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This study proposes a novel optimal generation scheduling model for virtual power plant (VPP) considering the degradation cost of energy storage system (ESS). The VPP is generally formed by a mix of distributed energy resources, and the ESS is an important installation for flexible VPP dispatch due to its controllable and schedulable behaviours. For the operations of battery storage systems, the ambient temperature and depth of discharge have significant impacts on the wear and tear of the ESS as well as battery degradation cost. Furthermore, the battery degradation cost is modelled and approximated by a piecewise linear function, and then incorporated into the proposed optimal VPP scheduling model. Consequently, the optimal VPP scheduling problem is formulated as a two‐stage stochastic mixed‐integer linear programming in order to maximise the expected profits of the VPP. The proposed model has …