China is banking on virtual power plants (VPPs) as a crucial tool to enhance its power grid's flexibility and accelerate the integration of renewable energy sources, according to new policy guidelines.

As the world's largest market for low-carbon energy investment, China is aggressively pursuing VPPs to bolster its grid flexibility and renewable energy integration, setting ambitious targets to reach 20 gigawatts of virtual power plant capacity by 2027 and 50 GW by 2030, according to new guidelines.

The directives, jointly issued by the National Development and Reform Commission and the National Energy Administration, highlight the increasing importance of VPPs in China's evolving power system and electricity market.

A virtual power plant is a network of decentralized energy resources that are controlled via software to function as a single, flexible power source. It allows these dispersed resources to operate in a way that mimics the behavior of a traditional power plant, providing electricity to the grid or responding to changes in demand.

With advanced technology used to manage aggregations of distributed energy resources like renewables, storage and controllable loads, VPPs are seen as crucial for enhancing power supply security, facilitating renewable energy consumption and improving electricity market mechanisms, according to the NEA.

By fully leveraging the regulatory potential of virtual power plants, the operational costs are significantly reduced, it said.

The virtual power plant market in China, according to estimates by Huatai Securities, is projected to reach 10.2 billion yuan ($1.4 billion) this year and further grow to over 100 billion yuan by 2030. These developments offer new opportunities for the diversified growth of private enterprises in the new energy sector, it said.

According to Deng Simeng, a senior analyst for renewables and power research at global consultancy Rystad Energy, around 80 percent of China's power consumption and generation will be transacted through competitive markets this year, significantly up from the 61 percent traded in 2024.

While regions like Guangdong, Shandong and Shanxi provinces have seen initial VPP development, the NEA acknowledged the sector is still nascent nationwide.

Challenges remain in establishing unified definitions, management frameworks, market mechanisms and standards. The new guidelines aim to address these issues, promoting localized development and improved operational management for VPPs, it said.

China is also encouraging diverse business models for VPPs, urging their participation in electricity markets and demand response programs to generate revenue. Beyond grid services, VPP operators are encouraged to explore value-added services such as energy efficiency consulting, data analytics, and carbon trading support, expanding their revenue streams.

Industry experts believe that the development of VPPs is a key measure to encourage private sector investment in the energy sector.

VPPs, boasting lower capital requirements and flexible operations compared to traditional power plants, are well-suited for private companies, said Lin Boqiang, head of the China Institute for Studies in Energy Policy at Xiamen University.

Shenzhen in Guangdong, among other regions, already sees private firms as major players in VPP investment and operation, and the guidelines explicitly support further private sector engagement.

Private companies are also actively laying out plans to develop VPPs across the country.

Zhu Gongshan, chairman of GCL(Group) Holdings Co Ltd, China's largest private power conglomerate, said the company is very optimistic about the virtual power plant market in China.

A more market-driven energy sector could lead to increased efficiency in the allocation of resources, as the government has been stepping up efforts to deepen market-oriented price reforms of new energies while promoting the integration of new energy sources like wind and solar power into the electricity market, he said.

With a population exceeding 1.4 billion, China's vast market presents significant energy demand. New national policies promoting the full integration of new energy into the market, coupled with improving electricity market trading mechanisms, are opening up substantial opportunities for new energy companies in areas such as ancillary services and virtual power plants, said Zhu.

The company predicts over 50 percent growth in its VPP business this year.