California Public Utilities Commission Establishes Parameters for Energy Storage Market

by K&L Gates LLP

One of the most powerful actions the government can take to promote emerging technologies is to establish a market. Three years ago, the California state legislature took the first step in establishing a market for energy storage in the state by passing Assembly Bill (“AB”) 2514, which requires the California Public Utilities Commission (the “CPUC”) to consider requiring utilities and other load-serving entities to integrate energy storage into their resource portfolios. Last week, the CPUC adopted a decision establishing targets for this market and adopting a methodical process for filling it over the next seven years. Not later than December 1, 2014, the utilities will issue their first solicitations and begin the process of purchasing 1,325 MW of energy storage by 2020. Over a similar time period, non-utility suppliers (energy service providers and community choice aggregators) will be purchasing an amount of energy storage equal to 1% of their peak load. While there are no specific rules governing how the non-utility suppliers procure their storage, the CPUC has created a very methodical process governing utility procurement. Between now and December 1, 2014, the details of that process will be developed and these details will have a significant impact on how the energy storage market develops in California.

Market Segments and Target Size
AB 2514 empowered the CPUC to define the target size of the energy storage market. The CPUC adopted an aggregate target of 1,325 MW in an effort to balance competing proposals. The procurement target for each utility is segmented in three ways: (1) interconnection point, (2) ownership and (3) technology. The following table shows how the CPUC has initially allocated the procurement targets based on interconnection point:

Procurement Target Allocation by Utility and Interconnection Point (MW)
  2014  2016 2018 2020 Total
Southern California Edison (SCE)
Transmission 50 65 85 110 310
Distribution 30 40 50 65 185
Customer 10 15 25 35 85
Pacific Gas & Electric
Transmission 50 65 85 110 310
Distribution 30 40 50 65 185
Customer 10 15 25 35 85
San Diego Gas & Electric
Transmission 10 15 22 33 80
Distribution 7 10 15 23 55
Customer 3 5 8 14 30
Total 200 270 365 490 1,325

The CPUC has given the utilities a substantial amount of flexibility to deviate from this initial allocation. Subject to certain requirements, up to 80% of the capacity can be reallocated between the transmission and distribution levels and up to 80% of the annual procurement target can be deferred to later years. The utilities may not, however, reallocate capacity designated for interconnection at the customer level. Any over-procurement in one year can be credited to procurement in later years. Procurement of any storage pursuant to any other procurement proceeding, including Resource Adequacy, the Self-Generation Incentive Program, the California Solar Initiative, demand-side management and electric vehicles, counts towards these storage targets as does any existing storage that was procured after January 1, 2010. So, while the CPUC’s initial allocation provides some indication of how much energy storage is expected to be procured, the final market size remains somewhat variable.

The CPUC requires the utilities to consider a variety of ownership structures, including customer-owned, joint ventures, third-party ownership, aggregation and utility ownership. Utility ownership, however, is capped at 50% of the market.

With respect to eligible technology, the CPUC authorized all technologies covered by AB 2514 to participate except pumped hydro over 50 MW in capacity. Larger pumped hydro storage facilities were excluded because they were viewed as having the potential by themselves to consume any one utility’s entire allocation of the energy storage market. Within the next six months, the CPUC staff is required to hold public workshops regarding pumped storage, which may create new opportunities for those resources. Until then, large pumped storage must look to other utility procurement tools to enter the marketplace.

Procurement Process
By March 1, 2014 (and biennially after that), the utilities are required to file a procurement plan, covering a two-year period, detailing the amount of storage expected to be procured and how the procurement will occur. One or more competitive solicitations must be issued, bids evaluated and contracts entered into for CPUC approval. The first solicitation must be issued on or before December 1, 2014, with contracts entered into and submitted for CPUC approval within one year after the solicitation. As discussed below, there are a number of aspects of the solicitation process that are yet to be determined. However, Southern California Edison Company’s recent RFO for local capacity requirements may be instructive insofar as it requests offers for energy storage capacity and suggests a purchase agreement form therefor. 1

The CPUC has also adopted several requirements designed to promote an equitable evaluation and comparison of the various storage options. Of critical importance is the method of evaluating the costs and benefits of the options. The utilities are required to procure only storage that is cost effective. The CPUC did not, however, impose any method of evaluating cost effectiveness; the utilities will be developing their own method and including that evaluation in their procurement plans. While evaluating cost effectiveness of storage has been left largely to the utilities, the CPUC has required the use of a uniform protocol with specific parameters for comparing bids that are submitted. Between now and March 2014, the utilities will be working with the CPUC’s Energy Division to develop an evaluation method that allows for a consistent comparison of bids across utilities and use cases. This methodology will be critically important to industry participants.

The CPUC also requires the utilities to use an independent evaluator to assess the “competitiveness and integrity” of the solicitation. The evaluator’s report, along with approval from the utility’s procurement review group, forms part of the utility’s application for approval of the resulting contracts.

With this decision come a number of key opportunities: Manufacturers of “cost effective” energy storage solutions have certainty that a market exists for their product, and next year, should be given some guidance as to how cost effectiveness will be evaluated. Irrespective of the ownership structure or interconnection point, manufacturers will have the opportunity to provide equipment to the California market. Project developers will now have the opportunity to submit proposals and compete directly for contracts that can be financed. Debt and equity providers can provide products to deploy more capital into the California energy market. Even customers will have the opportunity to generate revenue using their existing point of interconnection to the utility.

This decision is a significant milestone for the energy storage industry, but stakeholders should remain vigilant in continuing to monitor and influence the utilities’ procurement plans. The final rules have yet to be determined and those rules will significantly impact the extent to which the opportunities offered by the CPUC decision can be realized.

The full text of this decision is available here

1. SCE’s Local Capacity RFO can be found at this link:


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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