Virtual Power Plants – How distributed energy resources become a grid-scale flexibility resource

The System Problem

Electricity has one fundamental requirement that makes the power system different from most other infrastructure:

Supply and demand have to remain balanced continuously.

At any given moment, the amount of electricity being generated has to closely match the amount being consumed. If generation falls short of demand, or rises significantly above it, the system has to respond quickly to maintain reliability and keep the grid operating within acceptable limits.

Historically, this was relatively manageable because the electricity system was built around a small number of large, centralized generators. But the system is changing:

• Solar and wind are adding large amounts of variable generation
• Batteries are becoming more widespread.
• Electric vehicles, heat pumps and other technologies are increasing electricity demand.
• More generation and flexible resources are appearing closer to the consumer, including rooftop solar, home batteries, EV chargers and smart appliances.

This is creating a more complex system, where generation, consumption and flexibility are increasingly spread across different technologies, locations and time periods.

That makes the ability to respond to changes in supply and demand increasingly important. Flexibility can come from increasing or reducing generation, shifting consumption, or charging and discharging storage when the system needs it. The IEA identifies this growing need for flexibility as a central requirement of today’s evolving power systems.

And there is an important complication.A growing amount of this potential flexibility is distributed across thousands or millions of individual assets.

• A battery in a home can store electricity.
• An EV can delay its charging.
• An air conditioner can temporarily reduce its consumption.
• A commercial building can shift some of its electricity use.

Individually, these resources may be too small to matter much to the wider electricity system. Collectively, they could represent a significant resource. The challenge is to turn this fragmented flexibility into something the system can coordinate and use at scale.

How do you take thousands of small, geographically dispersed resources, each with its own owner, constraints and operating behaviour, and make them behave like a resource that the electricity system can actually use?

That is the problem that creates the opportunity for a Virtual Power Plant.

The Traditional Grid

To understand why this is difficult, it helps to start with how the electricity system was traditionally structured.

The basic architecture was relatively straightforward:

Large power plants → Transmission → Distribution → Consumers

Generation was concentrated in relatively few large facilities.

Large power plants could adjust their output based on system demand. Electricity then flowed through transmission and distribution networks to consumers. This created a relatively centralized model of control.

A grid operator did not need to coordinate millions of individual generators. It could work with a much smaller number of large resources.

• If additional electricity was required, generation could be increased at a power plant.

• If demand was expected to rise, additional generation could be scheduled.

• If the system needed reserves or other grid services, appropriately qualified large resources could provide them.

The physical infrastructure was also largely one-directional:

Generation → Transmission → Distribution → Consumption

Consumers were primarily consumers.

The distribution network was primarily delivering electricity to them.

This architecture was never completely static — hydro, demand response, distributed generation and other forms of flexibility existed — but the dominant model was still one of centralized generation and distributed consumption.

That made coordination comparatively simpler. The system was designed around a limited number of large resources that could be monitored, forecast and dispatched.

But the electricity system is now moving away from that architecture.

The Distributed Energy System

The modern electricity system is becoming much more distributed. Generation is no longer confined to large power stations.

• A household might have rooftop solar and a battery.
• A business might have solar, storage and controllable HVAC.
• An EV is not just a vehicle — when connected to the grid, its battery represents a potential source of storage and flexible demand.
• Electric water heaters, heat pumps, smart thermostats and industrial equipment can also potentially shift when they consume electricity.

The system therefore increasingly contains distributed energy resources (DERs): smaller generation, storage and flexible-demand resources located across homes, businesses and the distribution network.

The direction of electricity can also become more complex.

Instead of:

Power plant → Grid → Consumer

you can have:

Grid ↔ Home battery

Grid ↔ EV

Rooftop solar → Home → Grid

Electricity can move in different directions depending on what the resource is doing. At the same time, these resources behave differently.

• A solar panel produces electricity depending on sunlight.
• A battery can charge or discharge, but has a finite state of charge and may have degradation considerations.
• An EV can provide flexibility only while it is connected and subject to the driver’s mobility requirements.
• An air conditioner can reduce consumption, but only within limits set by the customer’s comfort requirements.

The system is becoming harder to coordinate as the number and diversity of resources increase. Assets are spread across different owners and locations, with different operating constraints and patterns of behaviour.

Most are individually small, which creates an aggregation problem.

A 500 MW power plant is immediately visible to the electricity system as one large resource.

But 50,000 home batteries are not automatically equivalent to a 500 MW power plant.

They have to be:

• connected
• measured
• forecast
• coordinated
• optimized
• dispatched
• and settled

as a collective resource.

This is why aggregation becomes important.

FERC’s framework for distributed energy resources makes the same basic point: individual DERs may be too small or dispersed to participate efficiently in wholesale electricity markets, while combining them into an aggregation can create a resource large enough to participate.

The distributed energy system therefore creates a new kind of resource: flexibility spread across batteries, EVs, rooftop solar and flexible loads. Individually, these resources are small, but coordinated at scale, they could provide significant value to the electricity system.

That is where the Virtual Power Plant enters the picture.

What Is a VPP?

A Virtual Power Plant (VPP) is a system that aggregates and coordinates distributed energy resources so they can operate as a single, flexible resource for the electricity system.

The resources themselves can include rooftop solar, batteries, EVs and chargers, or flexible electricity demand. They remain physically separate; the VPP connects and coordinates them through software and control systems.

The “virtual” part refers to the fact that there is no single physical power plant. The VPP creates a coordinated resource from many distributed assets.

Instead of treating 10,000 batteries as 10,000 separate assets, a VPP platform can monitor their availability, predict how they are likely to behave, determine when they should charge or discharge, and coordinate them in response to electricity prices or grid requirements.

Conceptually:

Thousands of distributed assets

↓

Aggregation + connectivity

↓

Forecasting + optimization + control

↓

One coordinated flexibility resource

Since a VPP is not a physical power plant. It does not require building a new generator. It is a software and control layer that makes existing distributed resources behave, from the perspective of the electricity system, more like a coordinated power-system resource.

A simple example

Imagine 10,000 homes, each with a battery.

• At 2 PM, electricity prices are low and solar generation is high. The VPP can coordinate the batteries to charge.

• At 7 PM, solar generation has fallen and electricity demand is high. The VPP can coordinate participating batteries to discharge, subject to each customer’s requirements and the technical limits of the batteries.

No individual household has to operate like a power plant. The aggregation makes the collective resource useful.

This is the fundamental idea behind a VPP:

Take flexibility that is fragmented across many small resources and coordinate it into a resource that the grid or electricity market can use.

That also explains why a VPP is more than an app connecting batteries.

For the system to rely on the aggregated resource, the VPP needs to know what resources are available, what they can do, when they can do it, and what it costs to activate them.

It therefore sits at the intersection of:

Physical assets + data + software + control + electricity markets

That is what makes the VPP model interesting: the underlying assets may be distributed and individually small, but their aggregated flexibility can have system-level value.

How a VPP Works

A VPP brings together distributed energy resources and coordinates them through a central software platform. The basic process looks like this:

Distributed assets → Data → Forecasting → Optimization → Dispatch → Grid / Market

1. Connect the assets

The VPP first needs access to participating resources. These could include home batteries, EV chargers, rooftop solar systems, commercial batteries, HVAC systems or other flexible loads.

The VPP needs to know what each resource can do, when it is available and what constraints apply.

A battery, for example, has a certain capacity and state of charge. An EV charger has a charging schedule and may need to ensure the vehicle is ready by a particular time. A household may also set limits on how much the VPP can control its battery.

The physical assets remain where they are. What the VPP brings together is the data, control and decision-making around them.

2. Monitor what is happening

The platform receives information from the connected assets and the wider electricity system.

This can include:

• Current electricity consumption
• Battery state of charge
• Solar generation
• EV charging status
• Asset availability
• Electricity prices
• Weather conditions
• Grid conditions

This gives the VPP a continuously updated picture of the resources it can potentially use.

3. Forecast

The VPP then estimates what is likely to happen. Things like:

• How much solar will be generated?
• How much electricity will customers consume?
• How many EVs are likely to be charging?
• Which batteries will have enough stored energy available?
• How much flexibility will actually be available at a particular time?

Forecasting helps the VPP determine how much flexibility will be available at different points in time. That depends on the state and behaviour of each connected resource: a battery may already be partially discharged, an EV may soon need to be driven, solar generation depends on weather conditions, and customers may change their electricity consumption.

By forecasting these factors, the VPP can anticipate how much flexibility it will have available and plan how to use it.

4. Optimize

After forecasting, the VPP decides how to use the available resources.

Suppose electricity prices are low in the afternoon while solar generation is high. The VPP may charge participating batteries or increase flexible electricity consumption.

Later, when demand rises and electricity prices increase, it may discharge some of those batteries or reduce flexible consumption.

The optimization has to consider several things at once:

Electricity prices + asset availability + customer preferences + technical constraints + expected future conditions

The objective is largely to determine the most valuable combination of actions across the portfolio.

5. Dispatch

Once the VPP determines what should happen, it sends instructions to the participating assets.

For example:

Charge these batteries.
Delay charging for these EVs.
Discharge these batteries.
Reduce consumption from these flexible loads.

Because the resources are distributed, the VPP effectively turns many individual actions into one coordinated response.

From the outside, what looks like thousands of separate decisions can appear as a single change in electricity supply or demand.

6. Measure and settle

After the action takes place, the VPP needs to measure what actually happened.

• Did the batteries discharge as expected?
• Did electricity consumption fall?
• How much flexibility was delivered?

This information can be used for market settlement, payments to participating customers and future optimization.

The VPP therefore operates as a continuous loop:

Monitor → Forecast → Optimize → Dispatch → Measure → Repeat

The important point is that the VPP is coordinating physical resources through a software layer.

The batteries, EVs, solar panels and flexible loads still operate independently at the physical level. The VPP creates the coordination layer that allows their combined flexibility to be used as a system resource.

What Can a VPP Actually Do?

The purpose of coordinating all these distributed resources is ultimately to make their flexibility useful to the electricity system. The same assets can be used in different ways depending on what the system needs at a particular moment.

When electricity is abundant

There may be periods when electricity supply is high relative to demand. For example, when solar generation is strong and electricity prices are low.

A VPP can use this period to:

• Charge participating batteries
• Shift EV charging to these lower-cost hours
• Increase other flexible electricity consumption
• Store electricity for use later

This allows flexible demand and storage to absorb electricity when it is most available.

When electricity is scarce or demand is high

The situation can reverse later in the day. Solar generation may fall while electricity demand remains high. Electricity prices may rise and the system may need additional supply or lower demand.

The VPP can respond by:

• Discharging participating batteries
• Delaying EV charging
• Reducing flexible electricity consumption
• Increasing available distributed generation

Instead of building additional generation solely to meet a short period of high demand, the system can draw on flexibility that is already connected to the grid.

When the grid needs a rapid response

Some grid requirements are about speed, rather than simply producing more electricity. If there is a sudden change in supply or demand, batteries and flexible loads can respond quickly.

A VPP can coordinate many resources to provide services such as:

• Frequency regulation
• Balancing
• Reserves
• Other ancillary services, depending on the market

The value here comes from the ability to respond quickly and predictably across a portfolio of resources.

When the grid has a local constraint

Flexibility can also have value at a particular location and time.

A distribution network may face capacity limits or congestion during certain periods. If enough flexible resources are available in that area, a VPP can shift consumption or discharge local storage to reduce pressure on the network.

This can provide an alternative to immediately expanding physical grid infrastructure. Upgrading transformers, substations or distribution lines can require significant investment and time. Coordinating existing flexible resources can help manage the constraint when the network is under pressure.

This means the value of flexibility isn’t the same everywhere. A battery that provides a useful service to the wider system can become particularly valuable when it is located where the grid needs flexibility most.

The broader idea

Across all these situations, the VPP is doing the same fundamental thing:

It changes when, where or how much electricity a group of distributed resources produces, stores or consumes.

That flexibility can then be matched to different needs of the electricity system – from absorbing excess generation to reducing peak demand or responding to grid conditions.

The important question that follows is:

If this flexibility has value, who pays for it?

That leads to the economics and electricity-market side of the VPP.

Where Does the Money Come From?

A VPP creates value by making distributed flexibility available to someone who needs it.

That flexibility can be valuable in different situations, creating several potential revenue streams.

Energy markets

Electricity prices are generally shaped by the balance between supply and demand at a given time. When electricity supply is abundant relative to demand, prices can fall; when demand is high relative to available supply, prices can rise.

A VPP can coordinate batteries and other flexible resources around these price differences; charging when electricity is cheaper and discharging when prices are higher.

This creates an opportunity for energy arbitrage: storing electricity when it is relatively inexpensive and using or selling it later when it is more valuable.

Grid balancing and ancillary services

The electricity system also needs resources that can respond when conditions change unexpectedly.

Batteries and flexible demand can respond quickly by increasing or reducing their electricity consumption, or by charging and discharging.

Where markets compensate resources for services such as frequency regulation, reserves or balancing, a VPP can aggregate enough distributed resources to participate and earn revenue from providing these services.

Here, the value comes less from the amount of electricity produced and more from the ability to respond when the system needs it.

Capacity and peak demand

Electricity systems need enough capacity to meet periods of very high demand, even when those periods occur only occasionally.

A VPP can reduce peak demand by coordinating batteries or flexible loads during these periods.

In markets with capacity mechanisms, resources may also be compensated for being available when the system is under stress.

Local grid flexibility

Flexibility can also have value at the distribution level. If a particular part of the network is approaching its capacity, a utility or network operator may value resources that can reduce demand or provide electricity at that location during specific periods.

This can create another source of revenue for VPPs through local flexibility or demand-response arrangements.

Who pays for this flexibility?

The buyer can vary depending on the service being provided. It could be:

• An electricity market
• A grid or system operator
• A utility or retailer
• A distribution network operator

In organized wholesale markets, the VPP or DER aggregator can act as the market participant, aggregating many small resources and passing compensation back to the participating resource owners. FERC’s Order 2222 is one example of a regulatory framework designed to enable this type of participation.

But there is another important layer between the VPP and the physical assets: equipment manufacturers and technology providers.

Batteries, inverters, EVs and chargers often have their own software platforms and interfaces. Access to these devices can therefore depend on the technology provider, and in some cases the manufacturer may also operate its own aggregation or VPP offering.

This creates an important strategic question:

Who controls the connection to the underlying asset?

A VPP may have sophisticated optimization software, but its ability to monetize flexibility ultimately depends on having reliable access to the resources it is trying to coordinate.

Where does the asset financing fit?

There can also be a capital layer behind the VPP. The batteries, solar systems or other distributed assets have to be purchased and installed before they can provide flexibility. Those assets may be owned by customers themselves or financed by third parties such as lenders, infrastructure investors or specialized energy-finance companies.

This means the broader value chain can look something like:

Capital → Distributed assets → VPP / Aggregator → Electricity market / Grid

The VPP does not necessarily own the underlying assets. Its role is to aggregate, optimize and monetize their flexibility.

That leads to the central economic question for the VPP business:

Is the value generated from each asset, and from the portfolio as a whole, large enough to cover the cost of acquiring, connecting, operating and compensating those resources, while leaving a sustainable margin for the VPP operator?

Because ultimately, having thousands of connected assets is not the same as having a profitable VPP.

Who Are the Participants?

A VPP brings together several different players. They don’t all play the same role, and not all of them directly participate in the electricity market.

Asset owners

These are the customers who own or control the distributed resources being aggregated.

They can include:

• Households with batteries or rooftop solar
• EV owners
• Commercial and industrial businesses
• Building owners with flexible loads
• Owners of larger distributed storage systems

They provide the physical flexibility and receive compensation for allowing the VPP to use it, subject to their own requirements and agreed limits.

VPP operator / aggregator

The VPP operator provides the coordination layer. It connects the distributed resources, monitors their availability, forecasts how they will behave, determines how they should be used and coordinates their response.

The operator can also aggregate these resources for participation in electricity markets or other grid-service arrangements.

This is the layer where the software, optimization and commercial model of the VPP come together.

Equipment manufacturers and technology providers

These companies provide the physical and digital infrastructure that allows distributed resources to participate.

They can include:

• Battery manufacturers
• Solar inverter manufacturers
• EV and charger manufacturers
• Smart-home and energy-management companies
• Metering and connectivity providers

Their importance extends beyond hardware.

The technology provider may control the software interface or API through which a VPP accesses the asset. In some cases, the manufacturer may also operate its own VPP or aggregation service.

This creates an important strategic question: Who controls access to the asset?

Utilities and retailers

Utilities and electricity retailers can interact with VPPs in several ways.

They may procure flexibility, manage demand, offer customer programs or use aggregated resources as part of their broader electricity operations.

Their role varies significantly across electricity markets because market structures and regulation determine what distributed resources are allowed to do.

Grid and system operators

System operators are responsible for maintaining the reliability and balance of the electricity system.

Depending on the market, they may procure services such as balancing, reserves or frequency regulation from aggregated distributed resources.

At the distribution level, network operators may also have an interest in flexibility that can help manage local congestion or capacity constraints.

Electricity markets

Electricity markets provide the mechanism through which some of the flexibility can be monetized.

Depending on the market structure, aggregated resources may participate in:

• Energy markets
• Capacity markets
• Ancillary-service markets
• Balancing markets
• Local flexibility mechanisms

The exact opportunities vary substantially by country and market design.

Capital providers

There can also be a financing layer behind the physical assets. Banks, infrastructure investors, leasing companies and other capital providers can finance batteries, solar systems or other distributed resources. Their role becomes particularly important when the customer does not purchase the asset outright.

The ecosystem can therefore be viewed as:

Capital providers
↓
Distributed energy resources
↓
Equipment / technology platforms
↓
VPP operator / aggregator
↓
Electricity markets / utilities / grid operators

The interesting part is that value does not necessarily accrue to the same player that owns the physical asset.

A household may own the battery, an OEM may control the device interface, a VPP may monetize its flexibility, and a market or grid operator may ultimately pay for the service.

That makes the question of who owns the asset, who controls access to it, and who captures the resulting value central to understanding the VPP business model.

Why Software Matters

The physical assets in a VPP already exist. The challenge is coordinating them reliably and economically.

A VPP may be managing thousands of batteries, EVs, solar systems and flexible loads, each with different capabilities, availability and constraints.

Software is what allows the VPP to coordinate this complexity.

It has to continuously answer questions such as:

• How much electricity will each resource produce or consume?
• Which assets are currently available?
• How much energy does each battery have stored?
• When will an EV need to be charged?
• How much flexibility can each customer provide?
• What will electricity prices look like?
• What will solar generation look like?
• Which resources should respond to a particular grid requirement?
• What will the portfolio be able to deliver after today’s actions?

The challenge becomes more difficult because these decisions are interconnected.

Charging a battery now may leave less room for it to absorb cheaper electricity later, while discharging too much may leave insufficient energy for an evening peak. Delaying an EV’s charging can create flexibility, but only until the vehicle needs to leave.

The software therefore has to optimize across time, assets, prices, customer requirements and grid conditions.

From individual assets to a portfolio

Consider 10,000 batteries.

A simple control system could tell all of them to discharge at the same time.

A VPP needs to make a more sophisticated decision.

Some batteries may have more energy available. Some customers may have stricter limits. Some batteries may be more valuable for a particular grid service. Electricity prices may change over the next few hours.

The software can determine which combination of resources should respond and by how much.

The value comes from optimizing the portfolio rather than treating every asset independently.

Software also has to manage uncertainty

The VPP is making decisions based on forecasts, but the future is not known with certainty.

• Solar output can differ from the forecast.
• Electricity demand can change.
• An EV may leave earlier than expected.
• A battery may not be available when anticipated.

The platform therefore has to continuously compare what it expected with what is actually happening and adjust its decisions.

This creates a continuous loop:

Forecast → Optimize → Dispatch → Measure → Re-optimize

Where does AI fit?

Machine learning and other advanced analytics can improve parts of this process, particularly forecasting and optimization. But AI is not what makes a VPP a VPP. The fundamental requirements are connectivity, data, forecasting, optimization, control and reliable execution.

The more interesting question for a VPP company is therefore is:

Can its software consistently extract more value from the same portfolio of distributed assets?

If two VPPs have access to similar batteries and markets, the quality of their forecasting, optimization and dispatch could affect how much value each can generate from those assets.

That makes software potentially important because it determines how effectively that infrastructure can be coordinated and monetized.

The Economics of the VPP

A VPP can access several sources of value, but revenue alone does not determine whether the business works. The fundamental economic question is:

How much value can a VPP generate from each connected asset, and how much does it cost to capture that value?

Revenue per asset

A single home battery may be able to generate revenue through energy arbitrage, grid services, capacity payments or other flexibility programs. But the value from one asset can be relatively small.

This makes aggregation economically important. A VPP might connect thousands of batteries, EVs or flexible loads and combine their individual contributions into a much larger portfolio.

The business therefore depends partly on achieving enough scale for the aggregate value to become meaningful.

The cost of acquiring flexibility

The VPP also has costs associated with bringing each resource into the portfolio.

These can include:

• Customer acquisition
• Hardware or control equipment
• Software integration
• Connectivity
• Metering
• Market access
• Customer incentives or payments
• Operations and maintenance

Some assets may be relatively easy to connect and control. Others may require additional hardware, integration work or customer engagement.

This means that 1,000 connected assets are not necessarily equivalent to 1,000 economically valuable assets.

Asset-owner economics

The asset owner also needs to benefit.

A homeowner may allow a VPP to control their battery because they receive a share of the revenue, lower electricity costs, or another financial benefit.

An EV owner may allow charging to be shifted in exchange for lower charging costs or other incentives.

The VPP therefore has to balance two objectives:

Maximize the value extracted from the asset while

Maintaining an attractive proposition for the asset owner.

If the VPP takes too much of the value, customers may have little reason to participate.

VPP operator economics

The VPP operator captures the remaining value after compensating asset owners and covering the costs of operating the platform.

At a simplified level:

Value from flexibility − Asset-owner compensation − Operating and technology costs = VPP economics

The operator’s margin therefore depends not just on electricity prices or market revenues, but on how efficiently it can aggregate and operate the portfolio.

Does scale create an advantage?

This raises one of the most important questions about the business model.

As the number of connected assets increases, some costs can potentially be spread across a larger portfolio. The same software platform can coordinate more assets, while a larger portfolio may also provide more opportunities to optimize across different resources.

Scale can therefore improve economics. But aggregation does not automatically create a moat.

A VPP still has to acquire customers, integrate new devices, maintain reliable control, comply with market rules and compete for access to the same sources of flexibility.

The key question is therefore:

Does increasing the size of the portfolio create enough additional value to outweigh the cost and complexity of acquiring and managing more assets?

The unit economics ultimately matter

A VPP can have thousands of connected devices and still have weak economics if the value generated per asset is too low. Conversely, a smaller portfolio of highly flexible assets in a valuable market could potentially be more attractive.

This makes several metrics particularly important when evaluating a VPP business:

• Revenue per asset
• Cost to acquire an asset
• Cost to connect and operate an asset
• Revenue shared with asset owners
• Utilization of available flexibility
• Gross margin per asset
• Portfolio size and growth
• Customer retention

Ultimately, the VPP business is a portfolio economics problem.

The technology has to make it possible to extract enough value from many small, distributed resources to create a business that is attractive to the asset owner, the electricity system and the VPP operator.

What Makes a VPP Viable?

Having distributed energy resources is not enough to make a VPP viable. The underlying assets need to be technically accessible, the market needs to value the flexibility they provide, and customers need to be willing to participate. Several conditions, therefore, have to come together.

Enough flexible resources

A VPP needs access to resources that can actually change their electricity production or consumption.

These could include batteries, EVs, smart chargers, flexible industrial loads, HVAC systems or other controllable demand.

The resources also need to be available when the VPP needs them. A large number of connected devices does not necessarily translate into a large amount of usable flexibility.

Reliable connectivity and control

The VPP needs to communicate with the underlying assets and reliably measure and control them.

That requires appropriate:

• Smart meters
• Connectivity
• Inverters and control systems
• Device APIs and interoperability
• Data infrastructure

The more heterogeneous the asset portfolio, the more difficult this can become.

A market that values flexibility

There also needs to be somewhere for the VPP to monetize the flexibility it provides. Electricity markets may allow aggregated resources to participate in energy, balancing, ancillary-service or capacity markets. Without a mechanism that compensates flexibility, the VPP may have limited ways to turn its capabilities into revenue.

This makes market design a critical part of the VPP business model.

Regulatory access

Market access is also shaped by regulation. Rules determine whether aggregators can participate, how distributed resources are measured, how they are settled, what services they can provide and how they interact with utilities and system operators.

This means a VPP can be technically possible in a market without necessarily being commercially viable there.

Customer participation

The VPP ultimately depends on customers allowing their assets or electricity consumption to be managed. That creates another requirement: the customer needs a reason to participate.

The benefit could be lower electricity costs, payments for providing flexibility, or other incentives.

At the same time, customers need confidence that the VPP will respect agreed limits and that essential requirements, such as having an EV charged when needed, will still be met.

Sufficient value density

Finally, there needs to be enough economic value in the available flexibility to justify the cost of aggregating it.

A resource may technically be flexible but economically unattractive if it generates very little value relative to the cost of acquiring, connecting and managing it.

This makes the characteristics of the market particularly important.

A VPP is more attractive where there are:

• Significant price variation
• Valuable ancillary services
• High peak demand
• Local network constraints
• Large amounts of distributed flexibility

The ecosystem has to line up

A viable VPP therefore requires several pieces to work together:

Flexible assets | Reliable connectivity and control | Customer participation | Market access | Regulatory permission | Sufficient economic value

If any one of these is missing, the technical ability to aggregate distributed resources may not translate into a viable business. This is also why VPP adoption can look very different across countries.

The technology may be similar, but the market structure, regulation, electricity prices, grid constraints and availability of flexible assets can be very different.

Why Some Countries Are Ahead

VPPs are not developing at the same pace everywhere. The underlying technology (batteries, solar, EVs, smart meters and software) is becoming increasingly available across many markets. But technology alone does not determine whether a VPP business can develop.

The key differences are in the electricity system around those assets.

Germany

Germany has a large base of distributed solar and battery storage, alongside an electricity market with significant price variation. This creates both a large pool of flexible resources and opportunities to monetize their flexibility.

The combination matters.

A country can have many batteries but limited market opportunities, or sophisticated electricity markets but relatively few distributed resources. VPPs benefit when both exist together.

United States

The US provides a different path.

Its electricity system is divided across different regional markets, utilities and regulatory structures. Some markets have developed mechanisms that allow aggregated distributed resources to participate in wholesale electricity markets.

This creates opportunities for VPP operators to combine batteries, demand response, EVs and other resources and offer their flexibility into those markets.

The regulatory framework therefore becomes particularly important.

FERC Order 2222, for example, established requirements for regional transmission organizations and independent system operators to enable distributed energy resource aggregations to participate in wholesale markets, subject to the relevant rules and coordination requirements. (ferc.gov)

Australia

Australia offers another interesting combination. The country has very high levels of rooftop solar, creating a large population of distributed energy resources. It has also experienced periods of network stress and significant variation in electricity prices.

This creates a strong incentive to coordinate household batteries, solar systems and other flexible resources rather than treating every installation independently.

What these markets have in common

The paths are different, but several common conditions appear:

• A large pool of distributed resources: Solar, batteries, EVs or flexible demand create the underlying flexibility.
• A reason to use that flexibility: Price volatility, peak demand, renewable variability or network constraints create economic value.
• A mechanism to monetize it: Markets, utility programs or other arrangements allow someone to pay for that flexibility.
• Rules that allow aggregation: Aggregators need to be able to connect distributed resources and participate in the relevant markets or grid programs.
• Customers willing to participate: The asset owners need a compelling enough financial or practical reason to make their resources available.

The broader lesson is that VPP adoption is as much a function of electricity-market design as it is of technology.

Two countries can have similar levels of solar, batteries or EVs and still have very different VPP opportunities if their market structures, regulations and grid constraints differ. This is why looking at the technology alone can be misleading. The VPP is a technology layer sitting inside an electricity system. The economics of that system determine how valuable the technology can become.

India Lens

India is building much of the physical and digital foundation that could eventually support Virtual Power Plants.

Renewable generation is expanding, battery storage and EV adoption are growing, and smart-meter deployment is creating a more granular view of electricity consumption. As of January 2026, 5.62 crore smart meters had been installed across India under various initiatives.

But the availability of infrastructure does not automatically create a functioning VPP market.

There is another layer: whether consumers trust the digital electricity infrastructure being built around them.

Smart-meter rollouts have faced consumer resistance and billing concerns in several parts of India. In Uttar Pradesh, protests over prepaid smart meters contributed to a rollback of the mandatory prepaid approach in May 2026. Maharashtra has also seen resistance and complaints from consumers alleging higher bills following smart-meter installation.

This matters for VPPs because the consumer is not just a passive recipient of electricity anymore. A VPP may eventually ask that consumer to allow their battery, EV charger or electricity consumption to be coordinated in response to grid conditions. That requires a very different level of participation and trust.

India therefore faces an interesting transition:

Physical infrastructure is being built from the top down.

A VPP ecosystem will ultimately have to work from the bottom up as well.

Consumers need to understand what they are participating in, what control they are giving up, what they receive in return, and how their electricity use and payments are being managed.

At the same time, the regulatory framework for aggregation and distributed flexibility is still developing. The draft National Electricity Policy 2026 proposes frameworks for aggregating distributed renewable generation, small storage systems and demand response, and expanding participation in ancillary services through aggregators.

The opportunity for VPPs in India therefore depends on more than the number of batteries, EVs or smart meters installed.

It depends on whether India can build an ecosystem where technology, regulation, market incentives and consumer trust develop together.

The physical foundation for distributed flexibility can be built through policy. A functioning VPP market ultimately requires consumers to become willing participants in it.

Startup Landscape

The VPP market is not developing around a single business model.

Companies are approaching the opportunity from different points in the value chain — from optimizing large batteries, to aggregating distributed energy resources, to providing the software infrastructure that allows utilities and other energy companies to operate VPPs.

1. Battery optimization

One model focuses on large-scale battery storage.

These companies connect batteries to electricity markets and use forecasting, optimization and automated trading to determine when the battery should charge, discharge or provide grid services.

Capalo AI is an example of this model. Its Zeus VPP combines route-to-market access with optimization and trading for battery storage and hybrid renewable assets. Capalo AI

The attraction of this model is relatively clear: the underlying battery already exists, and software can potentially increase the economic value generated by the asset.

But there is a strategic question around vertical integration.

If battery manufacturers, renewable developers or asset owners build their own optimization and trading capabilities, a specialist optimizer could face pressure from players that already control the physical asset.

The question becomes:

Who ultimately owns the optimization layer?

2. Broad DER aggregation

A second model aggregates a much wider range of distributed resources — batteries, rooftop solar, EVs, flexible loads and other DERs — and combines them into a portfolio that can participate in electricity markets or provide grid services.

The opportunity here is broader than optimizing one type of asset.

The aggregator is effectively building a distributed power portfolio.

But this also creates greater operational complexity.

The VPP has to manage different technologies, customers, locations, availability and operating constraints while accurately forecasting what the portfolio can deliver.

EVs add another layer of complexity. With V1G, the VPP manages when an EV draws electricity from the grid through smart charging. With V2G, the vehicle can also discharge electricity back into the grid. These models have different technical requirements, customer considerations and potential sources of value.

The aggregator may also face greater exposure to forecasting errors, customer availability and market imbalance, depending on its role and the market structure.

The central question becomes:

Can the aggregator build enough scale and portfolio diversity to make the complexity economically worthwhile?

3. VPP software infrastructure

A third model provides the software infrastructure rather than operating the entire VPP itself.

The customer could be a utility, retailer, energy company or another aggregator.

The platform can provide capabilities such as:

• DER connectivity
• Device management
• Forecasting
• Optimization
• Dispatch
• Customer management
• Market integration
• Measurement and settlement

This can create a more asset-light business model because the software provider does not necessarily need to acquire thousands of end customers or own the underlying assets.

But it introduces another challenge:

Utility and energy-company sales cycles can be long.

A company may have strong technology but still face lengthy procurement processes, integration requirements and regulatory considerations before it can scale.

The central question becomes:

Can the software provider become embedded deeply enough in the customer’s energy infrastructure to create a durable position?

The three models face different bottlenecks

Model	Core opportunity	Key strategic challenge	Potential moat
Battery Optimizer	Maximize the value generated by large-scale storage	Vertical squeeze: asset owners or hardware OEMs building in-house optimization and trading	Optimization quality, market access and trading capability
DER Aggregator	Build a large, diversified portfolio of distributed flexibility	Operational risk: customer acquisition, churn, asset availability and portfolio imbalance	Scale, asset diversity and customer relationships
VPP Software	Provide infrastructure to utilities and energy companies	Commercial drag: long enterprise procurement and integration cycles	Deep software integration and critical device/grid interfaces

These are not simply different versions of the same company.

They have different customers, capital requirements, operational complexity, scaling dynamics and potential moats.

Where is the market moving?

The commercial opportunity also varies considerably by market and asset type.

Large battery assets can offer relatively concentrated flexibility and clearer access to electricity-market revenues, making optimization and trading an attractive starting point for some companies.

VPP software can take another route: rather than acquiring and managing the underlying customer portfolio, the software provider can supply the orchestration layer to utilities, retailers or other energy companies that already have customer relationships.

Residential aggregation is potentially much larger in terms of the number of assets, but it also introduces greater complexity around customer acquisition, device interoperability, customer participation and regulatory access.

The result is that the VPP landscape is not simply a race to aggregate the largest number of devices.

It is a question of where a company can capture value most efficiently within the flexibility value chain.

A battery optimizer needs to extract more value from the assets it manages.

An aggregator needs to build and retain a portfolio of reliable flexible resources.

A software provider needs to become sufficiently embedded in an energy company’s infrastructure to make replacement difficult.

The important question when evaluating a VPP startup is therefore:

Which layer of the flexibility value chain does the company control, and what prevents another participant from capturing that value?

That question is ultimately more useful than simply asking whether a company is a “VPP.”

Capalo AI Connection

The broader VPP landscape helps explain where Capalo AI fits.

Capalo is not trying to aggregate millions of household devices into a single residential VPP.

Its focus is on a different part of the flexibility value chain: optimizing and monetizing battery storage and hybrid renewable assets in electricity markets.

A simplified version of the model is:

Battery / hybrid asset

↓

Capalo optimization + market access

↓

Electricity markets

The underlying battery provides the physical flexibility.

Capalo’s software determines how that flexibility can be used across different market opportunities — including when to charge, discharge or provide grid services.

This makes Capalo a useful example of an important point from the VPP analysis:

The value of a flexible asset depends not only on the asset itself, but on how effectively that flexibility is optimized and monetized.

A battery can participate in multiple potential value streams, but those opportunities change over time and can interact with one another. Choosing one action can affect what the battery can do later.

The optimization layer therefore becomes economically important.

Why Capalo is an interesting VPP case

Capalo illustrates a more focused VPP model built around large-scale storage rather than millions of small residential devices.

That changes several parts of the business model:

• The company can work with fewer, larger assets.
• Customer acquisition can be more concentrated.
• The underlying assets can provide substantial amounts of flexibility individually.
• Market participation and trading become central to the value proposition.
• The economics depend heavily on the quality of optimization and access to electricity markets.

It also highlights one of the strategic questions facing the entire VPP category:

Where does the optimization and market-access layer sit in the value chain — and who ultimately owns it?

Battery owners, renewable developers, OEMs, utilities and specialist software companies can all potentially compete for this layer.

Capalo is therefore not simply an example of “a VPP company.”

It is an example of one way to monetize flexibility: using software, market access and optimization to extract more value from battery storage.

That distinction matters when comparing Capalo with other VPP businesses.

The broader VPP category is about coordinating distributed flexibility.

Capalo demonstrates how that flexibility can be optimized and monetized in electricity markets.

Open Questions

The VPP model is compelling at the system level, but several questions determine how large and durable the opportunity can become.

Who captures the value?

A VPP can create value from distributed flexibility, but that value has to be divided among the asset owner, equipment provider, VPP operator and other market participants.

The question is whether enough value remains with the aggregator to support an attractive business.

Does aggregation create a durable moat?

Connecting thousands of assets is valuable, but connectivity alone may not be defensible.

A stronger moat could come from proprietary optimization, exclusive access to assets, customer relationships, market access, accumulated operating data or deep integration into utility and grid infrastructure.

Who controls the customer or asset relationship?

The VPP may not own the underlying battery, EV or solar system. The customer may instead have a relationship with an OEM, utility, retailer, installer or financing provider.

This creates a strategic question:

Who controls access to the flexible asset?

The answer can determine who has the strongest position in the value chain.

How much does regulation determine the business?

VPP economics depend heavily on whether distributed resources are allowed to participate in relevant electricity markets and whether they can be compensated for the services they provide.

A technically strong VPP can still have limited commercial opportunity if the market structure does not recognize or remunerate its flexibility.

Can the economics work without constant incentives?

Some VPP models may benefit from subsidies, capacity programs or other policy support during their early development.

The longer-term question is whether the underlying flexibility has enough intrinsic value through electricity markets and grid services to support a sustainable business.

Does scale actually improve the economics?

More assets can create a larger and more diversified portfolio, but they also bring more customers, devices, integrations and operational complexity.

The key question is whether the additional value created by scale grows faster than the cost of managing that scale.

Where will the value concentrate?

The VPP market may ultimately not have a single winner. Value could accrue differently across:

Physical assets → device platforms → aggregation → optimization → market access → grid services

The companies that capture the strongest positions may be those that control a particularly valuable layer rather than simply those that aggregate the largest number of devices.

Key Takeaways

1. VPPs address a coordination problem.

As electricity generation, storage and demand become more distributed, increasing amounts of flexibility are spread across small assets. A VPP coordinates these resources so their combined flexibility can be used by the electricity system.

2. A VPP is a coordination layer, not a physical power plant.

The batteries, EVs, solar systems and flexible loads remain physically separate. The VPP brings together the data, control, forecasting and optimization needed to operate them as a coordinated resource.

3. Flexibility can have several sources of value.

A VPP can potentially earn from energy arbitrage, balancing and ancillary services, capacity mechanisms, peak-demand management and local grid flexibility. The available opportunities depend heavily on the electricity market.

4. Software is important because the assets are heterogeneous and constrained.

The challenge is not simply connecting devices. The VPP has to continuously decide which resources to use, when to use them and how to balance electricity prices, asset constraints, customer requirements and future conditions.

5. VPP economics depend on more than the size of the portfolio.

A large number of connected assets does not automatically create a profitable business. The value generated per asset has to justify customer acquisition, integration, operation and customer compensation costs.

6. Regulation and market design can be as important as technology.

The same battery, EV or flexible load can have very different economic value depending on whether the surrounding electricity system allows its flexibility to be aggregated, dispatched and monetized.

Ultimately, the VPP opportunity is about turning fragmented flexibility into a system-level resource, and capturing enough of the resulting value to make that coordination economically sustainable.