California Takes Pioneering Role on Energy Storage Policy

I noted in July that emerging energy storage technologies have received increasing attention from policymakers as an essential element for improving the efficiency and reliability of the electric grid. Adequate storage is also seen as important for facilitating the integration of larger quantities of renewable generation. At that time I posited that the states would likely precede the federal government in advancing policies to encourage the development and adoption of storage technologies.

Last Thursday, California stepped up to the plate. On October 17th, California established a target for its investor-owned utilities to procure 1,325 MW of energy storage capacity by 2020 and to install that capacity by 2024. The California Public Utilities Commission’s decision adopting these targets requires the utilities to procure energy storage through biennial competitive solicitations, with the first such solicitation to occur no later than December 1, 2014. The Commission also directed Electric Service Providers and Customer Choice Aggregators to procure storage capacity equivalent to one percent of their annual peak load by 2020.

The Commission’s decision follows three years of rulemaking process initiated by a 2010 California bill, AB 2514, that called on the Commission to determine appropriate energy storage targets. Although some participants in the process, including the California utilities, expressed concerns that the targets were overly aggressive and could result in high costs, the Commission consciously chose targets that would promote technological development. To further address concerns about costs, utilities will be allowed to defer up to 80% of their procurement targets if they can show that there is a lack of viable bids or that meeting the targets without deferment would result in unreasonable costs. Utilities may also “bank” over-procurement in one target period for use in a following period. The Commission also excluded pumped storage resources with a capacity greater than 50 MW from counting towards procurement targets on the basis that large-scale pumped storage is an established technology with the potential to crowd out newer technologies, and barred utilities from counting utility-owned storage for more than 50% of their procurement targets in order to encourage an array of storage projects that may meet different types of needs.

The Commission’s decision touches on a policy and legal concept that has played a prominent role in various clean energy policy contexts: cost-effectiveness. Assessing the full costs and benefits associated with storage resources will be challenging because of the variety of services such resources can provide. For now, the Commission decided to leave utilities with discretion to develop and propose their own methodologies for assessing the cost-effectiveness of energy storage proposals; the Commission declined to adopt a prescriptive methodology or require application of a specific test or formula. To some extent, this approach kicks the can down the road by requiring the Commission to approve or reject methodologies submitted by utilities with their procurement applications. But this approach is also likely to allow the crafting of more nuanced and flexible methodologies. The cost-effectiveness methodologies that are ultimately approved and applied will significantly affect the types of storage resources selected in the procurement and the ultimate success of the program.

California’s new procurement requirements are a major development for the nascent energy storage industry. California’s policy may provide just what the industry needs: a market for it to demonstrate the value that energy storage projects can provide. Many states will be monitoring California’s efforts, particularly the results of the first solicitations next year, and the approach could spread if it proves successful.

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