3 days ago
California's successful virtual power plant program faces big budget cuts
California's biggest virtual power plant is facing over $100 million in funding cuts due to the state's ongoing budget crisis, threatening the long-term viability of a program that can act as a crucial release valve for the state's overburdened power grid.
The Demand Side Grid Support program pays electric customers who reduce their energy use or who provide power to the larger grid during extreme events that stress the system, like heat waves or wildfires. Going into this summer, the program has hundreds of thousands of smart thermostats, batteries, grid-responsive EV chargers, and other distributed energy resources that participating companies can control remotely with software. It can provide hundreds of megawatts of grid relief to help the state avoid rolling blackouts on the hottest days of the year, when air conditioning use pushes the power system to its limit.
The companies paying customers to commit to making their devices available for this grid service insist DSGS is a good deal for the money — about $17 million in incentives paid to date, and roughly $82 million remaining for future spending, according to Olivine, the energy services company managing the program. It's certainly a more cost- and climate-friendly approach to mitigating grid emergencies than the billions of dollars the state has spent on fossil-fueled power plants and backup generators over the past few years, they say.
But the program's future is now uncertain as legislators search for ways to alleviate California's multi-billion-dollar budget shortfall. The DSGS program already saw much of its state funding cut back last year due to similar budget issues — and now it's back on the chopping block.
Late last week, state legislative committees approved cuts to DSGS, proposed in Democratic Gov. Gavin Newsom's 'May Revise' budget plan. The proposal would take away future funding promised in 2024, including $75 million from the state's Greenhouse Gas Reduction Fund and $46.6 million from the climate bond passed late last year. Newsom's plan would also pull $18 million from DSGS's existing budget.
The state Legislature must pass a budget bill by June 15. If left in place in that final budget, these cuts and clawbacks would leave DSGS with about $64 million for the fiscal year that starts in July, according to Olivine. That won't kill the program immediately: 'Staff anticipate having sufficient funding for the 2025 program season,' which runs from May through October, Olivine states on its DSGS web page.
But Edson Perez, who leads trade group Advanced Energy United's legislative and political engagement in California, says funding cuts will severely cloud the outlook for a virtual power plant program that has been a rare success in the state.
For the past decade, California has largely failed to follow through on its stated policy objectives of developing virtual power plant programs, he said. Most of the state's utility-run virtual power plant programs have either stagnated or been canceled.
DSGS, by contrast, is 'a very successful program, leading the nation for distributed energy,' Perez said. According to the latest tallies by Advanced Energy United, the program boasts 800 megawatts of capacity ready to participate in reducing peak grid demands this summer, he said, up from more than 500 megawatts enrolled as of last fall. That's an enormous amount of energy flexibility, comparable to the capacity available from a fossil-gas-fired 'peaker' plant.
Keeping the program running for the long haul requires having enough money to give participants confidence that it will still exist from one year to the next, Perez said. To be clear, it's very hard to predict exactly how much money is needed to provide that confidence, because DSGS participants are paid for responding to grid emergencies. If weather conditions are mild and power supplies hold up, they could be called on very rarely, if at all, and money could be left over for next year.
But if lots of emergencies happen, the funds could be depleted quickly. In that event, participating companies will have to come back in January 2026 to plead for more money to keep it going, with no guarantee the funding will be granted. That's not a sustainable way to do business, Perez said — and it's not a sustainable way to build a resource that the state's grid can truly rely on.
California's DSGS program began three years ago not as a virtual power plant but as an experimental response to a grid reliability crisis. The program has grown rapidly since then — largely because the California Energy Commission structured DSGS in a way that avoids the complications of past programs, Perez said. But the growth was also driven by companies that have invested since 2022 to deploy the underlying technologies needed to reliably control thousands of customer-owned devices for up to two hours per day.
Those companies have committed to paying customers both up-front incentives and 'performance payments' when they follow through on their promises to allow their devices to reduce power use or push power back to the grid. In some cases, companies have offered discounts on smart thermostats and other devices. All of these commitments are based on the expectation that state funding won't be pulled away, Perez said.
'The companies in this space need certainty,' he said.
That's the argument being made by Sunrun, Generac, Renew Home, and other companies working in the DSGS program, along with community energy providers and trade groups. In a June 3 letter to state lawmakers, they asked for existing funding to be preserved to allow companies 'to continue investing in market development and customer onboarding,' and to give customers 'certainty in program length to estimate their returns upon participation.'
Sunrun, the country's leading residential solar and battery installer, has had its ups and downs with California's ever-changing virtual power plant policies, said Chris Rauscher, the company's head of grid services and electrification. It has had to restructure projects as regulators and utilities altered program rules. One of Sunrun's large-scale pilot projects with utility Pacific Gas & Electric was discontinued last year.
Still, Sunrun has continued to enlist customers in what it calls the 'CalReady' virtual power plant, which now has about 56,000 customers capable of providing 250 megawatts of electricity from their batteries to relieve statewide grid stress for up to two hours at a time, Rauscher said. While Sunrun is participating in other virtual power plant opportunities, it has centered its efforts on preparing to serve the DSGS program.
Importantly, DSGS is also one of the few programs in California that doesn't bar solar-charged batteries from injecting their power back into the grid — most others allow them only to reduce a household's grid draw to zero. Allowing the equipment to send power back can roughly double their impact on relieving grid stress.
'You can very easily picture that by 2030, we're operating a nuclear power plant-sized [virtual power plant] in California,' Rauscher said. 'It sure would be a shame if the rug got pulled out from under this clean, reliable, and resilient resource that's providing payments to Californians.'
DSGS is also good value for the money, argued Kate Unger, senior policy advisor at the California Solar and Storage Association, a trade group pushing for funding to be restored.
'DSGS is providing energy when otherwise it's going to be at emergency pricing, when it's about the most expensive energy you can possibly buy,' she said. Participants get a small up-front payment in exchange for agreeing to allow companies to dispatch their devices or batteries for up to two hours on days when the day-ahead price of power on the state's wholesale energy market exceeds $200 per megawatt-hour. That's a proxy for days when the state's grid operator has forecasted that demand for power, most often due to air conditioning use during heat waves, will exceed available energy supplies.
But importantly, DSGS providers are not paid the wholesale energy market price, Unger said. Instead, the program pays companies and customers lower amounts based on energy or capacity actually delivered. That 'pay-for-performance' structure helps ensure that the state is getting value for the money it's spending, she said.
In that sense, DSGS is 'one of the most cost-effective forms of insurance for grid emergencies that you can have,' said Ben Brown, CEO of Renew Home. His company, formed by the merger of Google Nest's smart-thermostat energy-shifting service Nest Renew and residential demand-response startup OhmConnect, has set its sights on establishing gigawatts of virtual power plant capacity with existing and new customers across the country. It has an undisclosed number of customers participating in DSGS.
It's more difficult to measure the reduction in energy use from thermostats that dial down air conditioning than to measure the amount of power that batteries inject back onto the grid. But Renew Home has 15 years of experience in utility and energy market programs that Nest has run across the country, and has confidence that it can deliver on the grid relief it has pledged to the DSGS program, Brown said.
Still, it takes time for demand-side programs like these to become a reliable part of the grid resource mix, he said. They must both entice customers to participate and then use financial incentives to encourage them to stick around.
'You can't just have a program stand up and be able to operate that at scale overnight,' Brown said. 'Having certainty over the next five years is pretty important when you're talking about subsidizing technology.'
Financial certainty is particularly key to getting a new form of carbon-free grid resource up and running, DSGS backers say. But to date, fossil-fueled alternatives have gotten most of the money from the multi-billion-dollar emergency backup programs created after the state's rolling blackouts in 2020 and close brush with similar blackouts in 2022.
As of last spring, California had spent about $426 million on 'emergency and temporary' power generators that burn fossil gas or diesel fuel, according to the state Department of Water Resources, which administers that program. It has also promised about $1.2 billion to keep fossil-gas-fired 'peaker' plants in Southern California open until 2026, well past their scheduled 2020 closure date — a decision that runs counter to the state's environmental and climate policies.
DSGS, by contrast, relies on resources that don't emit carbon or toxic air pollution. What's more, the smart thermostats, solar-charged batteries, smart EV chargers, and other devices involved are being installed and paid for by California residents for their own purposes.
Customer-owned resources could significantly lower energy bills for Californians. A 2024 report from The Brattle Group, a consultancy, found that virtual power plants could provide more than 15% of the state's peak grid demand by 2035 and save California consumers about $550 million per year by then.
Most of that money would go to the owners of the devices being tapped. But utility customers at large would save about $50 million, compared to what they'd otherwise have to pay for utility-scale resources to fill in where virtual power plant capacity had failed to emerge, the report found. That's an important consideration in a state where utility electricity rates have risen to roughly double the U.S. average and are set to keep climbing in coming years.
Not everyone is confident that virtual power plants are a truly reliable alternative to more traditional options. California utility regulators and grid operators have critiqued the performance of demand-side programs during past grid emergencies, saying they haven't delivered what was promised.
Nor is California's grid as vulnerable to summer heat waves as it was in 2020 and 2022 when these emergency grid relief programs were created. In the intervening years, the state has added gigawatts of energy storage to absorb its still-growing share of solar power for use after the sun goes down, relieving the evening 'net-peak' challenges of previous years.
In a May assessment, the California Energy Commission noted that 'rapid clean energy deployment, expansion of battery storage, and strategic efforts to build up emergency reserves' have put the state on solid footing for this summer. But the commission is also striving to dramatically expand the state's capacity for getting customers to help the grid, with a goal of 7 gigawatts of demand flexibility resources by 2030.
'Innovative programs like DSGS provide a critical buffer for ensuring the reliability of California's electrical grid while reducing emissions,' California Energy Commission Vice Chair Siva Gunda said in an October press release issued after the program surpassed 500 megawatts of enrolled capacity.
Anne Hoskins, senior vice president of policy and market development at Generac Power Systems, highlighted the risks that programs like DSGS insure against. Generac, one of the country's biggest manufacturers of backup generators, has expanded into grid services, solar-charged battery backup systems, and smart thermostats via its 2021 acquisition of startup ecobee.
Back in 2022, when Gov. Newsom's office sent out emergency text alerts to Californians to turn down power in the face of a potential grid overload, Generac tapped into ecobee's automated grid-response capabilities to help meet the call, Hoskins said.
'With this DSGS funding, we can provide that in a more efficient way,' she said.
The costs to the state of keeping DSGS healthy in future years pale compared to the economic risks of leaving California open to future grid emergencies, Hoskins added. She cited a 2023 study from Gridwell Consulting, a Sacramento, California-based energy market analysis firm, that found that the state's four days of emergency grid conditions in September 2022 added more than $1 billion in energy costs to utility customers that 'would have been avoided if there were additional capacity online to meet the increased demand.'
'You're looking at potentially multi-billion-dollar impacts that could be avoided by calling on these distributed resources,' Hoskins said. 'We recognize that California is in a challenging situation' with its budget. But before state lawmakers take away DSGS money, she'd like to see an analysis of 'the alternative costs for this program going away if the money isn't there for customers.'
