPPs, which have gained traction in recent years as a cost-efficient way to meet variable power demand and help the grid weather extreme stress—all while cutting utility bills.

In Texas, utility NRG Energy and virtual power plant developer Renew Home are now planning to create a 1-gigawatt VPP made up of thousands of smart thermostats by 2035—the largest in the country. Similar projects are taking off in other states.

But experts say they remain an underused tool to leverage all the smart devices, batteries and distributed generation assets (like rooftop solar) that are making their way into a growing share of homes and businesses.

How virtual power plants can support power grids

The idea behind a virtual power plant is simple. Instead of only supplying power from large-scale generation, VPPs aggregate a theoretically unlimited number of distributed generation resources, batteries and other devices to provide extra supply when needed, or automatically curtail consumption to reduce demand.

Such flexibility provides key benefits over a traditional power plant. A utility can use smart thermostats linked to air conditioning units to tweak home temperatures—and lower how much electricity the units consume during demand peaks, with zero or limited noticeable impact to customers.

On hot summer days, the thermostats can be set to pre-cool homes before air conditioning usage typically surges, for example. Similarly, they can draw power from batteries or solar arrays, or store excess energy in plugged-in EVs. All of this can be up and running in as little as six months—much faster than a new power plant.^[1]

In Texas, where NRG and Renew Home are planning their project, extreme weather now threatens a power grid already stretched by growing demand. The two companies will offer free installations of Nest and Vivint smart thermostats for customers who sign up for a rate plan and incentives that allow the companies to shift their power use.

They estimate that 8.5 million homes in the state could yield 8.5 gigawatts of load-shifting capacity for the state's power grid. Eventually, the companies hope to add other devices, including EV chargers, batteries and other smart appliances to their program.

Their plans are part of a bigger trend. Around the US, 33 gigawatts of VPP capacity is now operating or in development across hundreds of programs, meaning the industry has moved "well past pilot scale" according to analysts at Wood Mackenzie.

But that accounts for less than a fifth of total distributed energy capacity, and is also dominated by legacy commercial and industrial demand response. And while nearly half of US states have launched at least one VPP program, California is home to a quarter of those projects, with New York, Texas and Massachusetts making up much of the rest. Many efforts are struggling to move beyond initial experiments, industry participants say.

Why is virtual power plant adoption still lagging?

The slow pace of adoption comes down to a combination of issues.

Market access is one. Many programs are bilateral capacity procurements between VPP providers and utilities or retail electricity providers, and thus closed to residential customers, according to Wood Mackenzie.

Part of the reason Texas is more advanced when it comes to VPPs is that its energy market is more open. Retail electricity providers in the state compete for customers who are not locked into their local utility's service, meaning they can shop around for VPP offers. And retail providers are rewarded for matching their contracts and wholesale power purchases with their rate commitments.

There are successful examples outside of Texas, to be sure. ConnectedSolutions, which is run by National Grid and Eversource in New England, allows anyone to participate. Plus, customers can earn money from batteries, EV chargers, smart thermostats and other devices—rather than just one type.

That technology-agnostic approach is another key criterion to make VPP programs successful, according to the nonprofit advocacy group Solar United Neighbors, alongside flexible participation and fair retail export compensation. Last year, the group worked with solar-battery installers such as Sunrun and Sunnova to come up with model tariffs and legislation to promote a more standardized approach to the fractured state-by-state landscape for VPPs.^[2]

"We're faced with this gap right now between the enormous potential of [VPPs], and the actual deployment on the ground," Glen Brand, Solar United Neighbors' vice president of policy and advocacy, told Canary Media in September.

Flexible participation means customers can join VPPs hosted by third-party companies, rather than being limited to their local utility. Solar and battery sellers, demand response providers and even car makers have already gotten into the business. Fair compensation is more complex, hinging on how much customers and VPP companies get paid in advance, how their performance during grid events is monitored and rewarded, and how they're penalized if they fall short of their promises.

Solar United Neighbors is now trying to convince state lawmakers to introduce the model tariff and legislation in Illinois, Minnesota, New Mexico and Virginia.

Improving the landscape for VPPs could be a game changer for energy management. The US Department of Energy itself estimates potential for 80 to 160 gigawatts of capacity across the country by 2030. That's probably enough to meet up to 20% of peak grid needs and save utility customers billions of dollars every year.

Again, this will require faster adoption, ideally spurred by reforms to how VPP programs are integrated into utility planning and wholesale markets. Even something as simple auto-enrolling customers in programs could help a great deal. Chris Rauscher, head of grid services and VPPs at Sunrun, which runs the biggest single-owner VPP in the US, says the opt-out rate is vanishingly small once people are signed up.

"I think the biggest thing is that customers don't care about virtual power plants," he told Powergrid International last year. "There's an old saying that they spend six minutes total each year worrying about their electricity. Customers just want hot showers and cold beer."