Virtual Power Plant Development: Challenges and Opportunities Amid Power Market Reform

By Xin-En Wu

Amid the global wave of energy transition and decarbonization, Taiwan's power market faces unprecedented challenges and opportunities. The development of green energy, energy security, grid stability, and resilience have become focal points of concern. In this context, the roles of Distributed Energy Resources (DER) and Virtual Power Plants (VPP) are becoming increasingly important. However, Taiwan's current power market and policy environment have yet to accommodate the demands of these emerging technologies and models fully.

"Our cognition limits our imagination, especially when it comes to energy and power issues. Most people lack an understanding of the 'power market,' which creates a gap in expectations. From a policy perspective, we must first grasp the key directions within a broader framework. As we gradually focus, we need to reconcile different perspectives on the power market," said Tze-Luen Lin, Deputy Director of the Office of Energy and Carbon Reduction under the Executive Yuan.

Tze-Luen Lin, Deputy Director of the Office of Energy and Carbon Reduction under the Executive Yuan

Maximizing the Core Value of Distributed Energy Resources and Virtual Power Plants: Harmonization as the Key Strategy

Virtual Power Plants (VPPs) have rapidly emerged in recent years as an "alternative utility" driven by the development of open data governance and advancements in information and communication technologies (ICT), such as Distributed Energy Resource Management Systems (DERMS) and Distribution Renewable Energy Advanced Management Systems (DREAMS). VPPs represent a customer-side energy operation model that aggregates behind-the-meter distributed energy resources.

The development of distributed energy systems and VPPs can be seen as a key pathway to scaling up green energy. VPPs enhance grid stability and flexibility by integrating multiple distributed energy resources, such as solar, wind, and energy storage, to provide coordinated power output and demand response. These technologies effectively utilize dispersed green energy resources and alleviate power stress during peak demand periods. However, Taiwan’s current grid infrastructure and policy environment do not yet fully support the integration of these technologies, highlighting the need for further improvements.

Energy policy reforms in the United States and the European Union offer valuable references for Taiwan. The U.S. issued FERC Order No. 2222 in 2020, allowing distributed energy resources and VPPs to participate directly in wholesale and capacity markets, thereby enabling more effective integration and utilization of these resources. The European Union's Directive 2019/944 emphasizes the need for Distribution System Operators (DSOs) to have enhanced coordination and platform management capabilities to integrate and operate behind-the-meter distributed energy resources.

"We currently need to harmonize our overarching key frameworks first. While everyone recognizes the importance of 'diverse green energy development,' 'energy security,' and 'grid stability and resilience,' there are significant discrepancies in understanding their definitions, detailed applications, and implementation strategies," said Lin. He noted that Taiwan's policy planning often looks to international policies and experiences for reference. "The challenge lies in the differing perspectives on enhancing grid flexibility and adaptability, as well as how to align the expectations of supply and demand sides in Taiwan's power market. Each party tends to have its own self-interest, which is a natural phenomenon in a democratic society."

Lin emphasized that energy security, decarbonization, and grid resilience are the three pillars of Taiwan's power market reform. "Energy security ensures there is always enough power supply to support economic and social activities; decarbonization aims to reduce greenhouse gas emissions, helping Taiwan achieve its net-zero carbon targets; and grid resilience guarantees that the power system can withstand and quickly recover from natural disasters or other unexpected events." Lin stated that harmonizing and balancing these three objectives will be a critical consideration in future policy formulation, with the primary focus on aligning stakeholders' understanding of how to achieve these goals.

The Need for Power Market Liberalization

Taiwan's current power market structure limits the development of Virtual Power Plants (VPPs) and Distributed Energy Resources (DERs). While the wholesale and capacity markets remain largely closed, only the ancillary services market is open, restricting the participation scope and commercial opportunities for DERs. To accommodate the future increase in renewable energy penetration and achieve green industry and circular economy goals, gradually opening the wholesale and capacity markets is essential. Allowing a broader range of market participants to engage in fair competition will enhance market efficiency and improve grid stability.

Moreover, Taiwan's grid lacks real-time monitoring and management capabilities for DERs, particularly in tracking the status of behind-the-meter VPPs. This deficiency in data and information poses significant challenges for system operators when implementing central dispatch and ensuring grid stability. International experience demonstrates that grid systems equipped with real-time data visibility and dispatch capabilities can more effectively manage the volatility associated with green energy development. Taiwan needs to strengthen its grid data infrastructure to improve visibility and control over distributed energy resources.

Taipower plays a crucial role in driving power market reform. However, policy implementation often faces difficulties due to coordination challenges among its internal departments. The phenomenon of siloed operations within Taipower leads to a lack of clear strategic objectives when formulating and executing policies. To address these issues, establishing a more effective cross-departmental collaboration mechanism is necessary to ensure that all departments can work together to advance the energy transition.

"Currently, discussions in Taiwanese society regarding energy policy, future power market, and technological development lack sufficient imagination and foresight. This often results in policies lagging behind technological advancements and market demands. To adapt to future changes in the energy landscape, policymakers need to broaden their thinking, consider more long-term designs for the power and energy markets, and explore more viable business models," stated Lin.

Establishing a Dedicated Chapter for Virtual Power Plants

As an emerging model in the power market, Virtual Power Plants (VPPs) could break through various conceptual and self-interest barriers by gaining legal support and regulation. "Including a dedicated chapter for VPPs in the upcoming amendments to the Electricity Act would clearly define their operational models, participation requirements, and market mechanisms. By establishing clear definitions, stakeholders would have a more consistent understanding, providing legal protection for both the supply and demand sides in the market. This clarity could also attract more companies to invest in VPP projects, thereby promoting the diverse development of green energy," stated Lin.

Legally, a dedicated chapter would first define the market mechanisms for VPPs. Subsequently, successful demonstration projects would help validate the practical operational effectiveness of VPPs and distributed energy resources, providing a reference for market participants. By showcasing VPP demonstration sites, it would be possible to illustrate how advanced data management and dispatch technologies can efficiently integrate and utilize distributed energy. This approach would help build market confidence and encourage more companies to engage in VPP development.

Adjusting Energy Policy Priorities

Taiwan should reassess its energy investment priorities, directing more funds and resources toward enhancing grid stability and management capabilities. "I can clearly sense a gradual shift in thinking compared to the past. More people are now starting to recognize that smart grids, energy storage technologies, and distributed energy management systems can more effectively enhance the resilience and efficiency of the power system compared to building new large-scale traditional power plants," said Lin. This shift not only helps meet current energy demands but also lays a solid foundation for future energy transitions.

Taiwan faces numerous challenges on its path to power market reform and energy transition, yet there is also significant potential. By drawing on international experience, strengthening policy support, advancing legislation, and fostering technological innovation, Taiwan is well-positioned to offer valuable insights and creative solutions in the global energy transition, ultimately achieving net-zero sustainability goals.