California budget cuts could decimate key virtual power plant programs

This has made the DSGS program a key target for VPP developers in California, with $295 million budgeted for participants 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 $75 million deferred to 2025 and 2026, 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?”