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EXPLAINER-What is a virtual power plant?

Jan 31 (Reuters) - Solar panels and home batteries have soared in popularity because they allow consumers to generate and store their own carbon-free power and save on their electricity bills.

Bundled together by the hundreds or thousands, these devices can also serve as a critical tool: they can be called on to supply vast amounts of power when grid supplies are stretched or store it when there is more solar and wind power than needed.

When used this way, they are called virtual power plants, or VPPs. Energy experts say they are key to reducing the power industry's dependence on climate-damaging fossil fuels as the nation moves toward electrifying transportation, buildings and industrial sectors.

Though still nascent, VPPs are poised for big growth in the United States in the coming years thanks to President Joe Biden's new climate change law that includes incentives for electric cars, solar panels and home batteries.

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"We can use our existing assets more efficiently as opposed to raising rates for all electricity users by doing things less efficiently," Jigar Shah, director of the Loan Programs Office at the U.S. Department of Energy, said in an interview. "Virtual power plants are at the center of that."

Investment in these so-called distributed energy resources is forecast to eclipse $110 billion between 2020 and 2025, according to research firm Wood Mackenzie.

HOW DO THEY WORK?

VPPs are networks of small energy-producing or storage devices, like solar panels and batteries, that are pooled together to serve the electricity grid.

With their participants' approval, their energy can be tapped by utilities during times of high demand, or can be reserved for later use. Owners of the devices are compensated for their participation.

Energy transition nonprofit RMI estimates VPPs could reduce U.S. peak demand by 60 gigawatts by 2030 by shifting consumption to other times of day and supplanting centralized generation. That's the average amount of power consumed by 50 million households.

WHO IS INVOLVED?

U.S. solar companies including Sunrun Inc and SunPower Corp have pooled some of their customers' systems into virtual power plants in California, Hawaii and New England.

Sunrun last year, for example, operated a virtual power plant with thousands of homes in New England that provided 1.8 gigawatt-hours to the grid during June through August.

OhmConnect, which also manages a network of energy-consuming devices, said last year its members received $2.7 million for conserving energy during a nine-day summer heat wave in California - showing how VPP's can also be used to cut demand when utilities are short power.

WHERE ELSE ARE THEY USED?

VPPs have been on the rise in the United States since the Federal Energy Regulatory Commission in 2020 allowed them to compete in wholesale power markets.

But they are also being used in Australia, Japan and Europe by companies including Statkraft, Shell-owned Next Kraftwerke and Tesla Inc. (Reporting by Nichola Groom; Editing by Lincoln Feast.)