Virtual Power Plants: new energy systems will generate green revenues for real estate. But the sector will need to build capacity for Open Innovation. Here’s how.

Technology, changing customer needs and regulatory pressures are shaking up the real estate sector. In this article we discuss the Virtual Power Plant (VPP), a software technology that maximises efficiencies in energy management. This technology is already breaking ground in the utilities sector, and private and public real estate is uniquely positioned to also reap the benefits of its use, in turn creating new forms of value for their customers. Here we explain what VPPs are, what factors and strategies will drive their success, and how real estate players should embrace the opportunity.

WHAT IS A VIRTUAL POWER PLANT (VPP)?

VPPs are cloud-based software applications that aggregate data about energy generation from different sources such as wind farms, solar parks and Combined Heat and Power (CHP) units, as well as from flexible power consumers and storage systems, including electric vehicle batteries. The aggregation provides a reliable power supply, with benefits across the entire energy value chain: it relieves load from the grid, reduces the need for fossil fuels, and provides potential cost savings and possibly earnings for energy customers (Solar Power World Online, 2017) (Next KraftWerke, n.d.).

EVOLUTION OF THE VPP MARKET IN THE UK

We have reviewed the evolution of the VPP market over the period 2010–2019 using industry and sector reports, government grant awards and websites of market players. Our focus has mainly been on the UK market, but complemented with the analysis of additional data from EU and global players.

What we have seen:

1. The VPP market is crowding up: there is a high number of solutions being developed by different players and, in other words, a lack of a ‘universal or ‘dominant’ solution. Competition in this sector seems to have accelerated in 2018–2019. Different players include:

Utilities incumbents: Centrica, EON, Npower and EDF are offering VPP solutions. Some appear to have developed in-house capabilities, others via acquisition of start-ups.

Utilities challengers: OVO/Kaluza and Shell are also offering VPP capabilities.

VPP-only players: some companies in the UK have now been on the market for several years, such as Moixa, Origami and VPS, and were either born as VPP providers or have developed into a VPP, starting from energy-related activities. There are also strong players from outside the UK market like Next Kraft Werke (Germany), who offer VPP as a service, and Stat Kraft (Norway). A large number of players appear to have entered the market in the last couple of years.

Energy tech companies: these do not provide the entire VPP but offer some of the assets or services that relate to the VPP. These include Vehicle to Grid Technology, Grid Balancing Software, different energy storage devices and EV charging points.

Global corporates: Schneider, ABB, Siemens, GE, Mitsubishi Electric, Tesla and many others have entered this space. Their strength is in their financial resources, networks and global infrastructure.

Figure 1: VPP Market evolution

Source: INSTA Associates, 2020

2. Government is supporting change: governments and institutions often play a role in the creation of new markets. This has happened in the liberalisation of the UK’s energy market and more recently in the growth of the country’s FinTech sector. Today the UK government is supporting investments in distributed energy systems. In 2018, in the context of the UK Industrial Strategy, UK Research and Innovation (UKRI) launched the £102-million Energy Revolution Programme (UKRI, 2019) in support of local energy systems demonstrators that are based on or include a VPP. In March 2019, the EU Parliament adopted the new Electricity Market Regulation and Electricity Market Directive (European Commission, 2019) introducing the concept of energy communities. According to Article 22 of the Directive, “Member States shall ensure that renewable energy communities are entitled to produce, consume, store and sell renewable energy, including through renewables power purchase agreements”.

3. Network strategies will drive success: the lessons from the Fintech market have shown that access to customers for testing and improving solutions is key. Thus, utility incumbents with access to customers and owning VPP technology start with a substantial competitive advantage compared to pure VPP players that own only a technology solution. Similarly, large corporates with the capacity to mobilise networks, partnerships and infrastructures are equally well positioned to create the multi-stakeholder ecosystems in which VPPs can be created and scaled. But VPP ‘pure’ players also have opportunities to grow: their ‘lean’ management structure can enable them to concentrate their efforts on the best solutions, rapidly develop collaborations, and pivot the business model, unencumbered by some of the set ways of established companies. In all cases, in this unsettled space, managing boundaries of the business model, alliances and networks will be key to success.

WHY VPP AND REAL ESTATE

Being positioned at the intersection of grid, electrification of transport and green energy generation, there’s an outstanding opportunity for those in the real estate sector — as either developer, housing association or construction company — to capture the value of the VPP. And there’s several trends that they should consider.

Firstly, there’s an increasing number of consumers who value green energy and the idea of producing their own energy, and also seek additional savings on their costs. The entire movement of the UN Sustainable Development Goals and social media platforms have amplified these trends. Secondly, the built environment is moving away from a product imposed on the customer into an added-value service, tailored to the specific needs of its users — see #SpaceasaService by A. Slumbers. In fact, the sector is opening up to more investments in technology and adopting a more customer-focused approach. Thirdly, over time VPP as a technology will become a commodity. This means that solutions will become standardised and costs will reduce. After price, competition will be based on either factory build compatibility or retrofitting rollout speed and reliability. Lastly, VPP provides the opportunity for an additional revenue stream for a wide range of stakeholders in the built environment, each of whom could bring radically different business models given their broad range of interests.

AN OPEN INNOVATION ROADMAP FOR REAL ESTATE

Early experiments in VPPs will allow real estate stakeholders to carve out a space in this emerging industry and stay at the forefront of value creation for their customers. These experiments will provide a better understanding of how customers engage with VPP technologies, of their potential in terms of financial efficiencies and of additional revenue streams that can be generated.

We suggest the following roadmap for pioneering real estate stakeholders through an open innovation approach:

1. Selection of VPP partner. Real estate stakeholders should partner up with one or more of the VPP solution providers, considering alignment of objectives and cultural fit.

2. Identification of first customers. Engaging in conversation with potential customer and identifying the cohort of early adopters interested in testing the new solution.

3. Engaging the broader ecosystem. Depending on the scale and scope of the VPP it may be necessary to mobilize additional players, such as the regulator, local government authorities, operators of EV infrastructure, and citizen advocacy groups.

4. Pilot experimentation. Perform a live experiment that will help you refine the value creation and value capture strategy. Investment levels should be set taking into account both the need to collect valuable data but also manage the risks of uncertainty that characterize this early stage.

5. Allocation of responsibilities. The responsibility for piloting the VPP should be allocated to an ‘explorative’ unit supported and reporting to the company leadership. This unit should be provided with enough freedom to experiment and access to internal resources.

The feedback process provided by this approach will generate a new ‘sense of the possible’, and unlock tremendous pathways to growth in the short term.

We wish to express our appreciation for work and insights on new energy systems provided by Prof Marc J. Ventresca of Said Business School, University of Oxford, Luisa Matos CEO of VPS Power Solutions, and Igor Moreno, senior strategy consultant specialized in the energy sector.

About the Authors. Michele Scataglini and Nigel Greenhill are Partners of INSTA Associates. INSTA Associates is an innovation strategy consultancy with sectoral specialisation in energy and the built environment. It works with corporates and local and national governments to identify and experiment with opportunities that drive future value creation.

Innovator I Entrepreneur

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