Virtual Power Plant

The growth in distributed energy technology has enabled the exploration of models that use smart technology to aggregate and optimise consumer energy resources (CER) to enable new value streams for customers.

A common approach to CER aggregation involves the establishment of a virtual power plant (VPP). A VPP broadly refers to the coordination and aggregation of CER, including solar PV, storage and controllable load devices - for example, air-conditioners, hot water systems or pool pumps – through VPP software.

VPPs are grid connected systems that could be, but do not need to be, constrained by location, or types of participating resources or customers. They can deliver multiple values streams to their customers through savings in retail energy charges, and participation in energy and ancillary services markets and network support services.

A VPP which enables the trading and sharing of locally generated CER within a defined geographical boundary may also be driven by affordability, reliability and decarbonisation objectives.

Parties who operate and control CER on behalf of customers for the purpose of participation in the National Electricity Market (NEM) are subject to the national energy regulatory frameworks – that is, the National Electricity Law (NEL) and National Electricity Rules (NER), and the National Energy Retail Law (NERL) and National Energy Retail Rules (NERR).  These frameworks include arrangements for registration and participation in the wholesale and retail markets, metering arrangements and system security obligations.

In addition, these parties may be required to comply with various jurisdictional energy rules and regulations, including licensing requirements, depending on their location, technical characteristics and business model.  They may also be required to comply with Australian Energy Market Operator (AEMO) procedures and technical specifications (for example, the market ancillary services specification, which sets out technical specifications for the provision of ancillary services) and Australian Energy Regulator (AER) authorisation or exemption requirements (for example, retailer authorisations/exemptions and network exemptions).

The Use Cases on this website (‘Material’), are made available for use on the following basis:

• Purpose: The Material is provided for general information only. It is designed to assist you to gain a basic understanding of the subject matter and is not intended to be comprehensive. You are not permitted to commercialise it or any information contained in it. The Material is not and should not be regarded as legal, business or other professional advice. It should not be relied on and is not a substitute for obtaining independent legal, business or other professional advice relevant to your particular circumstances.
• Currency: The Material is based on publicly available information as at the date of its preparation. The Material is current as at 1 July 2024.
• Scope: The Material only covers energy market regulatory obligations that are administered by the Australian Energy Regulator (AER), the Australian Energy Market Operator or the relevant state or territory energy regulator. It does not cover other obligations that may apply, such as safety obligations, general consumer law obligations or obligations under the financial services regulatory framework. It also does not cover associated technical matters such as compliance with Australian standards or connection requirements.
• No reliance or warranty: The Material may be subsequently amended or updated. While reasonable care is taken in the preparation of the Material, the AER makes no representation or warranty, express or implied, as to the currency, accuracy, reliability or completeness of the Material, or as to its suitability for any purpose. In all cases, anyone proposing to rely on or use the Material should independently verify its accuracy, completeness, reliability and suitability for their own purposes, and obtain independent and specific advice from appropriate experts.
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The Proponent will own the VPP software and act as the VPP operator. As the VPP operator, it would be responsible for controlling and coordinating an aggregation of end-customer owned assets including customers’ batteries, solar PV system and smart appliances (e.g. smart air-conditioners, hot water systems or pool pumps that can be remotely controlled).

Customers will own the batteries, solar PV, smart appliances and other CER devices.

Before setting up its business model, the Proponent considered the multiple value streams available to a VPP including through the provision of:

• network support services to the local distributor
• energy services in the wholesale electricity market, and
• ancillary services in the ancillary services market (for example, FCAS)

The Proponent initially considered establishing a service delivery model focused primarily on the provision of services to the local distributor, through network support agreements. This model would have enabled customers involved in the VPP to retain their existing retailer and the ability to switch to a new retailer at any point. 

However, to increase opportunities for revenue, the Proponent decides to establish a model that enables the provision of services in both the energy and ancillary services markets, in addition to network support services. Under this model, value would be returned to customers through the Proponent being, or partnering with, an Australian Energy Regulator (AER) authorised retailer and be registered by Australian Energy Market Operator (AEMO) as a Market Customer.

To maximise participation immediately and to set itself up for future growth, the Proponent decides to become an authorised retailer and register as a Market Customer itself, rather than partnering with an existing retailer¹.  Retail authorisation and registration as a Market Customer will allow the Proponent to achieve two things.

First, as a retailer, the Proponent will purchase energy in the wholesale electricity market and pay the wholesale spot price for the net amount of energy consumed by its customers.  With the ability to remotely control the solar PV, battery systems and smart appliances of its customers, the Proponent will be able to shift energy to respond to fluctuations in the spot price, allowing it to earn money by generating more electricity² or save money by reducing consumption when the spot prices are high.  This will have the effect of reducing the Proponent’s settlement bill for energy consumed by customers in its VPP portfolio. A share of this value will be returned to VPP customers through a credit on their energy bill.

Second, in its capacity as a Market Customer, the Proponent will be able to participate directly in the ancillary services market - that is, the FCAS markets.  This will require the Proponent to apply to AEMO for approval to classify the relevant customer loads as ancillary service units. It will also need to comply with AEMO’s Market Ancillary Service Specification (MASS).  Revenue earned from participation in the FCAS markets will also be shared with VPP customers through a credit on their energy bill.

To provide network support services from the VPP, the Proponent would need to negotiate a contract with the local distributor.

For the purposes of this case study, the Proponent has decided to expand its business to include the sale of energy to retail customers.  It will therefore need to seek an energy retailer authorisation from the Australian Energy Regulator (AER)³ and to establish all the necessary systems (including billing systems) to support that function and comply with the resulting obligations.⁴

The Proponent would also be required to register with Australian Energy Market Operator (AEMO) as a Customer. It will be a Market Customer given it will purchase electricity from the electricity wholesale market for its customers. 

As a Market Customer, the Proponent would be able to participate in the energy market on behalf of households participating in the VPP, that is - buying energy in the wholesale electricity market. The Proponent would also be able to participate in the ancillary services markets on behalf of the VPP in its capacity as a Market Customer, but would need to apply to AEMO for approval to classify the relevant market loads as ancillary service units.

Importantly, a VPP is not considered to be a generating system under the National Electricity Rules and therefore the Proponent of the VPP would not be eligible for registration as a Generator.⁵

The Proponent will need to pay a fee to register with AEMO as a Market Customer.⁶  The process for registration is set out on AEMO’s website.⁷

In South Australia, a generation licence or exemption is required from the Essential Services Commission of South Australia (ESCOSA) for generators with a rated nameplate output of more than 100 kVA⁸ who supply electricity for reward by means of a transmission or distribution network.⁹

Exemptions must be approved by the Minister. ESCOSA has previously granted exemptions for several VPP trials¹⁰ and has recently issued a fixed term exemption for all VPPs.¹¹ The current VPP exemption applies until 30 November 2025, unless revoked earlier.

Persons captured by the ESCOSA licensing regime are also subject to rules relating to equipment installation, energy infrastructure standards and equipment safety, and the accompanying ESCOSA inspection and enforcement rights. ESCOSA also sets compliance guidelines for licensed parties.

To provide market ancillary services and participate in central dispatch, the VPP operator would need to meet relevant requirements in the Australian Energy Market Operator's (AEMO) Market Ancillary Service Specification (MASS), which requires specific telemetry and other sophisticated equipment. This is required by Chapter 3 of the National Electricity Rules and is subject to civil penalty provisions.

If the Proponent is an authorised retailer under the National Energy Retail Law, it will be required to be a member of Energy and Water Ombudsman SA.

The Proponent will need to meet various requirements in order to obtain an energy retailer authorisation from the AER and a customer registration from Australian Energy Market Operator (AEMO).

In respect of Australian Energy Regulator (AER) authorisation requirements, the Proponent would need to demonstrate that it has the necessary organisational and technical capability and financial resources and is a suitable person to hold an authorisation. It will then become subject to all of the same consumer protections and other regulatory obligations as a large electricity retailer, with large financial penalties for non-compliance. It will therefore need systems and staff with expertise in these areas and well-developed compliance systems. The costs of complying with these requirements may impact a VPP's ability to make competitive commercial offers to customers. 

The Proponent will be responsible for buying energy in the wholesale market to meet its customers’ electricity consumption needs and selling energy generated by the VPP into the ancillary services markets. The wholesale spot price varies every 5 minutes and can be very volatile, while most retailers sell energy to small customers for a fixed price. The Proponent will need to manage this financial exposure through, for example, hedging products.

As noted above, to provide market ancillary services, the National Electricity Rules (NER) require the Proponent to demonstrate that it can meet the requirements for telemetry and other sophisticated equipment as set out in the Market Ancillary Service Specification (MASS) made and published by the Australian Energy Market Operator (AEMO) under Chapter 3 of the NER. Currently, the only ancillary services that VPPs can provide are contingency frequency control ancillary services (FCAS). AEMO published amendments to the MASS in December 2021, which commenced on 1 February 2022. These amendments include changing the minimum measurement time resolution for fast FCAS delivery from VPPs from 50 milliseconds to 200 milliseconds, which is expected enable VPP operators to comply with the MASS at lower cost.¹³

There are now multiple VPPs operating in the National Electricity Market (NEM) that exceed 10 MW and for several operators, the aim is to have portfolios of hundreds of megawatts in the next few years. However, as the size and scope of aggregated CER portfolios increase, so too does the need for operational visibility and dispatchability of VPPs, in addition to fit-for-purpose performance standards, to maintain system security and reliability. AEMO is considering options to provide operational visibility (both to it and distribution businesses), but these may involve costs for aggregators and device owners, which will need to be considered and factored into decision making.

Trials undertaken by the Australian Energy Market Operator (AEMO) also highlight the complexities associated with predicting VPP value. In particular, future revenue from frequency control services and wholesale energy price movements are event driven.  The Proponent will need to consider carefully what information will be provided to consumers who plan to participate in a VPP around the value that may be gained and ensure it complies with Australian Consumer Law obligations and, as an authorised retailer in this case study, the National Energy Retail Law (NERL) and National Energy Retail Rules (NERR) obligations.  Broader consumer obligations around VPPs (for example, provisions around explicit informed consent to change between VPP providers) are currently being considered by the Australian Energy Market Commission (AEMO) and through various other workstreams.

To provide network support services from the VPP, the Proponent would need to negotiate a contract with the local distributor.  Whether the distributor is willing to enter such a contract and the amount it is willing to pay for services will depend on a range of factors including whether the local distribution network is facing capacity constraints at times of peak demand and/or voltage issues at times of peak export from solar systems. Network support payments may also vary over time – for example, a distributor may be willing to pay a network support payment for a short period of time to defer an augmentation but may not be willing to enter into a longer-term agreement. Information published by distributors, the Network Opportunity Maps¹⁴ and discussions with the relevant local distributors can help VPP proponents identify the locations to focus on where VPP services are likely to be of the most value to the distributor.

The AEMC recently proposed a number of changes to the NER, including several which enable 'flexible' CER (e.g. rooftop solar, batteries, electrical vehicle)) to be identified and managed separately from other 'passive' consumer loads (e.g. lights, fridges) in the national energy market. These changes mean that, in future, opportunities for small customers participating in VPPs to benefit from the provision of services to network businesses may increase as networks gain access to secondary settlement point data which may lead to more network services agreements for demand management. A draft determination and draft Rule for the Unlocking the benefits of CER through flexible trading rule change were published in February 2024. A final determination and final Rule are expected to be published in the second half of 2024, with new Rules to commence in 2026.¹⁵     

1. Partnering with an authorised retailer would limit participation in the VPP to customers of that retailer.

2. Note that periods of net generation from households participating in the VPP are considered ‘negative load’ and so the retailer is paid at the spot price for this generation.

3. For more information see: https://www.aer.gov.au/retail-markets/authorisations

4. Note that authorisation by the AER is not a necessary condition of providing a VPP service and depends on the business model.

5. Each generating system within a VPP has its own connection point to the national electricity market and therefore classification of each system (and registration of the system’s owner) is determined based on the individual nameplate rating.

6. Registration fees are set out in AEMO’s electricity market fees schedule. See: https://aemo.com.au/about/corporate-governance/energy-market-fees-and-charges

7. See: https://aemo.com.au/en/energy-systems/electricity/national-electricity-market-nem/participate-in-the-market/registration

8. The low voltage poles and wires that take power from the transmission networks to homes and businesses across Australia.

9. The Department for Energy and Mining is currently reviewing the South Australian licensing framework.  A Position Paper published in February 2024 proposes increasing this threshold from 100kVA to 5MW with the condition that the exempt entity maintain a maintenance plan to the Technical Regulator. See: https://yoursay.sa.gov.au/review-electricity-licensing-framework/news_feed/release-of-position-paper 

10. For example, participants enrolled in AEMO’s Virtual Power Plant Demonstrations Program were granted an exemption from the requirement to hold an electricity generation licence by ESCOSA. The exemption had limited application and was subject to conditions that are similar to the mandatory conditions set out in electricity generator licences. In October 2023, ESCOSA extended the term of the temporary exemption for VPPs. It is now due to expire on 30 November 2025. This aligns with the anticipated timeframe of ESCOSA’s electricity licensing framework review. See  https://www.escosa.sa.gov.au/news/electricity-news/dec19-news-2019-e-vp…. https://www.escosa.sa.gov.au/projects-and-publications/projects/electri….

11. See https://www.escosa.sa.gov.au/projects-and-publications/projects/electricity/electricity-generation-licence-exemption-virtual-pp-operations-ev-charging-and-sub-5mw-operators/vpp-ev-sub5-initiate

12. See for example: https://aemo.com.au/-/media/files/initiatives/der/2021/vpp-demonstrations-knowledge-sharing-report-4.pdf?la=en, https://arena.gov.au/assets/2021/08/simply-energy-vppx-stage-3.pdf, https://arena.gov.au/projects/agl-virtual-power-plant/

13. See: https://aemo.com.au/en/consultations/current-and-closed-consultations/mass-consultation.

14. See: https://www.energynetworks.com.au/projects/network-opportunity-maps/accessing-the-network-opportunity-maps/

15. See: https://www.aemc.gov.au/rule-changes/unlocking-CER-benefits-through-flexible-trading