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
A common approach to DER aggregation
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
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
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
To help identify and unpack some of the key regulatory questions that a virtual power plant
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
The Australian Energy Regulator (AER) regulates electricity networks and covered gas pipelines in all jurisdictions except Western Australia. The AER sets the amount of revenue that network businesses can recover from customers for using these networks. The AER also enforces the laws for the National Electricity Market (NEM) and spot gas markets in southern and eastern Australia, as well as monitoring and reporting on the conduct of market participants and the effectiveness of competition.(AER), the Australian Energy Market OperatorThe Australian Energy Market Operator (AEMO) manages electricity and gas systems and markets across Australia, helping to ensure Australians have access to affordable, secure and reliable energy. Ownership of AEMO was – and still is – shared between government and industry, with members representing federal and state governments, as well as generation and production, distribution, retail and resources businesses across Australia. AEMO has always operated on a user-pays cost-recovery basis, and it recovers all operating costs through fees paid by industry participants.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.
- Limitation of liability: To the maximum extent permitted by law, the AER and its officers, employees, consultants, contractors, and other contributors to the Material (or their respective associated companies, businesses, partners, directors, officers or employees) are not liable for any errors, omissions, defects or misrepresentations in the Material, or for any loss or damage suffered by persons who use or rely on such information (including by reason of negligent act, omission, misstatement or otherwise). If any law prohibits the exclusion of such liability, the AER’s liability is limited, at the AER’s option, to the re-supply of the information, provided that this limitation is permitted by law and is fair and reasonable.
Scenario: Aggregation and sharing Distributed Energy Resources (DER) through a virtual power plant (VPP)
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
At the same time, a seller and installer of behind-the-meter
In partnership with an innovative IT business, the Proponent has developed 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.
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
Services that are essential to the management of power system security, facilitate orderly trading in electricity and ensure that electricity supplies are of acceptable quality. These services are managed by the Australian Energy Market Operator (AEMO) to maintain standards for frequency, voltage, network loading, and system restart processes., and
- provide additional value through arbitrage opportunities in the wholesale electricity market
Wholesale electricity markets are markets in which generators sell electricity and retailers buys electricity. Retailers buy electricity to on sell to end users..
|Aggregated DER through a virtual power plant|
Innovative behind-the-meter DER seller and installer
1,000 individual systems
Ownership and service delivery
The Proponent will own the VPP software and act as the VPP operator
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
Wholesale electricity markets are markets in which generators sell electricity and retailers buys electricity. Retailers buy electricity to on sell to end users., and
- ancillary services
Services that are essential to the management of power system security, facilitate orderly trading in electricity and ensure that electricity supplies are of acceptable quality. These services are managed by the Australian Energy Market Operator (AEMO) to maintain standards for frequency, voltage, network loading, and system restart processes.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
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
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
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
The Proponent would also be required to register with Australian Energy Market Operator
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
Importantly, a VPP is not considered to be a generating system under the National Electricity Rules
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
Retailer authorisation required
Authorised retailers must comply with the National Energy Retail Law
Authorised retailers have various obligations in respect of the sale and supply of electricity to small customers, relating to:
Authorisations and exemptions - Australian Energy Market Operator
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
If the Proponent is an authorised retailer
The Australian Renewable Energy Agency
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
In respect of Australian Energy Regulator
In respect of AEMO registration requirements, the Australian Energy Market Commission
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
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
Trials undertaken by the Australian Energy Market Operator
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
Partnering with an authorised retailerUnder the National Energy Retail Law (NERL), a person must hold a retailer authorisation (unless exempt from the requirement) prior to engaging in the retail sale of energy (electricity or gas). A retailer is generally a person (ie: a company) that engages in the activity of selling energy to customers for premises (see s.88 of the NERL for further information about selling of energy). The Australian Energy Regulator (AER) administers retailer authorisations.would limit participation in the VPP to customers of that retailer.
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.
For more information see: https://www.aer.gov.au/retail-markets/authorisations
Note that authorisation by the AER is not a necessary condition of providing a VPP service and depends on the business model.
Each generating system within a VPP has its own connection point to the national electricity marketThe National Electricity Market (NEM) spans Australia’s eastern and south-eastern coasts and comprises of five interconnected states that also act as price regions: Queensland, New South Wales (including the Australian Capital Territory), South Australia, Victoria, and Tasmania. Western Australia and the Northern Territory are not connected to the NEM, primarily due to the distance between networks. The NEM’s transmission network carries power from electricity generators to large industrial energy users and local electricity distributors across the five regions. These assets are owned and operated by state governments, or private businesses.and therefore classification of each system (and registration of the system’s owner) is determined based on the individual nameplate rating.
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
For example, participants enrolled in AEMO’s Virtual Power PlantA virtual power plant (VPP) is collection of distributed power-generating units connected by a central software that makes up a larger power plant. VPPs can be made up of combined heat and power asset, renewable generation through wind and solar farms, as well as battery storage. The units are dispatched together through the VPP, but each individual asset can operate independently.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 generatorAny person who owns, controls or operates a generating system connected to a transmission or distribution network must register as a with the Australian Energy Market Operator (AEMO) as a generator, except where they meet the exemption criteria. Each of the generator’s registered generating units must be classified as market or non-market depending if the sent-out electricity is sold through the spot market and classified as scheduled, non-scheduled or semi-scheduled depending on how the generating unit participants in central dispatch.licences. See https://www.escosa.sa.gov.au/news/electricity-news/dec19-news-2019-e-vppdp-aemo-initiate.
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/
To enable the provision of frequency control services, the rules will need to recognise units that can provide both ancillary servicesServices that are essential to the management of power system security, facilitate orderly trading in electricity and ensure that electricity supplies are of acceptable quality. These services are managed by the Australian Energy Market Operator (AEMO) to maintain standards for frequency, voltage, network loading, and system restart processes.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.
Hypothetical case study exploring a shared community battery established by a local energy cooperative, providing electricity to a population of 5,000, offering revenue to community investors, storage services, peer-to-peer trading, network support services, and energy and wholesale market ancillary services. Particularly relevant for: battery operators, battery providers, community groups, local governments, private investors