The electric grid is like the brakes on your car—it’s really important, it can be expensive to fix, and if anything goes wrong, you find out in a hurry and way too late.

Electricity that travels along the grid has become much more expensive with the last few years. Households and businesses recognize that energy costs are among the major sources of inflation. Now, Minnesota’s Public Utilities Commission (PUC), the entity that regulates the utilities and energy system, wants a smarter way to operate the system to slow down the rate increases faced by customers of Xcel Energy and the state’s other major utilities.

Virtual power plants (VPPs) are generating interest as a potential solution because they can coordinate and manage thousands of distributed resources as if they are emanating from a central power source.

“We’re trying to optimize what’s already out there, because it can be a tremendous reliability resource and a tremendous affordability resource,” said PUC vice chair Joseph Sullivan in an interview about the commission’s actions on VPPs.

Why costs are going up

One of the best ways to control costs would be to achieve better utilization of what’s already been built. After a prolonged period of stagnant electricity usage, demand has been increasing. It’s driven by large new energy loads coming online from industrial facilities, such as data centers. Depending on the technology they employ, data centers wouldn’t use much more electricity than other industrial and commercial facilities, but they are being built at a rapid pace and large scale that the commercial sector hasn’t produced for many years.

The power grid must meet that greater demand, which has been driving cost increases on utility bills. Advocates for large commercial energy users have suggested that building these facilities can help share the costs of essential grid upgrades without overburdening households. The fact remains that demand and costs are both increasing, so fresh thinking is needed on cost-effective solutions.

“The grid, as we think of it, is really two systems. One is the generation of energy supply, and one is delivery,” said Will Kenworthy, regulatory director, Midwest for Vote Solar, an advocacy organization that lobbies on behalf of clean energy resources. It was a major stakeholder in the PUC’s process.

Most utility bill price increases come from building new capacity and infrastructure, transporting them to where they are needed, and buying extra resources for the periods when demand begins to outpace supply. If you can avoid doing any of those things, you can reduce your costs.

Traditional power plants generate big energy sources and push them in many different directions, but meeting the new demand exclusively with centralized resources can be prohibitively expensive because it forces many of the costs onto the system’s distribution.

The future of the electric grid will rely, in part, on tapping many smaller, distributed energy sources built in thousands of different places – enabling you to use inexpensive solar energy when the sun is shining, or more importantly, battery backups when the system needs more power. That’s where VPPs come in.

How virtual power plants could lower costs

When the electric grid is put under strain and begins to have trouble meeting demand, the grid operators are forced to increase their bids to purchase more power to meet the demand on the system. Typically this happens on the hottest days of the year when everyone is maxing out their air conditioning.

The grid operators bring more electricity into the system in two ways: 1) they bid in a market that’s open the day before the energy is needed, and 2) they bid in the “spot market”, which is like a virtual version of the old stock market floors with people holding ticker tape and yelling out their bids (if you’re under 40, look it up). This system has up-to-the-minute pricing and bids happening virtually in real-time. Because you’re buying energy you need right at that moment, it can be very expensive.

“There are 8,760 hours in the year. Fifty of those are the most expensive. If we can reduce the cost in those fifty hours by 20% or 30%, that would have a huge affordability benefit,” said Sullivan.

The key to controlling those extra costs is eliminating those stressful hours. How do you do that? Absent a master plan to get people to reduce their energy usage at key moments, the best way is by having more resources available. If those resources aren’t in a power plant on your grid, they have to come from somewhere.

While bidding for real-time resources from other places can often be the most expensive way to get electricity, building new power plants is right up there with it. New centralized power plants that are intended to meet demand for the most expensive hours, called “peaker plants,” carry a lot of costs. They can include building new generation infrastructure to installing new wires, poles, and expensive and in-demand gear like transformers that allow the power to travel along the wires.

Batteries, which store extra resources that can be generated when energy is abundant or cheap, play a key role here. They store energy that can be deployed when it’s the most expensive to procure new electricity. “Could batteries and demand response reduce the need for a gas plant?” asked Kenworthy. “You may not be able to replace the gas plant, but you may be able to make it so that they don’t need the next gas plant.”

The VPP system would give the electric grid operators many more options to tap the most reliable, least expensive options at a given moment. “What you want to do is take customer systems, energy storage systems that the customers have invested in for their own use, and use them for grid benefits,” Kenworthy explained. “If you orchestrate that and do that smartly, [then] that’s what VPPs are all about. Using those resources for grid benefits has a ton of value.”

What comes next at the Public Utilities Commission

Technically speaking, VPPs can be set up and run by anyone. With the right permits, you and your neighbors can build and operate a solar array and batteries between your homes (please call your local utility first). What’s novel in this case is that this program could give Minnesota the country’s first utility-operated VPP.

There are two paths to getting there. The first is one that Xcel Energy already has been pursuing through a program that it calls Capacity*Connect, where it would own and operate all the resources in the system.

“This first-of-its-kind program will deploy up to 200 megawatts of utility-owned, distributed battery storage across Minnesota to provide flexible, cost-effective capacity for the electric grid,” said Xcel Energy media relations representative Kevin Coss in an email. This program is being managed through a company called Sparkfund, which has built a technology platform to manage distributed resources across the grid.

The second is a truly distributed plan where many third-party developers and system owners can be included in the VPP plan. This approach is intended to bring a much larger set of resources into the grid planning process than what’s envisioned through Capacity*Connect. The third-party option would be more difficult to manage given the number of resources that could be available, but if executed correctly, it could also have a much larger impact on both reliability and cost.

“In line with the direction of the Minnesota Public Utilities Commission, we plan to file a virtual power plant proposal by March 2027 for a VPP that balances our customers’ needs with the need to keep costs down and maintain a reliable grid,” Coss added, regarding Xcel’s plans for the third-party system. Both programs will work their way through the planning process, while more information on their deployment will be provided in 2027.

If demand increases at the rate it has the past few years, building some new centralized power plants likely will be a necessity. But meeting that demand entirely with new centralized resources likely would be prohibitively expensive. Because utility costs are passed along to those that pay utility bills, that added expense would be borne by households and businesses across Minnesota. Money saved on the electric grid means household and business customers could hold on to more of their money, instead of finding ways to cope with steadily higher utility bills.

In an era of rising demand, bigger costs, and ever-hotter weather, Sullivan argues that inaction may carry a bigger risk than trying something that hasn’t been done before.

“In a very real way, it would be riskier not to do this,” said Sullivan. “Twenty years from now, I want to look back and say, ‘Yeah, we’ve got an awesome VPP resource—not just in the Twin Cities, but throughout Minnesota.’ “