Advances in Virtual Power Plants (VPPs) illustrate how changes in Minimum Efficient Scale (MES) can reshape
industry structure. Traditionally, electricity generation exhibited a high MES:
firms needed large, capital-intensive plants to achieve low average costs,
reinforcing concentration. VPPs lower MES by allowing thousands of small,
distributed assets, such as rooftop solar, batteries, smart appliances, and EVs, to be
aggregated through software and operated as a single, dispatchable resource.
Because efficiency now comes from coordination and data rather than plant size,
firms can enter electricity markets without owning large-scale generation
assets. When MES falls relative to market demand, entry becomes easier and
market structure shifts toward greater competition and fragmentation.
Not only are VPPs an example of how lower MES in physical assets reduces market power, they also relocate it. While generation-scale economies decline, new scale economies emerge in aggregation, customer acquisition, data analytics, and platform integration. As a result, competition increasingly resembles a platform market, where firms that control large networks of enrolled devices or superior optimization software can achieve cost and reliability advantages even without owning physical capacity. Declining MES at the asset level intensifies entry and rivalry, while increasing MES at the coordination layer may create strategic bottlenecks that generate a potential winner-take-most outcome.
