Frontier Forum: Why utilities should go big on VPPs

In the next five years, Arizona Public Service estimates peak demand will grow by 40%. In order to meet that peak, the utility is increasingly turning to demand-side flexibility. A few years ago, APS started working with EnergyHub to experiment with smart thermostats as a resource to manage peak demand. The initial resource was modest – a few megawatts, and then 20 megawatts. That program eventually turned into a 190-megawatt virtual power plant made up of smart thermostats, behavioral demand response, commercial and industrial demand response, and some batteries. And the APS operations team now treats the VPP as a valuable resource. “We had to really build trust in this as a real resource. As it got bigger and you could see a noticeable difference when we called on these devices, that trust really began to build,” explained Kerri Carnes, director of customer-to-grid solutions at APS. This week, we’re featuring a conversation about the value of VPPs with APS’ Kerri Carnes and Seth Frader-Thompson, co-founder and president of EnergyHub. It was recorded as part of Latitude Media’s Frontier Forum series. What does APS’ experience tell us about what is working in VPP program design? How do we convince utilities that VPPs are reliable? And what is their role as load growth rises? “A VPP is actually more capable in some ways than a traditional power plant,” explained Frader-Thompson. “My guess is that over the next few years we'll probably come up with some more nuanced things to call VPPs.” This is a partner episode, produced in partnership with EnergyHub. This is an edited version of the conversation. You can watch the full video here that includes audience questions about VPP design and implementation.

• 0:00Speaker 00

  This is a Frontier Forum, brought to you by Latitude Studios.

• 0:04Speaker 01

  When Carrie Karns started working at Arizona Public Service in 2003, she definitely hadn't heard the term "virtual power plant."

• 0:11Speaker 02

  Breaking technology in 2003 was a scanner. It was like, mind-blowing that I could scan documents and store them on a little disk at the time. They wanted me to order some additional file cabinets to store documents. And I was like, "We have computers, let's use them." And they were like, "Wow, that's smart."

• 0:29Speaker 01

  Over the years, Carrie worked across many different teams inside APS: nuclear, transmission and distribution, operations, the trading desk. Eventually, she landed at the customer-to-grid solutions team. And by that point, technology had come a long way since the scanner. Like a lot of utilities, APS was facing a surge in solar, smart thermostats, and some batteries, but it still hadn't decided on how to harness them.

• 0:57Speaker 02

  Our planners typically are rather conservative, and they have to be, because we have to make sure that we've got all of the resources lined up to meet customer demand in advance of when that demand shows up. And so until a resource or a new technology is proven, they're going to be rightfully skeptical about that.

• 1:15Speaker 01

  Over a decade earlier, Seth Frader Thompson co-founded Energy Hub, a demand-side management platform for utilities. It started with smart thermostats, and over the years, as utilities watched customer-sided resources grow, the platform evolved to include a wider range of technologies.

• 1:30Speaker 03

  And at some point, they would reach a critical mass. They would say, "All right, we need a single platform to manage all of this in one place." And so they came to us for the thermostats, and then the same thing has now happened with other classes of DERs. So you see batteries, EV chargers, EVs, heat pumps, et cetera.

• 1:46Speaker 01

  APS took a similar path. The utility started working with Energy Hub to experiment with smart thermostats as a resource to manage peak demand. It went well, and the program expanded.

• 1:56Speaker 03

  And they decided to just generally double down on what is now customer to grid. And I mean, it's kind of interesting, just the fact that there is a team called Customer to Grid kind of indicates how important that's become for Arizona.

• 2:10Speaker 01

  Customer-side resources were increasingly important because APS faced a fast-rising summer peak, caused by intensifying heat waves, a growing population, and expanding factories and data centers. The initial resource was modest, a few megawatts at first, and then 20 megawatts, still pretty small for the operations team.

• 2:28Speaker 02

  20 megawatts, that feels like noise to them, right? And so, we had to really build trust in this as a real resource. And as we grew the resource, as it got bigger, and you could see a noticeable difference when we called on these devices, that trust really began to build, so much so that it went from, "That's cute, come back when you're a real thing," to, you know, a couple of years later, them asking, "How much can you bring us? How quickly can you grow this resource?"

• 2:57Speaker 01

  That program eventually turned into a 190-megawatt virtual power plant, made up of smart thermostats, behavioral demand response, commercial and industrial demand response, and some batteries. And the APS operations team now treats the VPP as a valuable resource.

• 3:13Speaker 03

  We almost put ourselves at a disadvantage by calling it a virtual power plant, which in a way, almost makes it sound like it's not a real power plant. But then, what's interesting is that a VPP is actually more capable in some ways than a traditional power plant, right? Like, a traditional power plant can only export real power to the bulk system, it's not distributed, whereas a VPP is very distributed. And that's interesting because it doesn't, you don't call things that you dispatch on the distribution system "power plants," you call that something else. But we're just using this term, "VPP." And my guess is that over the next few years, we'll probably come up with some more sort of nuanced things to call VPPs.

• 3:56Speaker 01

  I'm Stephen Lacy. This week, we're diving into virtual power plants with Seth Frader-Thompson of Energy Hub and Kerry Carnes of APS. This conversation was recorded live as part of Latitude Media's Frontier Forum series. What does APS' experience tell us about what's working in VPP program design? How do we convince utilities that VPPs are reliable? And what's their role as load growth rises?

• 4:25Speaker 01

  So when that trust evolved, was it a particular event where the VPP proved itself? Was it a series of events? Was it just the level of scale? What actually changed?

• 4:37Speaker 02

  So, you know, I'm sure you may have seen, it's been national news, we keep breaking at records in Arizona for the hottest summer ever. It's like every summer is the new hottest summer ever. And so during the pandemic, on top of everything else that Arizonans were dealing with, we had another really extreme heat summer. And at the same time, we were also reaching a larger scale of the asset. And it continued to show up. We had to call on it several times that summer, and it functioned exactly in the way that we expected it to. And so that really kind of cemented it as an asset for us, as a real asset that we can depend on, on those days when the system needs to support the most. And for us, we

• 5:22Speaker 02

  like to think about it, it's not just supporting reliability. We also view our virtual power plant as a significant saver for our customers, essentially, right? We didn't have to go to the market and buy expensive power on the real time market. And we didn't have to start a traditional power plant or conventional generation unit that day. So we also saved money on fuel. And so for all those reasons, we really view the virtual power plant as affordability for our customers, not just reliability.

• 5:51Speaker 01

  And Seth, from your perspective, what was the turning point? And is it reflective of how other utilities become open to this resource?

• 5:59Speaker 03

  I think this question of trust, in a lot of ways, it's just like how many, you know, it's like, it's like anything, just sort of practice makes perfect. It's like, how many touches do you have on the ball in a game? You have, you have folks who are on Kerry's team who sort of live and breathe VPPs all day. But then if you're thinking about a planner, someone on the markets and trading team, someone in an operations function, they need to have sort of seen for themselves that there is this track record. And I think it's interesting, I was talking to a client the other day. Who's we've been working together for 10 years, but it was a brand new audience within that client. And one of the execs asked like, this sounds great. I just need to know,

• 6:44Speaker 03

  you know, how much do I derate this in my plan? Like, should I derate it by 50% or by 90%? And I was like, well, hang on, like, I can show you data from literally tens of thousands of events showing that this thing is 99.9% plus reliable. And not only do you have to trust that, or not only can you trust that the platform works, but there's all these backups and other mechanisms that you use to do resource assurance that are sort of similar to the way utilities do contingency planning. And so, you know, the data is there, but the reality is the first time someone comes into this, they don't have years of hands-on experience with it. And so I think that's where we are as an industry is new people are getting

• 7:28Speaker 03

  that hands-on experience. You can, you can get them up to a point with data, but at some point, they've just got to drive the car.

• 7:35Speaker 01

  Carrie, and we talked a little bit about the resource makeup. Can you go, you've got tens of thousands of DERs. Go into more detail about what that resource mix looks like and how it could evolve.

• 7:49Speaker 02

  Yeah, absolutely. So today, we're nearing 200 megawatts in our virtual power plant. The bulk of that, as Seth said, is thermostats by far. This summer, we achieved 163 megawatts with the thermostats. We also have commercial and industrial demand response in the portfolio, residential battery storage, as well as behavioral demand response. But we also, at a point in time, had water heaters in the portfolio. We didn't, we had some communications challenges with, with those assets, so we actually shut that down. But we also are looking forward to, you know, as communication protocols improve and we can bring those types of assets back in,

• 8:30Speaker 02

  we're not going to foreclose the idea. We want to be thinking about how can we bring pool pumps into the portfolio as well. We've got a lot of pools in our service territory. And then, of course, electric vehicles. We're really excited to be transitioning our EV work over to Energy Hub, kind of keeping everything in one spot within our resource operating platform so that we can get smarter about the way in which we dispatch events, leveraging the different technologies.

• 8:58Speaker 03

  Yeah, I think what's interesting about this is that as you round out the resource pool, you start to be able to kind of do more with the VPP than what any given class of DER can do on its own. So for example, if you have a mix of thermostats and batteries and EVs, you can figure out what time of day is each of these sort of most effective. You can do instead of, if you're talking about what is today sort of an event-driven framework, you can move from short events to long events. So instead of a three or four hour event, you can now do an eight hour event. And over time, that kind of creeps you toward what I think will be a 24/7, 365 kind of expectations of VPPs.

• 9:43Speaker 03

  The other thing that I want to mention that I think is remarkable about the Phoenix area is that APS is closing in on 10% of their customers participating in these VPP programs, which is like 2 to 3X what we see sort of as a national average. What's amazing about that is you've got one of the most unforgiving climates in the country, but 1 in 10 customers is choosing to participate in these programs. There's a million reasons why people could choose not to participate, but they choose to participate over and over and over again. And when you survey customers, customers who are participating in these VPP programs are more enthusiastic. They have a higher opinion of their utility than an average customer of that utility.

• 10:28Speaker 03

  So it's one of these things where you're asking more of them, but somehow the opportunity to be part of the solution is actually leading to a higher customer sat.

• 10:38Speaker 01

  What do they care about? Do they want savings? Do they want to compete to see how well they do? Do they want to help the broader grid? What is the? General response.

• 10:49Speaker 02

  Yeah, I would see it's probably a little bit of all of those, right? It's very unique. Each customer has a different driver, but certainly it doesn't hurt to get a bill credit on your September bill in the desert during the summertime, right? So it's a variety of that. But I think the other thing that's really important is, you know, we are so committed to keeping the customer at the front of everything that we do. And so making sure that we're regularly going out and hearing the voice of the customer and then incorporating that into our program design. It's something that my team is just incredibly passionate about. We really want to make sure that we're not developing a program, pushing it out into the universe, and then moving on to the next thing. We want to keep going back and checking in on that.

• 11:31Speaker 02

  And as we continue to scale this asset, that will be even more important because as we grow it and it becomes a larger component of our overall resource mix, we need to make sure that we're keeping customers satisfied so that they stay enrolled and participate year after year after year. And so we just can't, we can't let up on the customer centricity and thinking about the program development lifecycle and what does that mean? What works for them? How do their needs and desires change over time? And to make sure that we're pivoting with them, growing with them essentially.

• 12:06Speaker 01

  Can we talk a little bit more about the evolution of the resource mix? My understanding, Carrie, is that there has been some debate over how to include distributed generation, batteries specifically. What is APS's view on batteries specifically as a VPP tool? And what has been the back and forth with the battery and solar industry on that?

• 12:35Speaker 02

  So we definitely think that all customer-sided resources have a place in APS's virtual power plant, absolutely, right? The reality is customers are adopting a variety of technologies and we want to be, have a program ready for that asset to participate in because we really truly view it as a win-win, right? It is supporting the reliable operation of our grid in a way that supports affordability. Ability for all customers, whether you're participating or not. And so we think that's incredibly important. We also, though, think that it's important to make sure that we fully understand how each technology functions on our, in our service territory, how our customers engage with those technologies. And then we also want to be thinking about, as we're, as it relates to program design,

• 13:18Speaker 02

  what is it, what, what impact might this have on our customers, right? At the end of the day, customer satisfaction has to be at the forefront of everything that we do. And while we think of this as a, as a virtual power plant, it's not the same thing as I push, you know, I call for a start on a, on a combined cycle. Right? When we call on the virtual power plant, there are customers on the other end of that. And so we really want to make sure that before we kind of scale rapidly, any one specific technology, that we're understanding that. And I also think that it's a very, the impact to the customer varies based on the technology. Right? The impacts from a battery event are very different than in the impacts

• 14:03Speaker 02

  from a thermostat event or even an EV event, especially in a service territory like EPS is where we're extremely dependent on our cars. You know, mo- most of our service territory is not walkable. And so we want to make sure that as we're thinking about those active managed charging programs, how can we call events? How can we develop the program in a way that still enables the customers to make the choice that, you know, works for them and their families?

• 14:30Speaker 03

  To, to pick up on the battery point, batteries, if you ignore the customer, the battery, a battery is a, an infinitely flexible resource, right? It can perform more or less the same under any circumstances. It can respond in milliseconds. It can do things, it can, it can do kind of inverter based control, or it can do bulk power control. When you layer in the customer, it can do even more. You know, APS has a pretty meaningful time of use rate. So they've got, I don't know, like a three or four to one spread between an off-peak and an on-peak rate. So if you take a battery and you say, okay, you can use this battery to manage your exposure to peak rates and minimize your bill. That's sort of step one. And then if you layer in, and then you can sort of rent access to the battery,

• 15:13Speaker 03

  to the utility for them to dispatch for, for a variety of reasons, you unlock more value for the battery, you unlock more value for the customer, you unlock more value for the grid. So I love batteries for that. I think EVs are going to be another one because you have, you don't have a lot of batteries plugged in, or sorry, you don't have a lot of EVs plugged in during the traditional sort of summer late afternoon peak, but you have tons of EVs that are plugged in in the overnight period and, you know, school buses you may have available during the afternoon peak. And so you start putting these together and you start to say, oh, I have a ton of flexibility for when I charge this car in the middle of the night. I have the ability to do maybe V to G on school buses in the late afternoon that I can layer in with batteries and thermostats. You can put all this stuff together and do something pretty special.

• 15:57Speaker 01

  Arizona is setting new records for summer peaks and I believe by 2031, you anticipate an additional peak of more than 13 gigawatts and that peak demand is going to be, it's about a 40% increase. So talk about what is shifting, what is contributing to Arizona's growing peak? How does that compare with the rest of the country and is that creating more momentum for VPPs?

• 16:28Speaker 02

  Yeah, absolutely, Stephen. You know, we see significant load growth happening, both the residential and on the non-residential side of things. We've got quite a few data centers that are, of course, energy intensive and interested in citing in our service territory. And so thinking about how can we meet all of this demand as it's coming, we see that customer cited resources are just part of the solution. You know, I think at this point with the load growth that we're seeing, and it really is, and everything on the table, all of the above, what resources can we bring in to solve for this rapid load growth? And we view customer programs as an important part of that solution.

• 17:11Speaker 03

  Something to remember is that when you think about meeting load growth, you often are talking about what is pretty similar to some of the peak demand challenges today, which is, okay, you've got a data center coming in. Do you have firm power to offer that, that data center all 8760 hours in the year? Maybe not. Maybe you, maybe you've got. You know, 100 hours where you can't offer 100% firm firm service. That's a great time to bring in a VPP and say, okay, well, at that moment, you have enough load flexibility to essentially guarantee firm power. But that kind of gets you back to this sort of planning framework of if the if the folks

• 17:52Speaker 03

  who are doing system planning are always looking at the worst case scenario and always assuming that that you that that load is completely uncontrolled. You're never going to conclude you can plan to have it. But if those folks have a few years of experience under their belt using it, then they say, okay, yeah, we'll cover that 20 hours, 100 hours with load flexibility with VPPs.

• 18:14Speaker 02

  Yeah, and I think that's one of the most important benefits of the virtual power plant, right? It is it's truly a flexible resource. This isn't kind of the old demand response where you just push a button and then like, you know, whatever you got, you got. We're able to really kind of plan what load profile we want to provide. And we can schedule that accordingly and can schedule those devices accordingly. And so we're able to really match what the system needs. And having that ability to leverage technology to flexibly kind of help out the grid. It's just, in my opinion, it's just very valuable.

• 18:48Speaker 01

  Seth, you indicated that load growth challenges were contributing to utility assessment of this resource. I'm curious, are there pockets of the country where load growth is particularly acute? How is that influencing general conversations about investment?

• 19:07Speaker 03

  I think there are places like Arizona, like Northern Virginia, you know, a handful of other places that get, you know, the most interest from either data centers or new manufacturing. But I think every utility is facing this. Something that I've been hearing a lot of utilities saying recently is that we've been so good at energy efficiency over the last two or three decades that a lot of planning teams have not been focused on planning for load growth. And so you're sort of like reestablishing a skill that was there and kind of was foundational for 100 years before, but has been sort of underused for the last few years. So I think this exists everywhere. I think anywhere that has rapid growth of EVs is worrying about both the system wide

• 19:50Speaker 03

  load shape and the distribution effects, which I think makes it that much more important to get VP to get EVs into the mix. The EV problem is a little different because you can use EVs as part of a VPP, but we don't really have a term for, yeah, that sort of distributed flexibility that you can deliver from EVs where you can say, all right, we've got congestion way down into the distribution network. How can we just manage that on an everyday basis so that you're not shortening the life of pieces of equipment? You're not forcing yourself to reconductor pieces of the distribution grid. So there's a lot that I think ultimately just boils down to reliability and cost control.

• 20:32Speaker 03

  The more you can manage the load profile of this stuff for any number of reasons, the slower you can move in terms of building this stuff out. I think that's really important because sometimes you just literally can't move fast enough.

• 20:45Speaker 01

  What are the changes to this resource that are coming ahead? Is it forecasting? Is it the diversity of resources? Carrie, what do you think is the most interesting trend that you're seeing?

• 21:01Speaker 02

  So I definitely think it's the diversity of resources because it enables us. We like to, my team and I joke that we like to think about it as Tetris. How can we put these assets together in the most effective manner? But if I, you know, look 10 years down the road and we're talking about, you know, like Seth said earlier, having a goal to get to a gigawatt, to be able to have true grid edge visibility, leveraging AI and other technologies so that we are dispatching the assets in a way that automatically considers the customer experience. So for example, imagine you're in the middle of a yet another heat wave in Arizona. It's unrelenting heat, right?

• 21:42Speaker 02

  I don't want to have to call on your thermostat every single day in a week, Stephen. I want to be able to kind of have through artificial intelligence, be able to smartly dispatch the asset in a way that provides the load profile that we need to provide to support the grid and also at the same time automatically considers and incorporates the customer experience. And so I think getting smarter about the way that we're engaging with our customers, understanding what matters to them, questions like what temperature do you like to have your house at when you're sleeping and building those things in automatically into the asset planning process and dispatch process. To me, that's the world we need to get to.

• 22:25Speaker 02

  But there's a long road between then and now. And what investments do we need to make in our internal systems so that they're talking to one another and we can truly get access to that data to actually get that level of intelligent dispatch?

• 22:39Speaker 01

  Seth, does that world feel achievable?

• 22:41Speaker 03

  It does, completely. And I think AI is a must. You know, you think about, like, imagine stepping into the cockpit of an airplane, right? And like somehow the walls and floor and ceiling are all covered with buttons and levers and stuff. So imagine that you're running the grid and you've got, all the way down at the edge of the grid, you've got some EVs that you're making sure you get them charged without blowing up a transformer. You've got some batteries that you're charging at a certain time so they soak up the extra solar that's coming out. You've got some thermostats you're controlling, you've got some water heaters you're controlling. Now imagine that that's happening across a million customers and you're trying to figure out, how do I optimize all of that at the same time while also saving customers on the bulk system while also firming up renewables? It's just not possible.

• 23:26Speaker 03

  You'd have a million buttons and the only way you're going to do that is with AI. That's the only thing that you can do that's kind of computationally efficient and is going to get the reliability and predictability you need.

• 23:35Speaker 01

  Any other technical innovations you see as important for expanding the industry coming up, Seth?

• 23:42Speaker 03

  No, I actually think that the innovations that are going to be most important from, honestly, are cultural, right? Like, if I think about what sets our sort of largest, most successful customers apart, so the folks like APS and Duke and National Grid and Eversource, like, why do they succeed? They've all gotten good at iteration and they're not afraid to try something that might be on the bleeding edge of a technology and figure out, like, where's the risk here? Is the risk in the implementation, the technology, or is it in the customer experience, or is it in the business model? Get to the sort of the point where you learn quickly.

• 24:26Speaker 03

  If it's working, double down on it. If it's not working, shut it down and try something new. And that, I mean, utilities have historically have not been rewarded for for that cultural flexibility. And I think that's what gets us to the to the scale.

• 24:40Speaker 01

  And that brings us to the closing question. If, let's say, there's a utility or regulator out there that's really skeptical about VPPs. What would you, Carrie, want them to know about your experience? The way you approach this as a utility that might get them to think differently about harnessing it?

• 25:01Speaker 02

  So my message would be everyone should do a VPP. Customers are adopting these technologies anyway. And if you are not developing programs to bring your customers into the fold to help meet your growing load needs, you're leaving something on the table and you're leaving something on the table that's a really low cost resource. So I would just encourage, if you are not sure about it, reach out to some of the utilities that that Seth mentioned. My team is always happy to talk about our experience with the VPP. And I am sure you would find the same with, you know, our friends at Duke and Eversource and National Grid. These, these people are very, very passionate about these technologies.

• 25:44Speaker 02

  And we love to talk about the experience, what we've learned, so that others don't have to kind of repeat the same mistakes that we've made. I don't even know that I would call them mistakes. I think that everything that we do is learning and to Seth's point, iterating, right? Even if something doesn't exactly work out the way that we thought it was going to out of the gate, we don't view that as a failure. We really think that that's just an opportunity to learn and get better and then apply that to other technologies. So I guess my overarching message is you should do your VPP. You should have a VPP.

• 26:14Speaker 03

  Yeah, just, I think it's simple, right? These things are already big. They're incredibly, incredibly reliable. They're an essential part of the resource mix going forward. Like, there's no world in which, in which this is not kind of core to your strategy for for decarbonizing or for dealing with load growth, period. And then on to your point about the regulators. I think lots of different regulators are taking different approaches. The one thing is, I would say, if you're in California and you're a regulator, the rest of the country exists. And if you look at what's going on, there are lots of examples of how you could be doing this a lot better.

• 26:50Speaker 01

  This conversation was recorded live as part of Latitude Media's Frontier Forum with Energy Hub, and there is so much more. This is an edited version of the conversation. If you want to watch the full video with tons of listener questions and a lot more technical details on VPP design, head on over to latitudemedia.com/events and click "Watch Recording." There's like a half an hour more and we dig deeper into program design. Energy Hub currently works with over 70 utilities across North America to build and scale VPPs using its Edge derms platform. To learn more, go to energyhub.com. And for additional coverage of the VPP market, subscribe to our newsletter. You can find it at latitudemedia.com/newsletter.