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California Utilities Struggle to Comply With State Energy Storage Requirements

March 19, 2014

California’s three major investor-owned electric utilities took the first steps last month to comply with stringent new energy storage requirements established under a 2010 state law known as Assembly Bill (AB) 2514. The applications were made to the California Public Utilities Commission (CPUC) for authorization to procure energy storage resources under the CPUC’s October 2013 energy storage order, Decision 13-10-040.[1] Getting there won’t be easy.

The investor-owned utilities (IOUs) – Pacific Gas & Electric Company, Southern California Edison Company and San Diego Gas & Electric Company already are subject to California’s ambitious Renewable Portfolio Standard (RPS), which RPS requires them to obtain 33 percent of their annual retail sales from eligible renewable sources. At the same time as they must satisfy the RPS, these same utilities must satisfy another aggressive state requirement – to acquire a total of 1325 megawatts (MW) of energy storage resources, also by 2020. Those resources must be “installed and delivering to the grid” by the end of 2024. Although the applications submitted to the CPUC last month do not identify specific new storage resources targeted for procurement, they help frame questions at the center of California’s initiative, including what qualifies as “energy storage” and whether procuring energy storage at unprecedented levels can be cost effective.

This article examines the CPUC’s groundbreaking requirements for energy storage procurement and evaluates several of the crucial implementation issues highlighted in the recent proposals. Although aspects of the requirements apply to other “load serving entities” as defined in California law, this article focuses on the debate surrounding the three IOUs.

AB 2514 and the Genesis of the Procurement Requirement

The CPUC’s energy storage requirement arises from Assembly Bill (AB) 2514 in 2010.[2] The law required the CPUC to “open a proceeding to determine appropriate targets, if any, for each load-serving entity to procure viable and cost-effective energy storage systems to be achieved by December 31, 2015, and December 31, 2020.”[3]

Under AB 2514, an “energy storage system” must be “cost effective and either reduce emissions of greenhouse gases, reduce demand for peak electrical generation, defer or substitute for an investment in generation, transmission, or distribution assets, or improve the reliable operation of the electrical transmission or distribution grid.”[4] In addition, an “energy storage system” must do at least one of following:

(A) Use mechanical, chemical, or thermal processes to store energy that was generated at one time for use at a later time.

(B) Store thermal energy for direct use for heating or cooling at a later time in a manner that avoids the need to use electricity at that later time.

(C) Use mechanical, chemical, or thermal processes to store energy generated from renewable resources for use at a later time.

(D) Use mechanical, chemical, or thermal processes to store energy generated from mechanical processes that would otherwise be wasted for delivery at a later time.[5]

California’s AB 32 requires the state to reduce emissions of greenhouse gases to 1990 levels by 2020; in Executive Order S-3-05, Governor Schwarzenegger set a long-term goal of reducing greenhouse gas emissions by 2050 to 80 percent below 1990 levels. Implicit in AB 2514 is the Legislature’s recognition that achieving such reductions in greenhouse gas emissions likely will require moving away from an electric power system in which intermittent renewable energy resources are “backed up” by fossil fuel-fired generating facilities – even highly efficient natural gas-fired turbines.

The Legislature recognized that there are significant barriers to the use of energy storage systems, “including inadequate evaluation of the use of energy storage to integrate renewable energy resources into the transmission and distribution grid through long-term electricity resource planning, lack of recognition of technological and marketplace advancements, and inadequate statutory and regulatory support.”[6] AB 2514, as implemented by the CPUC, takes aim at lowering and/or eliminating those barriers.

The CPUC’s Rulemaking

In late 2010, the CPUC opened a rulemaking to implement the provisions of the new law. The initial phase of the rulemaking resulted in the adoption of a staff proposal establishing the analysis framework[7] for the second, substantive phase.

In the second phase, potential energy storage resources (identified as “use cases”) were discussed not in terms of a utility’s overall system, but rather in terms of whether the storage resource would connect to grid on the transmission system, the distribution system, or “behind the meter” (i.e., at the energy customer’s site):

A Proposed Plan was developed in order to focus discussion. For each of the three investor-owned utilities, the Proposed Plan included procurement targets for 2014, 2016, 2018 and 2020 for each point of grid connection. The targets are based on the peak power capacity of the storage resource in terms of maximum MW discharge rate:

The proposed targets met resistance from the investor-owned utilities, which noted the potential impact on ratepayers, the need for flexibility, and the likelihood that resources obtained in the near term will be less cost effective than those obtained later. The IOUs, however, were far from the only parties questioning the proposed targets. The California Wind Energy Association, for example, contended that the CPUC in other proceedings had determined that there is no need for new resources to integrate intermittent renewable energy until at least 2020, and that unneeded energy storage technologies cannot be considered “cost effective,” as required under AB 2514.

Notwithstanding this opposition, the CPUC determined that it could set procurement targets in order to drive innovation and create a market for energy storage: “Based on AB 2514,” it decided, “as well as our overall energy policy, we find that it is reasonable to establish procurement targets to encourage the development and deployment of new energy storage technologies.”

The CPUC’s decision identifies three “guiding principles” based on AB 2514:

(1) The optimization of the grid, including peak reduction, contribution to reliability needs, or deferment of transmission and distribution upgrade investments;

(2) The integration of renewable energy; and

(3) The reduction of greenhouse gas emissions to 80 percent below 1990 levels by 2050, per California’s goals.[8]

The specifics of the decision reflect an acknowledgment on the part of the CPUC of the need to provide the IOUs with some flexibility, but within a framework that assures that the overall target of 1,325 MW is met, meaning it is installed and operational by the end of 2024. Under the CPUC’s decision:

  • The procurement targets adopted[9] were unchanged from the Proposed Plan.
  • The IOUs are allowed to shift up to up to 80 percent of the MWs assigned to the transmission or storage grid domain to the other domain, but not shifting of the procurement target into or out of the customer-side domain is allowed, and the procurement targets cannot be traded among the IOUs.
  • Consistent with AB 2514’s definition of a “new” energy storage project,[10] existing energy storage projects may be applied against the procurement targets if they are installed and become operational after January 1, 2010.
  • Pumped storage hydroelectric projects over 50 MW are not eligible to bid into the energy storage procurement solicitations. The CPUC concluded that although large-scale pumped storage hydro meets the statute’s definition of an “energy storage system,”[11] it must limit the size of eligible pumped storage systems in order to encourage the development and deployment of “a broad range of energy storage technologies.”[12] In the CPUC’s view, the goal of creating a new market for a range of storage technologies would be undermined if the IOUs could meet their targets by acquiring a pumped storage facility: “The majority of pumped storage projects are 500 MW and over, which means a single project could be used to reach each target within a utility territory.”[13]
  • Each IOU may satisfy no more than 50 percent of it cumulative procurement targets across all domains with utility-owned storage resources. The balance must be owned by third parties or customers, or else in joint ownership.
  • Each IOU was required to file a procurement application by March 1, 2014, and in 2016, 2018 and 2020.

The energy storage procurement applications were filed by the IOUs on February 28, 2014 to meet the initial deadline of the energy storage decision.

The Utility Applications and Lingering Issues

The IOU applications illustrate the range of energy storage technologies currently under development. The applications and supporting testimony identify existing or planned storage projects that may qualify toward meeting the CPUC’s procurement targets. PG&E listed among its eligible projects a CPUC-approved power purchase agreement with Rice Solar for a 150-MW solar thermal generating facility coupled with molten salt storage, which allows storage of thermal energy in a heated brine solution.[14] The facility, scheduled for commercial operation not later than December 1, 2015, ultimately could satisfy a substantial portion of PG&E’s storage procurement requirement for 2016 and beyond in the transmission grid domain. SDG&E reported slightly over 50 MW of existing eligible projects, with the largest being the Lake Hodges pumped storage hydroelectric facility, providing 40 MW of storage benefiting the transmission domain.[15] Southern California Edison did not report any “existing and eligible” projects in the transmission domain, but reported a range of projects connected at the customer and distribution level, with an emphasis on battery storage. These include the Tehachapi Storage Project – a distribution-connected 8 MW lithium ion storage project – as well as a demonstration project involving 14 residential energy storage units and a vehicle-to-grid demonstration project, using storage in plug-in electric vehicles, at the Los Angeles Air Force Base.[16]

PG&E’s application also seeks a determination from the CPUC that electric generation using biogas fuel qualifies as “eligible energy storage” under AB 2514.[17] PG&E declares its support for “the broadest interpretation of ‘energy storage resource’ eligibility consistent with AB 2514 to provide its customers with potentially more cost-effective procurement options.”[18] Although it is true – as PG&E observes – that the methane generated by decomposition of biomass would be wasted if not captured, the argument appears to confuse generation of renewable energy with storage of energy already generated.

The CPUC’s response to PG&E’s request will be instructive – the experiment of AB 2514 risks saddling California ratepayers with costs for unneeded energy storage in order to foster innovation and a robust market in energy storage technology. It may be tempting to adopt an interpretation of “eligible energy storage” that will allow the service providers to count some renewable energy resources – already required under California’s renewable portfolio standard – as eligible storage in order to provide a cost-effective solution for achieving the procurement targets.

The IOU applications will be subject to a CPUC public review process, with the approved procurement plans to be implemented through competitive “requests for offers” by December 2014. Whether the IOUs receive sufficient viable and cost-effective offers to meet their 2014 targets bears close attention, as the results may determine whether other states follow in California’s footsteps.

For more information on renewable project development, please contact Richard Allan or any other member of Marten Law’s Energy practice group.

[1] Decision Adopting Energy Storage Procurement Framework and Design Program, Cal. Pub. Util. Comm’n, Decision 13-10-040, Oct. 17, 2013, available here (hereafter “D. 13-10-040”).

[2] 2010 Cal. Stat. ch. 469.

[3] Cal. Pub. Util. Code § 2836(a)(1).

[4] Id. § 2835(a)(3).

[5] Id. § 2835(a)(4).

[6] Id.

[7] Cal. Pub. Util. Comm’n, Decision 12-08-16, Aug. 2, 2012.

[8] D. 13-10-040, App. A at 1.

[9] Id. at 2.

[10] Cal. Pub. Util. Code § 2835(c).

[11] See id. § 2835(a).

[12] D. 13-10-040 at 35.

[13] Id. at 34.

[14] Pacific Gas and Electric Company 2014 Energy Storage Procurement Application Prepared Testimony, Feb. 28, 2014, at 2-2.

[15] Prepared Direct Testimony of Lee S. Krevat, Feb. 28, 2014 at 6.

[16] Testimony of Southern California Edison Company in Support of Its 2014 Energy Storage Procurement Plan, Feb. 28, 2014, at 14-23.

[17] Application of Pacific Gas and Electric Company (U 39-E) for Authorization to Procure Energy Storage Resources (2014-2015 Biennial Cycle), Feb. 28, 2014, at 21-22.

[18] Id. at 21.

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