Newsom finally says yes to virtual power plants

California Gov. Gavin Newsom (D) defied political expectations on Wednesday and signed into law a slate of energy-affordability legislation aimed at containing the utility spending that is driving up electricity costs in the Golden State.

Among the bills he signed are two that will boost the use of virtual power plants — aggregations of rooftop solar–charged batteries, EV chargers, smart thermostats, and other controllable devices — as an alternative to costly grid investments and gas-fired power plants.

Newsom’s move drew praise from consumer advocates, clean energy trade groups, and environmental organizations. ​“I’d say we saw today a lot of evidence that Gov. Newsom has really prioritized affordability and accountability to an increased extent,” said Mark Toney, executive director of The Utility Reform Network, a ratepayer advocacy group that sponsored seven bills this legislative session, all of which were passed into law.

That outcome was far from assured. California’s big utilities have opposed legislation that would reduce how much they’re able to spend on capital investments for which they earn regulated profits and recover via the rates they charge customers. The Newsom administration has focused on smaller-bore energy-cost-containment policies in previous legislative sessions, even as critics have argued for more sweeping reform.

Clean energy advocates did not get everything they wanted from this legislative session. Newsom vetoed a bill that would have ordered state agencies to revamp a moribund market for community solar-battery systems — a form of clean energy that many other states have used far more effectively than California has.

Still, the outgoing governor’s choices this year largely align with the public’s increasing frustration over the soaring cost of electricity. Average residential rates charged by the state’s three major investor-owned utilities have risen to roughly twice the U.S. average in the past decade, even as those utilities have reported record profits.

“Governor Newsom is delivering on his promise to bring down electricity costs and clean up climate pollution,” Kat Lockwood, CEO of The Climate Center, a nonprofit think tank, said in a Wednesday statement.

Virtual power plants score big wins 

Two bills in particular — Senate Bill 905 and Senate Bill 913, both authored by state Sen. Josh Becker (D) — will create new opportunities for virtual power plants to reduce utility costs.

As Becker explained it in a Wednesday statement, the goal is to take advantage of the ​“millions of batteries, electric vehicles, smart thermostats, and other technologies” that Californians have already bought. Controlling those devices en masse can shift hundreds of megawatts of power demand away from the grid during moments of maximum stress — usually hot summer evenings — that drive an outsize portion of the grid costs that utilities pass on to customers.

SB 913 takes aim at the cost of keeping aging gas-fired power plants online for use during a handful of hours per year. For decades, utilities have been paying customers to turn off air conditioners and other appliances to reduce the need for those ​“peaker” plants.

California has lagged behind other states in making use of these customer-owned resources to achieve this goal. SB 913 instructs the California Public Utilities Commission (CPUC) and the California Independent System Operator, which manages the state’s transmission grid, to better measure and reward the grid value of these devices.

SB 905 targets another category of costs: the money that utilities invest in their grids to deliver power during those peak hours. All utilities overbuild their grids to meet those peaks, which means much of that capacity is underused most of the time. If they could rely on customers to reduce power use during such moments — or store power in batteries to ride through them — they could avoid some overbuilding.

But utilities need to better assess how efficiently they’re using their existing grids to know what’s possible. SB 905 instructs the CPUC to start requiring utilities to measure and report this data. That’s a first step toward discovering where VPPs or other technologies could improve utilization at a lower cost, and how regulators could reward utilities for using the tech rather than paying for traditional grid upgrades.

Newsom hasn’t been friendly to VPPs in recent years. He vetoed three VPP bills last year, and his administration has demanded successive funding cuts to the state’s premier VPP program, which may leave it unable to keep operating next year unless the legislature and the next governor can quickly agree on a way to fund it.

“We’re kind of shocked that he signed both bills,” Becker said in a Wednesday interview. But ​“as we build out these distributed energy resources, and have them in more and more people’s homes, it just makes sense to help them out to help the grid” by paying them for the services their devices can provide. ​“And if they can’t deliver in a cheaper fashion, they won’t be used.”

Brad Heavner, executive director of the trade group California Solar and Storage Association, agreed that Newsom’s approval of these VPP bills is a step forward. But he also cautioned in a Wednesday statement, ​“Implementation of the bill at the CPUC under the next governor will determine whether customers see lower bills.”

Going wide on checking rising utility costs 

SB 905 isn’t just a VPP bill. It also contains a host of utility cost-containment measures, many of them building on SB 205, another Becker bill enacted last year. 

Both pieces of legislation look to rein in the return on equity, or the amount of profits that utilities can collect, on one of their biggest costs: their massive investments in wildfire prevention and mitigation. They also order utilities to borrow more money to pay for a larger share of their grid investments, which can offset a portion of their profit-earning capital expenditures.

Becker said California’s big utilities were ​“very opposed” to these provisions. But with public anger over energy costs on the rise, ​“it’s a huge sign to the public that we can get something done that works on fundamental utility economics and get it signed by the governor.”

Last year’s SB 205 also ordered state agencies to create a ​“transmission accelerator” program that could use state-backed bonds to pay for a portion of utility transmission grid projects. Last month, Newsom signed Assembly Bill 192, which officially funds that effort with $325 million collected from a $10 million climate bond package passed by voters in 2024.

California’s utilities have tens of billions of dollars of transmission grid expansions underway, but many of them are running behind schedule. Another bill that Newsom signed on Wednesday, AB 2493, orders the CPUC to monitor progress on those buildouts and take ​“remedial action” if they don’t stay on schedule.

Last, SB 1098, also signed by Newsom on Wednesday, will slice away at the cumulative costs that utilities pass on in rates. The new law will limit utilities’ use of balancing and memorandum accounts, which were created so utilities could manage hard-to-forecast costs but have become overused and hard for regulators to police, The Utility Reform Network’s Toney said. The common goal of this bill and of SB 905 is ​“making sure that utilities don’t overspend,” he said.