California is facing a significant spike in electricity prices, prompting Governor Gavin Newsom to take action. In October, he issued an executive order instructing the California Public Utilities Commission (CPUC) to review the cost-effectiveness of programs funded by ratepayers. The goal is to identify areas where spending might exceed the benefits of these initiatives. One major trend under consideration is the state’s increasing reliance on utility-managed demand response (DR) programs.
Back in 2015, California introduced a new category of demand response programs called supply-side demand response (SSDR). This allows demand response aggregators to directly offer their resources in the wholesale market, earning capacity payments through the Resource Adequacy program.
The rationale behind this approach is straightforward: both wholesale energy prices and capacity prices are determined by supply and demand, promoting more cost-effective outcomes. Utilizing these frameworks is intended to guide California’s electricity providers toward the lowest-cost solutions to meet grid needs effectively.
However, the financial aspects of these programs raise concerns. Over the past decade, third-party demand response providers (DRPs) have engaged more substantially in the market, but investor-owned utilities (IOUs) also have their own SSDR programs. Unlike third-party providers, the costs associated with IOU programs are not linked to market conditions. Third-party DRPs manage their own administrative expenses based on what they earn from the market, while IOU-run programs recoup these costs directly from ratepayers.
These administrative costs can add up. For instance, Pacific Gas & Electric (PG&E) expects to allocate 9% of its budget for the Capacity Bidding Program (CBP) from 2024 to 2027 for administrative costs, a figure that jumps to 12% for its new Automated Response Technology (ART) initiative. Despite both programs projected to achieve similar reductions in load, PG&E has been seeking additional funds to expand the CBP program, raising questions about whether the benefits of these programs align with their costs.
As rates for electricity continue to climb, it is vital to ensure that program budgets reflect genuine needs rather than inflated projections. PG&E, for example, indicated that it could fund its CBP expansion using leftover funds, which raises concerns about why those funds went unspent initially. Would it not be more beneficial to return this surplus to customers, as suggested in Governor Newsom’s executive order?
The challenge lies in the fact that, since IOU costs are not bound by market dynamics, there is a risk of inefficiency and excessive costs. Interestingly, recent CPUC policies are steering more customers towards IOU-run SSDR programs, which could result in higher costs for consumers. The CPUC has connected valuable incentives like Automated DR and the Self-Generation Incentive Program to participation in specific IOU offerings, despite third-party options providing comparable support to the grid.
Historically, the CPUC aimed to maintain fair competition between third-party providers and IOUs, understanding that customer choice is essential for a cost-effective demand response sector. However, in a December 2023 ruling, the CPUC backtracked, stating that any efforts to support third-party DRPs must also deliver clear benefits to ratepayers. While emphasizing cost-effectiveness is important, it seems the logic applied is flawed. Third-party DRPs, which rely on their shareholders for funding and face competitive pressures, often keep their costs low. In contrast, IOU programs should need to justify their expenses to customers.
Encouraging competition typically drives prices down, a principle applicable across various sectors, including demand response. Yet, California is currently veering away from this path by implementing incentive policies that favor IOUs over third-party providers. This could lead to costlier programs for customers, demanding higher funding from ratepayers to expand these initiatives. Governor Newsom’s executive order aimed at reducing costs may ultimately be undermined by current CPUC policies.