Distributed energy resources illustraltion

Virtual Power Plant

This hypothetical case study will be particularly relevant to market participants (including existing aggregators), community groups, local governments, developers and other innovators looking for opportunities in this space.

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

A common approach to DER aggregation involves the establishment of a virtual power plant (VPP). A VPP broadly refers to the coordination and aggregation of DER, 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, participation in energy and ancillary services markets and network support services.

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

Parties who operate and control DER 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 frameworks governed by 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).

To help identify and unpack some of the key regulatory questions that a virtual power plant (VPP) proponent may encounter when navigating the national, as well as relevant state or territory based, regulatory requirements, this case study will explore a scenario focused on the aggregation and sharing of distributed energy through a VPP.

For this scenario, the following information is provided:

  • a high-level overview of a hypothetical project including the project goals, project facts and ownership and service delivery models
  • relevant authorisation, registration and licence requirements applicable to the hypothetical business model
  • key energy specific regulatory obligations applicable to the hypothetical business model, and
  • potential challenges the hypothetical Proponent may need to navigate when developing this business model.

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 3 December 2021.
  • 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.
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Scenario: Aggregation and sharing Distributed Energy Resources (DER) through a virtual power plant (VPP)

Project overview

A state government recently announced a home battery subsidy program.  The program provides grid-connected customers in the state the opportunity to access state government subsidies and low-interest loans to help cover the cost of home battery and new solar PV systems.

At the same time, a seller and installer of behind-the-meter solar PV and battery systems to residential and business premises (the Proponent) has identified an opportunity to expand its business to offer a market integrated Distributed Energy Resources (DER) solution to its customers.

In partnership with an innovative IT business, the Proponent has developed virtual power plant software that is able to connect directly to its fleet of solar PV and battery systems. The cloud-based control system will connect a network of 1,000 household and business premises with DER, to operate collectively as a 4MW virtual power plant.

The Proponent expects its VPP portfolio to grow over time, in line with the growth in installations of solar PV and battery systems, driven by state government support.

Consistent with the objectives of the state government’s home battery subsidy scheme, the Proponent considers that the VPP (and others like it) will be able to play a major role in managing power system security and providing value for consumers.   

Project goals

The VPP service seeks to:

  • earn money from providing network support services through peak demand management
  • earn money by providing power system support through provision of market ancillary services , and
  • provide additional value through arbitrage opportunities in the wholesale electricity market .
Project facts
Aggregated DER through a virtual power plant

Location

South Australia

Proponent

Innovative behind-the-meter DER seller and installer

VPP specifications

Capacity

Solar PV and batteries with an aggregate capacity of 4MW

BTM systems

1,000 individual systems

Ownership and service delivery

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 or pool pumps that can be remotely controlled).

Customers will own the batteries, solar PV, smart appliances and other DER 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 retailer1Retail 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 load. 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.

Overview of authorisation, registration and licensing requirements

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 load.

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 kVA who supply electricity for reward by means of a transmission or distribution network.

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

Exemptions must be approved by the Minister. ESCOSA has previously granted exemptions for several VPP trials8 and has recently issued a fixed term exemption for all VPPs.9 The current VPP exemption applies until 30 November 2023, unless revoked earlier.

Description of key energy specific regulatory obligations

The table below sets out the key energy specific regulatory obligations that may be applicable to the Proponent as a result of the various registrations, authorisations and jurisdictional licenses that apply.

Requirement Key regulatory obligations

Authorisations and exemptions - Australian Energy Regulator (AER)

Retailer authorisation required

Authorised retailers must comply with the National Energy Retail Law (NERL) and National Energy Retail Rules (NERR), as well as any relevant provisions of the National Electricity Law (NEL) and National Electricity Rules (NER), and jurisdictional energy legislation, before they start selling energy.

Authorised retailers have various obligations in respect of the sale and supply of electricity to small customers, relating to:

  • customer connections

  • minimum energy-specific consumer protections, including in relation to billing, payment obligations, pricing, customer complaints and dispute resolution, and

  • additional energy-specific consumer protections contained in standard and market retail contracts.

Authorisations and exemptions - Australian Energy Market Operator (AEMO)

Registration as a customer required

Registered Customers must comply with the relevant provisions in the NEL, NER and AEMO Procedures. The relevant provisions include those related to participation in the energy and ancillary service markets, network connections and metering.

Licences and exemptions - South Australia (ESCOSA)

Electricity Generation Licence or exemption required

Electricity generation licence or exemption required

Licence holders must comply with the Electricity Supply Act, their licence conditions and Codes and Guidelines made by ESCOSA. ESCOSA's model licence conditions contain technical requirements all generators must comply with.

Exemption holders must comply with the conditions of the exemption. The conditions of ESCOSA’s VPP exemption include obligations to comply with all applicable laws, provide information to ESCOSA on request, maintain insurance, and comply with all safety, reliability, maintenance and technical requirements imposed by the Office of the Technical Regulator.

Other energy specific regulatory obligations

In addition to the regulatory obligations that flow from the various registration, authorisation and jurisdictional licensing requirements, the Proponent will also need to be aware of various other energy specific regulatory obligations falling out of the national and (relevant) jurisdictional energy market frameworks. For example:

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 the SA Energy and Water Ombudsman.

The Australian Renewable Energy Agency (ARENA) has funded several VPP trials and demonstrations, including projects that were part of the Australian Energy Market Operator (AEMO) Virtual Power Plant Demonstrations program. The knowledge sharing reports for these projects contain useful information on regulatory obligations as well as insights and lessons on regulatory, technical and commercial challenges. These reports are available on the ARENA and AEMO websites.10

Potential challenges for this business model

The above discussion frames the breadth of regulatory considerations that the Proponent could face under this case study. This raises a range of challenges they may need to consider when developing their business model. While these challenges depend on the arrangements used to buy and sell electricity, some threshold questions the Proponent may need to consider are set out below.

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. 

In respect of AEMO registration requirements, the Australian Energy Market Commission (AEMC) has undertaken a comprehensive review of the electricity rules, through the Integrating Energy Storage into the National Electricity Market rule change. This work aims to address some of the costs and complexity associated with registration of energy storage systems and hybrid facilities.  In addition to introducing a new registration category for providers of storage and hybrid energy services – the Integrated Resource Provider - the final rule will also address the regulatory barriers in the rules to bi-directional capability of VPPs as well as the currently limitations around the Small Generation Aggregator participant category.11  A rule determination was made on 2 December 2021 and the majority of changes are to come into effect on 3 June 2024.  However, two changes are coming into effect on 31 March 2023 which will allow aggregators of small generating and storage units to provide ancillary services and allow hybrid systems to use aggregate dispatch conformance.

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 VPP can provide are contingency frequency control ancillary services (FCAS). AEMO published amendments to the MASS in December 2021, which commence 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.12

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 DER 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 Energy Security Board in various 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 Maps13 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.


Additional information

Other information

  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. 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 has limited application and is subject to conditions that are similar to the mandatory conditions set out in electricity generator licences. See https://www.escosa.sa.gov.au/news/electricity-news/dec19-news-2019-e-vppdp-aemo-initiate.

  9. 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

  10. 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/

  11. To enable the provision of frequency control services, the rules will need to recognise units that can provide both ancillary services load and ancillary services generation (note that AEMO has implemented interim arrangements that currently allow for this). For wholesale market participation, the rules will need to consider an expanded SGA category that allows bi-directional market access for aggregated portfolios of DER.

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

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