California Public Utilities Commission Adopts Energy Storage Procurement Targets

by Reed Smith

California continues to lead the way on integration of renewable energy, improvement of grid reliability and reduction of greenhouse gas emissions with the adoption by the California Public Utilities Commission (CPUC) of the first mandatory energy storage procurement targets in the nation. Additionally, with the requirement that a majority of storage resources be owned by third parties and a strong preference for utility-owned storage to be independently developed, the CPUC has created a substantial new market for energy project developers and energy storage equipment vendors.

The targets adopted on Thursday, October 17, 2013, apply to California’s three major investor-owned utilities (IOUs): Southern California Edison, Pacific Gas & Electric, and San Diego Gas & Electric. The IOUs are required to collectively procure 1,325 MWs of energy storage capacity by 2020, with an installation deadline of the end of 2024, to implement AB 2514 (2010). The CPUC directed the utilities to file, by March 1, 2014, separate procurement applications with a proposal for their first energy storage procurement. The IOUs are required to conduct their first solicitation by December 1, 2014, and further procurement applications and solicitations will be held biennially until 2020. The state’s smaller IOUs, such as Pacific Power, are exempt from the legislation.

The Targets

The targets are as follows:

The targets have some built-in flexibility. The IOUs may shift up to 80 percent of the target capacity from transmission-connected domain to the distribution-connected domain and vice versa, but may not shift target capacity in or out of the customer-side domain. Qualifying storage resources installed after January 1, 2010 can count toward the targets. However, pumped hydro storage projects in excess of 50 MW will not be counted toward the targets, out of concern that a large-scale pumped storage project (most are more than 500 MW) could push out other technologies.

Third Party Participation and Ownership

The decision encourages third party ownership of energy storage facilities by limiting utility ownership of storage resources to 50 percent of cumulative target capacity across all three grid domains. For utility-owned storage (other than distribution reliability applications), the Commission has adopted a preference for projects developed by third parties and sold to an IOU on turnkey basis under a purchase and sale agreement, and requires that the utility make a showing that this approach is not appropriate if the IOU wishes to pursue an EPC, utility-build or other approach.

Customer-side storage may be procured through existing programs and new programs created through other rulemakings, such as the Self-Generation Incentive Program, the 2015 demand response application, the distributed generation / California Solar Initiative rulemaking, and the alternative-fuel vehicle rulemaking.

The IOU Procurement Processes

The decision requires procurement of transmission- and distribution-domain storage to be made through competitive solicitation processes authorized by the CPUC consistent with the Long-Term Procurement Planning (LTPP) process, subject to limited exceptions. Procurement applications are required to identify, among other things, the quantities of storage resources the IOU intends to procure, categorized by grid domain and use case, operational requirements and bid evaluation methodology. Public Utility Code Section 2836.2(d), added by AB 2514, requires energy storage targets and procurements to be "viable and cost-effective." The CPUC directs the IOUs to propose a methodology to evaluate the costs and benefits of bids, but each IOU must consult with the CPUC staff to develop an evaluation protocol consistent across all three IOUs to be used for benchmarking and general reporting purposes. Any bid evaluation methodology proposed by an IOU in its procurement application will be required to draw upon the use case analysis documents developed in connection with the proceeding as well as cost effectiveness analysis methodologies prepared by EPRI and DNV KEMA. All costs and benefits must be taken into account in the evaluation of bids.

The IOUs may request deferral of up to 80 percent of their procurement targets to the next solicitation based on a showing that the IOU was unable to procure enough operationally or economically viable projects to meet the targets for a specific solicitation period. Banking of MWs will also be allowed in situations of over-procurement during one solicitation period.
According to the CPUC, the developments underway in the Resource Adequacy and LTPP proceedings suggest that there will be procurement of energy storage projects outside the framework established in the decision. It held that such projects may be counted towards the procurement targets if the solicitations and projects are otherwise qualifying.

Aggregators and Electric Service Providers

Finally, the decision also sets a target for Community Choice Aggregators (CCAs) and Electric Service Providers (ESPs) to procure energy storage equal to 1 percent of their yearly 2020 peak load by 2020, also with installation no later than 2024. By January 2016, they will be required to file a report demonstrating their compliance to meet the target and describing their methodologies for cost-effective projects. This target is slightly lower than the IOU percentage target, since all customers, including those of CCAs and ESPs, will be required to pay certain non-bypassable charges that may be used by the IOUs to develop energy storage systems. Storage procurement targets for each of the state’s municipal utilities are required to be established, if appropriate, by the governing board of the municipal utility no later than October 1, 2014, and reported to the California Energy Commission.

We will be closely following further developments in California’s energy storage marketplace and providing timely updates to our clients and contacts on key developments and opportunities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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