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California budget cuts could decimate key virtual-power-plant programs

Governor Gavin Newsom plans to slash funding for batteries and utility customers to help with grid emergencies — but money for fossil fuel generators keeps flowing.
By Jeff St. John

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In an aerial view, solar panels are seen on the roofs of homes in a neighborhood on April 25, 2024 in San Rafael, California.
(Justin Sullivan/Getty Images)

Two years ago, California committed $6.7 billion in state funding to protect the grid against the risk of heat-wave-driven blackouts. Most of the money was directed at paying for fossil-fueled power plants and backup generators that don’t fit into the state’s clean energy plans.

But nearly $1 billion of that funding was committed to cleaner alternatives — financing small-scale batteries connected to low-voltage power grids and paying utility customers to turn down their power use to forestall grid emergencies.

Now, as California grapples with a budget shortfall, Governor Gavin Newsom (D) and state lawmakers have proposed slashing hundreds of millions of dollars of funding for these cleaner alternatives — a move that could undermine one of the key avenues for distributed energy to gain traction in the state.

So say a group of distributed-energy companies and advocates calling on state leaders to reverse the proposed cuts to the Demand Side Grid Support (DSGS) and Distributed Electricity Backup Assets (DEBA) programs. Both were put on the chopping block in the Newsom administration’s revised budget proposal last month, and those cuts were provisionally approved by lawmakers in the state’s Senate and Assembly appropriations committees last week.

Given the critical importance of these programs for maintaining grid reliability to avoid dire energy shortages as well as for achieving our state’s climate goals, we urge you to protect the funding for the DSGS and DEBA programs,” the companies wrote in a May 28 letter to state legislative leaders. Investing in these programs is an investment in California’s clean energy future and our resilience against the growing threats of climate change.”

If enacted, the budget cuts would be the latest blow to California’s nation-leading distributed-energy industry. In the past year and a half, state regulators have slashed compensation for rooftop solar systems of customers served by the state’s three major utilities; reduced the value of storing that solar power in batteries to supply to the grid; undermined solar programs for schools, farms, and apartment buildings; and, most recently, rejected a widely supported plan to boost community-scale solar and battery systems.

Now, as California and the U.S. West face forecasts of a hotter-than-average summer that could drive grid stresses similar to those that led to rolling blackouts in 2020 and a brush with grid emergencies in 2022, two of the only state-funded programs that don’t rely on fossil fuels to combat those grid emergencies are under threat.

Slashing funding for programs that prevent blackouts is beyond short-sighted — it’s a direct threat to our most vulnerable communities,” Edson Perez, California policy lead for clean energy industry trade group Advanced Energy United, said in a statement last week. These two programs are our best shot at creating a resilient, clean energy grid. It would be wise for the Governor and legislative leaders to reverse these cuts before finalizing the budget on June 15.”

Perez was one of the signatories to last week’s letter, which included demand response and distributed-energy companies CPower, Enel, EnergyHub, Engie North America, PowerFlex, Renew Home, and Voltus; solar and battery providers Generac, Lunar Energy, Sunrun, and Sunnova; backup-generator companies Enchanted Rock and Mainspring Energy; and solar and battery industry groups.

Many of these companies have invested money and time to pursue projects under these two programs, which were created in 2022 as part of a broader set of emergency measures proposed by Newsom and mandated by the passage of state law AB 205. Cutting funds at this crucial juncture would not only disrupt these processes but also damage California’s reputation as a reliable partner for energy companies,” the letter said.

State leaders have proposed backfilling the cuts with funding available from the state’s greenhouse gas cap-and-trade fund. But as the letter to legislators noted, a promise of future funding from uncertain sources does not provide prospective participants with any confidence in the program’s future or the state’s commitment to clean distributed power.”

What’s on the chopping block 

Both DEBA and DSGS are administered by the California Energy Commission. The DEBA grant program, meant to fund smaller-scale battery storage, has yet to be formally launched. Under the proposed budget cuts, DEBA would see its previous $545 million budget slashed by $418 million, essentially halting any ongoing work, said Rachel McMahon, vice president of policy for the trade group California Energy Storage Association.

We’ve been working on this for almost two years now, trying to get a program in place. A lot of people are interested,” she said. But without funding, a number of battery developers hoping to use the program to start installing batteries are unlikely to be able to continue, she said.

The situation is more uncertain for the DSGS program, which provides a pathway for companies to pay utility customers willing to reduce their electricity consumption — a tactic commonly known as demand response — or provide power from batteries or backup generators during times of grid stress.

These combinations of load reduction and behind-the-meter” generator and battery resources are commonly referred to as virtual power plants (VPPs), since they can largely mimic the grid-supporting capabilities of traditional power plants.

One key benefit of the DSGS program is that it avoided the complexities of traditional demand-response programs in California, which participants say have consistently undercounted the value of customer load reductions to forestalling grid emergencies. These programs have also barred customers from earning money for battery power they export to the grid — a restriction that DSGS eliminated by measuring and rewarding participants for that exported energy.

This has made the DSGS program a key target for VPP developers in California, with $295 million budgeted in 2022 and 2023. About 1,300 participants in DSGS-funded programs were able to reduce peak load by about 315 megawatts and provide more than 3,100 megawatt-hours of emergency response during hot summer weather in the summer of 2022, according to the companies that signed on to the protest letter to state lawmakers. Those companies have planned to provide much more emergency capacity in the summer of 2024.”

This newly expanded and re-designed program was finally launching for a full summer in 2024,” Perez of Advanced Energy United told Canary Media in an email. But the proposed budget cuts would eliminate $186.5 million in DSGS funding through this year and next, leaving only $108.5 million for the program to run through 2025, according to industry groups tracking the latest budget figures. That would severely impact” participating companies’ efforts, since they need to have predictability to invest in market development, customer onboarding, and program setup,” the letter stated.

If the proposed reductions go through, I don’t know how that will affect new and current participants,” said Cisco DeVries, executive vice president of Renew Home, the company formed by the merger of Google Nest’s smart thermostat energy-shifting service Nest Renew and California-based residential demand-response aggregator Ohmconnect. Renew Home works with hundreds of thousands of households in California and participated in the DSGS program in 2022 and 2023.

The potential for VPPs in California is particularly strong, given the state’s preponderance of homes equipped with rooftop solar, backup batteries, smart thermostats, and electric vehicle chargers. In an April report, consultancy Brattle Group projected that VPPs could enable $550 million per year in consumer savings in California and provide in excess of 15 percent of the state’s peak grid demand by 2035.

Jigar Shah, head of the U.S. Department of Energy’s Loan Programs Office, which has issued billions of dollars in loan guarantees to support VPP deployments, highlighted that report in an April social media post, citing it as evidence that VPPs are the lowest cost way” for utilities and regulators to handle load growth and lower rates for everyone.”

But with the future of the DSGS program now very much in doubt, it’s unclear how California utility regulators and policymakers will enable that potential, DeVries said. A big part of how we were going to figure out the next phase of demand response and virtual power plants in the state of California was the CEC programs, both DSGS and others,” he said. So now we’re back to the drawing board. We don’t have the answers to what’s going to happen next.”

That’s a problem for a state that’s simultaneously trying to control electric utility rates that are among the highest and the fastest-rising in the country, keep the lights on during stressful grid events, and retire a bunch of dirty old fossil fuel plants,” he said.

The missing money for alternatives to fossil fuels

To date, the lion’s share of California’s emergency-grid-support funds has gone toward extending the lifespan of its fossil fuel plants. The state has already spent about $426 million from those emergency programs to build or procure emergency and temporary” power generators that burn fossil gas or diesel fuel, according to a May report from the state Department of Water Resources, which administers that program.

Another $1.3 billion in funding has been promised to companies that own and operate aging fossil-gas-fired peaker” power plants in Southern California that were slated to be closed in 2020 under environmental regulations. Those plants are a particularly egregious target for state funding, environmental advocates said, given that they burden surrounding communities with harmful air pollution, and have been unprofitable to operate absent state subsidies.

What’s more, these power plants take days to ramp up in advance of predicted grid emergencies and are much more expensive than the capacity that can be enlisted through the DSGS program, which consists of customers that can almost instantaneously reduce power use or commit battery power to helping the grid, Perez said.

The proposed cuts to DSGS and DEBA aren’t the only state funds for cleaner alternatives that might fail to materialize. Part of the emergency plan laid out in 2022 called for directing $900 million to incentives to fund battery installations in lower-income and disadvantaged communities. But only $280 million of that has been set aside in the state budget.

To maintain commitments to fossil fuel resources and cut back on deployment of new resources — clean resources that could be used for emergencies — is short-term thinking and just seems kind of backwards,” said Ed Smeloff, managing director of the regulatory team at nonprofit group Vote Solar. It’s important to have strategic reserves for the future, because we are going to have extreme weather events. That’s a fact of life. But those reserves should be compatible with the state’s clean energy policies.”

It’s possible that state leaders aim to instead rely on the larger amount of utility-scale batteries to solve California’s grid problems, Smeloff said. In April, Newsom announced that California has deployed 10 gigawatts of installed battery capacity, a 13-fold increase from five years ago, and enough to meet about 20 percent of the peak electricity demand for the grid managed by the California Independent System Operator (CAISO).

But it’s not clear that California can continue that breakneck pace of utility-scale battery expansion in the face of its crowded transmission-grid interconnection queues, Smeloff said. Nor is relying on large-scale batteries alone the most cost-effective path for the state. A 2020 report from Lawrence Berkeley National Laboratory found that smarter utilization of demand-side resources could replace the need for billions of dollars’ worth of batteries and other utility-scale resources.

At the same time, California residents are being encouraged by state clean energy and climate policies to buy electric appliances, heat pumps, and EVs as rising electric rates make them more costly to operate, he said. Finding some way for those customers to earn money for programming those devices to relieve grid peaks is a vital counterbalance to the higher electric bills they’ll face as they electrify.

It’s also likely that state leaders believe that the grid emergencies of 2020 and 2022 aren’t as dire today, Smeloff said. An assessment from CAISO last month indicates that the state has a surplus of resources to meet expected peak grid demands this summer, he noted — a stronger position, at least on paper, than the state has had in years.

But as McMahon of the California Energy Storage Association noted, We had a mild summer last year. But what happens the year after that if we haven’t planned for it?”

Jeff St. John is director of news and special projects at Canary Media. He covers innovative grid technologies, rooftop solar and batteries, clean hydrogen, EV charging and more.