Circuit Makers

It marks a milestone development in China’s efforts to fulfill its dual carbon goals, peaking carbon emissions before 2030 and achieving carbon neutrality by 2060. But as the ratio of renewable energy in the power system increases, it is becoming more challenging to maintain the stability of China’s energy system, given the randomness, intermittency and volatility of wind and solar.　

In recent years, China has started to turn to virtual power plants (VPP) for a solution. A VPP, as its name suggests, has no physical plant. It is a digital system that aggregates and manages distributed energy resources through software, including flexible electrical loads, rooftop solar, energy storage systems and electric vehicle charging infrastructure.　

Zhou Feng, a manager of the Clean Power Program at Energy Foundation China (EF China), a non-profit organization focusing on advancing sustainable energy development, told NewsChina that a VPP acts as a platform to combine scattered energy resources, such as small-scale power sources or flexible demand, into a coordinated, controllable system. This helps improve grid reliability and supports renewable energy use.　

The exact role of a VPP depends on the types of resources it manages. For example, if it includes many adjustable power loads or storage systems, it can significantly enhance energy supply stability. 

In April, China’s National Development and Reform Commission (NDRC), China’s top economic planner, and the National Energy Administration (NEA), the country’s top energy regulator, released a guideline on “accelerating the development of VPPs.” The long-awaited policy document clarified the sector’s development roadmap, emphasizing that improving power market mechanisms will be the driving force of its development.　

According to Zhou Feng, the guideline aligns with the market-oriented electricity pricing reform launched in February and is intended to help VPP operators generate adequate profits by participating in power markets, paving the way for its large-scale adoption throughout the country.　

However, given the differences in desired outcomes between local governments, who prioritize power supply stability, and VPP operators and potential participants, who are mostly driven by profit, the widespread commercialization of VPPs remains a distant reality.

According to Zhang Yongping, director of EF China’s Clean Power Program, the primary incentive for local governments to support the establishment of VPPs is to ensure an adequate and stable power supply. “There is always the challenge of seasonal power shortages, such as during peak summer demand. To ensure supply, local governments have two options: increase stable power sources such as building coal power projects, or reduce electricity consumption during peak times,” Zhang said. As new coal power plants are becoming less desirable, the latter option is where VPPs can step in.　

The result is that most VPPs in China today remain confined to demand response, which involves encouraging electricity users to temporarily reduce or shift consumption during peak periods in exchange for compensation or subsidies.　

Shenzhen, a megacity in South China’s Guangdong Province, now has the country’s largest VPP. Operated by State-owned China Southern Power Grid, it integrates 59 operators with a total of 3,800 megawatts of power capacity, including 840 megawatts of real-time adjustable load, equivalent to the capacity of a large coal-fired unit.　

“Shenzhen’s virtual power plant is mainly based on the demand response model,” Rao Yiran, president of Shenzhen-based KZ Cloud, a VPP solution provider, told NewsChina. “Each time it initiates demand response, it can adjust an energy load of about 200 megawatts, which is a significant amount for peak demand management in the city.” Rao said that the platform handled two instances of demand response during peak demand in July and October 2023.　

However, the problem is that demand response is episodic, leading to unpredictable and inadequate economic returns for participants. In 2024, for example, the Yangtze River Delta did not experience significant power shortages. Jiangsu, one of China’s most prosperous provinces, only initiated demand response on one day in 2024.　

Even in 2022, when many provinces experienced power shortages at peak times and initiated more frequent demand responses, the revenue generated for operators was limited. According to data released by the Zhejiang Provincial Development and Reform Commission, the province initiated demand response 16 times in July and August 2022, which resulted in 438,300 instances of user participation – one user potentially participating multiple times.　

These events collectively reduced peak grid load by 52 million kilowatts, with authorities offering subsidies amounting to 546 million yuan (US$76m), or 1,246 yuan (US$174) on average per user.　

“It means that for a participating enterprise with 1 to 2 megawatts of flexible load, annual earnings from participating in a VPP may be less than 100,000 yuan (US$13,940), barely enough to cover the cost of connecting to the virtual power plant,” Zhou Feng said.　

For many enterprises, this inconsistency highlights the limits of demand response as a sustainable business model. Even where capacity subsidies exist, they are often too small to justify investment.　

Some provinces have started to provide subsidies to VPPs for just being available, even if they are not used. But the amounts are very limited. In the four months of peak electricity consumption in 2023, the provincial government of Zhejiang provided subsidies of 14.5 million yuan (US$2m) to local VPPs, amounting to less than 10,000 yuan (US$1,394) for each participant.　

“[Under the current policy], it is very difficult for VPPs to generate stable, long-term revenue through participation in demand response programs,” Zhou said.

For Zhou Feng, the focus on developing VPPs must go beyond ensuring the stability of power supply. Zhou hopes that the emphasis on market mechanisms in the guideline issued by the central government in April could provide new momentum to establish a market-based model.　

Compared to China, some countries have far more mature VPP markets. In Germany, VPPs are fully commercial and companies like Next Kraftwerke have networked thousands of electricity producers, consumers and storage facilities, which can generate revenue through multiple sources such as grid services, energy arbitrage (buying power at low prices and selling it when demand is high) and regulatory reserves.　

In the US, demand response programs remain a core function of VPPs. However, VPPs there can participate in capacity markets and are paid for just being available. In some states, VPPs are allowed to offer tailored energy packages to customers directly.　

The major hurdle for the commercialization of VPPs in China is the absence of a liberalized energy market. Currently, the price of electricity is determined through a mixed system that includes both government-administered pricing and market-based mechanisms.　

While the government has started to gradually liberalize the energy market, only a few provinces, including Shanxi and Shandong, have established electricity spot markets that allow VPPs to participate on a regular basis.　

Zhang Qiang, vice general manager of Huagong New Energy Technology, a VPP operator, told NewsChina that VPPs have great potential if the electricity market is liberalized.　

“We mainly aggregate two types of resources,” Zhang said. “One comes from large industrial and commercial users, which often have energy-intensive equipment that can shift production to off-peak hours. The other is energy storage, which is the best tool for balancing supply and demand. But storage deployed by industrial and commercial enterprises for their own energy backup and potential energy sale is still in the early stages of market adoption and remains limited.”　

“Right now,” Zhang added, “most companies have little understanding of VPPs. They may have thought about saving energy and cutting costs, but not through participating in the electricity market. And the market mechanism itself is still underdeveloped. Even if VPP operators sign deals with companies, it could take two or three years before they see any return. The promised benefits are mostly estimates, and the current returns are too small to attract much interest.”　

For energy experts like Zhou Feng, China should speed up energy pricing reform to establish electricity spot markets in all provinces and regions that allow new types of participants, including VPPs, to take part in.　

Zhou believes that the April guideline will encourage provinces to tailor their development plans to local conditions. Given the diverse energy structures across regions, power markets vary significantly.　

In coal-rich provinces like Shanxi, the focus is on valley filling, which is making use of excess renewable energy during low-demand periods. Meanwhile, in the Yangtze Delta area, which has yet to launch a spot market, the focus is oriented toward peak shaving, a method to reduce consumption during periods of high demand.　

These differences shape how virtual power plants are designed and deployed. Valley-filling markets, where demand is relatively low and renewable energy output is high, often experience large price differentials. This creates stronger incentives for VPPs to absorb surplus electricity during off-peak hours.　

There are signs the reform is gradually expanding. In November 2024, Zhejiang Power Exchange Center said the province would, “at an appropriate time,” allow new market participants, such as grid-side energy storage and virtual power plants, to join spot market trading, though no timeline was provided.　

But for Zhang Qiang, the challenge runs deeper. Even if the market opens, China’s VPP sector still has a long road ahead. Currently, China’s VPP operators remain small and fragmented.　

“The VPP market is still in the cultivation stage, and it’s just as important to build up the capabilities of operators,” Zhang said. “After all, the capability of a VPP that aggregates 100,000 enterprises is very different from one that aggregates 100.”