Statkraft operates one of the largest virtual power plants in Germany, aggregating almost 10 GW of power from about a thousand different assets – without even owning the assets. How does that work?
Through my rotation in Statkraft Ventures this spring/summer, the corporate venture fund of Statkraft (Not sure what that is? Check out my former blog post “Life as an investor”), I took a deep-dive into the virtual power plant business in order to understand the market better and to look for potential interesting investments. Let me share some of my findings with you.
A need for flexibility
The share of renewables in the energy system is increasing and expected to reach 50 % in Europe by 2040. This development drives a need for flexibility in the market, due to the intermittent nature of renewables. Virtual power plants can both aggregate these energy sources, and at the same time provide the needed flexibility.
So – what is a VPP?
A virtual power plant (VPP) aggregates the power from a range of assets, including generating assets, storage and demand, and sells it into the market as a whole. Thus the market views the power source as one large power plant. This has several effects. Firstly, the asset owners reduce their market risk because the responsibility to deliver the power to the market is transferred to the aggregator. Secondly, the large portfolio of assets sourced from different locations and technologies provides increased diversity and thus more flexibility and lower risk for the VPP operator. In other words: Win-win!
To manage this, what must a virtual power plant be able to do? The value chain includes sensors and metering, SCADA and communication systems, encryption, energy optimization and finally archiving and reporting.
The most challenging part of the value chain is the encryption. The main problem with connecting numerous different assets is that they do not speak the same “language”. As a VPP operator you need to be compliant with a range of different protocols to be able to connect the different assets. Acquiring these protocols might be challenging, expensive and time consuming. Compliance with many protocols is thus an attractive quality of a startup.
Of course there is a range of other important functions in a VPP. It should have integrated real-time market prices, interact with end users, manage billing relations, manage end user data protection etc etc… But let’s rather move on to the revenue streams. When looking for a potential investment, it is of course important that the startup has a well-functioning, scalable business model and is able to create (lots and lots of) revenues.
Searching for the “big bucks”
Taking another look at the value chain above: Where can the large values be found? One does not earn much by selling hardware only, like the sensors or the communication technology. Software providers can earn quite some money from licence fees. However, the really large values are found in power optimization. By trading a large and flexible pool of energy on the market you are in a good position to earn money – provided you have good knowledge of the market, of course. This is what our skilled traders do in Düsseldorf.
What is particularly interesting is that players enter the VPP business from completely different angles: Battery manufacturers now wanting to aggregate the stored energy, operators of electric vehicle charging stations wanting to utilize the flexibility of the connected vehicles, automation and software technology developers providing the platforms, or even utilities wanting to optimize the grid operation. And in addition: lots of startups. In other words, the competition is very high.
So is there a great startup out there, able to create large values in this business? Well, we have not invested in any yet, but it might be clever to look closer into those who do the energy optimization themselves, have all the necessary functions, many protocols and are able to connect a large number of assets.
In the future this might change of course! That is the challenge of the energy business: strategies of high value today might be of less value tomorrow. And the energy system is really changing these days. That makes working in the energy business even more interesting, don’t you think?
PS. Read more about Statkraft Ventures on their webpage.