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■ Date: July. 14, 2023
 
【 VPP (Virtual Power Plant): Growing as China’s Energy Market 】
 
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[Snapshot]
1. China’s VPP construction, in which most of VPPs are invitation type, falls behind world’s advanced energy markets, exposing market opportunities for experienced VPP players. Chinese VPP market size is expected to exceed RMB 30 bn in 2025. 
 
2. The load modulation market leads to good opportunities for VPP players who are able to modulate various energy resources, including distributed generators like rooftop PV, especially in middle, west and north regions. A national demo gave VPP stakeholders an average profit of RMB 0.18/kWh in 2020-2021. The profit is expected to increase as AS is further marketized.
 
3. The frequency modulation market can be potential business for VPP players with efficient frequency control capabilities, e.g., owning Energy Storage System (ESS), in the southern regions. The South Grid disclosed a frequency modulation market size of RMB 1.11 bn in 2022.
 
4. The emerging spot market will provide profitable chances for VPPs with sophisticated forecast capabilities for power generation, consumption and market price. Guangdong, Shandong, Shanxi, Inner Mongolia and Gansu’s spot markets have a price spread gap between RMB 0.195/kWh and RMB 0.548/kWh, which can be the profitable room for VPPs.
 
Keywords: #VPP #AS market #load modutation, #frequency modulation #spot market #capacity market
 
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1. Another blog article: "China's Demand Response in Action"
 
In 2022 May, SPIC launched a VPP in Shenzhen to join Guangdong power spot market. This is the first time in China that a VPP benefited from a spot market, with an average price of RMB 0.274/kWh. 
 
In the highlight of utilizing more demand-side resources, VPP is considered one of the optimal solutions to relieve grid’s pressure. To encourage VPP industry, China has opened up several market opportunities for VPPs, including ancillary services market and spot market. This indicates the marketization phase of VPP takes off.
 
I. China’s VPP in comparison with other countries
Typically, VPP’s development can be segmented into three phases: 1) Invitation-type VPP 2) Marketized VPP 3) Autonomous VPP. China has realized the 1st phase – invitation mode stage, now entering 2nd phase – marketized VPPs. 
 
Figure 1. The development stage in China
 
In the invitation mode, which is like a top-down approach, VPP usually provides grid support by the means of demand response (see previous blog: China’s Demand Response in Action). The grid company asks VPPs if they would like to adjust power consumption amount. After they accept the invitation and adjust accordingly, VPP participants can be compensated by government fund. In China, most VPPs are still invitation mode and considered to be the same as ‘demand response’. One of the current issues is very limited demand response events while still relying on coal-fire power plant for making power balance.
 
Following the invitation-type VPP, China has just entered marketized VPP stage. At this phase, VPPs can access to power markets and proactively bid at markets. Although China is just beginning this phase, there is an increasing policy trend that allows VPPs to enter various markets more easily, from ancillary service market, capacity market, to power spot market. Consequently, it is expected to see more business opportunities.
 
Figure 2. Overview structure of VPP with AS market
 
The third phase, autonomous VPPs, goes further beyond the concept of load modulation. As the resource types, participant number and covered geographical area increase, the VPP is actually more like a virtual power system.  VPP operators at this stage play a role of grid dispatcher. They not only regulate the consumption amount, also modulate the distributed power generation. So far, around the world, US, Europe and Australia are pilot in constructing autonomous VPPs. 
 
Figure 3. VPP development comparison of China, Australia, US and Europe
 
By comparing China, Europe, US and Australia, it shows that China lags behind other three countries in terms of marketization stage. In Europe, US and Australia, VPPs can successfully trade and gain profits at various energy markets. By contrast, most Chinese VPPs are subsidized by government fund, with only a minority of demo VPP projects entering market. Even for these few marketable VPP projects, it has been also quite difficult for them to realize profits.
 
In the types of energy resources, these countries are also very different. European VPPs anchor in distribute RE generators, Australian VPPs feature user-side storage systems, and US’s VPPs mainly use residential load resources while China’s VPPs basically use commercial and industrial (C&I) load. These differences imply the technology gap among them. Europe, US and Australia’s VPPs are more advanced in coordinating multiple-types and massive number of resources at the same time, so they are able to use distributed RE and residential load and batteries. China, not so proficient in modulation technology, has had to leverage commercial and industrial loads which doesn’t require high coordination technology.
 
Figure 4. Next Kraftwerke’s VPP model
 
For example, in Europe, Next Kraftwerke has aggregated over 13,000 distributed energy resources in eight EU countries, including 6,000 GW PV resource. By contrast, China has built up a total VPP capacity pool of 4.8GW in some provinces such as Hebei, Shanghai, Shandong, Zhejiang, Henan and Shanxi, as of Mar. 2023. 
 
II. China VPPs entangled with AS markets
Entering the marketization phase, China’s VPPs can currently join three energy markets: ancillary services (AS) market, spot market, and capacity market. The AS market is the most mature one and ready for current and mid-term, while the spot market is for the longer run. The capacity market welcomes VPPs but it is just at beginning stage. Different provinces have different maturity levels of each market. So, when VPP players entering China, they’d better check out markets provincially or regionally.
 
Figure 5 & 6. AS markets status in 2019*
*2019 is the last year China had the official data for AS market size
 
In China exist nine types of services, of which load modulation and frequency modulation mainly lead to monetization opportunities for VPP, representing over 90% of total ancillary service fees. According to China Electricity Council, the total society’s electricity consumption is estimated to reach 9.5 trillion kWh in 2025 and 11 trillion kWh in 2030. The ancillary service (AS) fee is expected to increase from 2.5% in 2023 to 3% in 2025. Thus, if the average electricity fee is assumingly 0.6 RMB/kWh, the AS market scale will be around RMB 171 bn in 2025 and RMB 198 bn in 2030.
 
Let’s have a look at load modulation market and frequency modulation market respectively.
 
1. Load modulation market
In China, the first energy market that has opened to VPPs is the load modulation market to give the stability to the central grid for power balance. They are mainly centered in middle, west and north regions. In 2020, Huabei region firstly allowed VPPs to enter load modulation market. During the 4-month pilot stage, the Jibei VPP profited at an average price of RMB 0.18/kWh for over 3,200 hours. These VPP operators and participants had a total revenue of RMB 6.24 million. Following that, Shanghai, Zhejiang and other regions’ load modulation markets gradually welcomed VPPs. 
 
Figure 7. Load modulation markets in China (as of Jan. 2023)
 
For VPPs to deliver load modulation service, one major key factor is a variety of the resources, from adjustable load, interruptible load, storage system, distributed generators to EV charging piles. The more types of resources of a VPP, it can be more flexible in load modulation, but it will be more technically difficult to construct and build.
 
Since China’s VPPs are transitioning from invitation mode to marketized mode, most VPPs are based on the load resources, such as HVAC and lightning, which are mostly from industrial and commercial side. 
 
These load-side VPPs have some prominent limitations. Firstly, not many industrial and commercial power users would like to suddenly change their consumption routine. Secondly, they have limited modulation capacity because industrial and commercial power users have very limited adjustable (or interruptible) load as factory cannot halt major production machine. For example, a pioneer VPP company, DFE (东方电子), has mainly aggregated industrial load and residential load. In a quick response, it can only modulate a capacity of 89MW.
 
Figure 8. China’s first marketized VPP project in Jibei
 
Thus, more resources from non-C&I load side are demanded. As the load modulation market becomes mature, it is expected to see an increasing demand for VPPs with multiple energy resources since they can respond to market more efficiently and tend to have larger capacity. As mentioned above, China’s VPP modulation technology so far has lags behind that of Europe, US and Australia. VPPs in these countries can automatically modulate a variety of different energy resources. A typical representative is Germany’s Next Kraftwerke, a VPP developer and operator. It has managed a total of over 11GW energy resources, including distributed renewable energy generators, load and storage systems, and can automatically respond to market prices and instructions.
 
In this way, multi-resources handling especially distributed generators, can seize the opportunity, including collaboration with local players, in China’s load modulation market in some provinces like Hebei, Henan and Shanxi.
 
2. Frequency modulation market
Similar to the load modulation market, frequency modulation market is another major arena that can use distributed energy resources to enhance the power quality. These markets have been mainly in south-east and south-west region and provinces. According to NEA’s data, South Region’s frequency modulation market size reached RMB 1.11 billion in 2022. Currently, the regional market modulates frequency at a daily mileage of 250TW. However, only two, Chongqing (at later stage) and Hubei (only draft policy), frequency modulation markets have recently opened to VPPs.
 
Figure 9. Frequency modulation markets in China (as of Jan. 2023)
 
So, why VPPs are not qualified enough by frequency modulation market? 
 
To deliver frequency modulation service, VPPs should respond to the market demand within a few seconds. Also, they should be able to provide two-way adjustment (frequency increase or decrease). Therefore, the more flexibly and efficiently VPPs can switch power output to reach stable frequency level, the better and more technically difficult it is. Currently, an ideal solution for frequency modulation is Energy Storage System (ESS). Clues Electronics (科陆电子) Engineer estimated that an ESS could help a set coal-fire generator (2 x 1GW) improve AGC’s frequency performance (called Ki value) to above 2.1, resulting at an average profit of RMB 0.274/kWh at market . 
 
Since China’s VPPs mostly aggregate C&I load that can be difficult for on-demand adjustment, they cannot instantly adjust frequency by turning on/off their working machines. So, once again, more energy resources, especially ESS, from non-C&I load side are needed for VPPs.​
 
For example, the Chinese company AI Power Tech (苏州均灏) built a VPP that included grid-side storage system of 1.2MWh and distributed PV in order to provide frequency modulation for local grid system.
Figure 10. AI Power’s VPP project in Xibaipo, Shijiazhuang
 
Some countries with mature coordination technologies have used more dispersive resources, which has higher capacity. The previous cross-nation VPP comparison shows that Australia has specifically used residential batteries as VPP resources. In South Australia state, Tesla built a 16MW VPP of home battery Powerwall (13.5kWh) and has been providing fast frequency response (FFR) (less than one second) since 2019.
 
Thus, for ESS players with advanced coordinating technology, these emerging markets in southeast and southwest regions is ideal areas to address high capital investment cost of storage system. Additionally, two-way energy resources, such as V2G, may also be considered as VPP resource to control frequency.
 
3. Spot market
China will have VPPs enter spot markets according to its Power Spot Market Basic Rules《电力现货市场基本规则》(draft in Nov., 2022). By the end of 2023, 13 provinces have opened spot markets, mainly centering in the eastern, south-east and middle regions. Shandong and Guangdong are the two earliest provinces that launched spot market and tried out VPP bidding at their markets.
 
Spot market price can be very spreading by province, for example, the 2022 average price ranges from RMB 0.366/kWh to RMB 0.556/kWh in Guangdong. For VPPs, price spread can be important for profits by power trade arcitrage. In trail spot market of Shanxi and Inner Mongolia, the gap of price spread can exceed RMB 0.5/kWh, while in more established Guangong spot markets, the gap is around RMB 0.195/kWh.  
 
Figure 11. Spot markets in China
 
The key factor for VPP to gain advantages at spot market is to forecast both power generation and consumption (load) amount and the market price. One VPP may aggregate a lot of different energy resources with various power patterns. Especially, if distributed RE generators are included to the resources, the total power curve can be volatile. Also, the load resources may be more stable but can have too many small-sized units, such as lightning, AC or TV, which can make coordinating complicated. Thus, for power forecast, accurate generation forecast and load forecast based on load management can impact on VPP’s bidding performance. As for market price, since the spot market is under formation, an accurate price forecast can be challenging because of fewer historical data.​
 
 
For example, in Shenzhen, SPIC Guangdong (国家电投广东)’s VPP joined Guangdong Spot Market and realized profits for the first time in China. Based on EV charging piles, this VPP bided based on its forecast of load and market price. 
 
Figure 12. China’s first profitable VPP by SPIC in Shenzhen
 
Hence, it is important to equip VPPs with advanced forecast technologies. As VPPs will aggerate more types of energy resources, such as distributed generators, ESS and charging piles, load forecast will not suffice the future demand. Chinese companies with forecast capabilities so far only focus on either load resources, i.e., Acrel (EMS operators), Haier Cosmoplat (ESCOs), or generation resources, i.e., Sungrow (distributed PV), Sprixin (RE forecast). 
 
Whearas, In Europe, as previously mentioned, VPPs with multiple energy types join spot market, implying that they have managed a sophisticated forecast. For example, at intra-day spot market, Next Kraftwerke needs to not only forecast power generation and load side altogether, but also forecasts market price and volume based on the clients’ data. Based on this information, it finally makes bidding decision at market.
 
It is an inevitable trend for VPPs to join spot market. To prepare for the market, it is necessary to obtain such technologies. Companies with precise forecast algorithm and computing technologies can capture this business chance.
 
III. A trend for technology bonus
To sum up, China has been trying to catch up with Europe, US and Australia in terms of VPP market development. For each energy market, different technologies are profoundly required, like multi-energy type modulation, frequency control technology and power-, load- and price-forecast capabilities. According to local estimation, Chinese VPP market size is expected to exceed RMB 30 bn in 2025, driven by growing energy markets.
 
Foreign VPP players can grasp this opportunity not only by providing software or hardware to domestic participants but also by operating VPPs on their own or by collaborating with local players. In fact, ABB and Hitachi energy have participated in VPP projects in China (See the picture below). Furthermore, capacity markets have launched in province Gansu and some regions like Xibei and Huabei, leading to more opportunities for VPP operators with ESS. Keep updated about Chinese energy markets development. 
 Figure 13. VPP projects including projects by ABB and Hitachi
 
If you would like to further figure out these topics, the following reports are recommended:
 
References:
1) China Machine Press. 2020. Approaching Virtual Power Plant.
2) NEA. 2021.12.27.《电力系统辅助服务管理办法》
3) NEA. 20210609湖南省电力辅助服务市场交易规则培训讲义. 
4) NEA. 20201223《东北电力辅助服务市场运营规则》
5) Arena. Gov. 2023.6.30. Tesla Virtual Power Plant
6) Wexin. 能源电力说. 2022.6.8. 首个参与现货市场盈利！虚拟电厂怎样参与电力市场？
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13) Weixin. 兰木达电力现货. 2023.1.10.电力现货价格年度分析报告（2022年）
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15) Cleanenergywire.org. 2019.6.12. Start-up Next Kraftwerke's renewable virtual power plant stabilises grid
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