The CPUC Just Changed Marginal Energy Source Natural Gas to Battery Storage!

July 15, 2020

The California Public Utilities Commission (CPUC) has made a major change in the way the benefits of behind-the-meter resources will be calculated. The CPUC will now calculate the avoided generation capacity cost based on the Net Cost of New Entry (CONE) of a new battery storage resource instead of a gas combustion turbine.

This change will have major implications for the cost-effectiveness of behind-the-meter investments in solar, storage, demand response, and energy efficiency and how they are considered against supply-side resources. 

In making this move, the Decision reinforces the growing consensus among parties that renewable generation will become California’s primary energy source -- and not just in the middle of the day.

As with any big policy change, some technologies stand to "win" while others do not. But whatever the impacts to individual technologies, what remains true is siloed demand-side programs--including energy efficiency, demand response, distributed generation and storage, electrification, and others--must be integrated into more holistic offerings that can maximize avoided costs and compete against supply-side alternatives. 

The figures below show the avoided cost changes resulting from the move to storage as the marginal unit, along with a number of other updates and adjustments to the avoided costs. These figures show the hourly avoided costs profiles for summer and non-summer timeframes when using the 2019 and 2020 avoided cost calculators. 

With the move to batteries, saving or producing energy during the day suddenly has value again, because in place of renewables curtailment we now anticipate using excess generation to charge batteries. However, saving or shifting energy during the summer peak and ramp hours is now less valuable as discharging batteries at those times can smooth the duck, or at least make it bow its head. 

With this shift, there are still winners and losers within the wide array of technology options.  We can see examples of this in how energy efficiency measures are valued.  

Using the same utility/climate zone combination and timeframe as in the figures above, we calculate that a typical commercial lighting measure would see a 15 percent increase in valuation.

However, every category is not a winner, residential HVAC measure sees a drop of 32 percent. 

Following a similar pattern to commercial lighting vs. residential HVAC energy efficiency, the new avoided costs profile stands to increase the value of solar PV and decrease the calculated benefits of DR. Heat pumps will also be worth more under the new 2020 avoided costs.

As we increasingly transition to the market-based deployment of demand flexibility, the shift in the value of underlying avoided costs has significant implications for deciding which combinations of technologies and solutions make economic sense.  

Mid-day commercial energy efficiency investments can deliver renewed value in relation to the flexibility that battery storage offers, while still leaving many options available for behind the meter optimization. Demand response may see some reduction in value because the highest peaks are tempered by the cost distribution that battery storage offers.

Avoided costs are updated annually. In a dynamic market, third party aggregators will have to stay on their toes to capture the value stream articulated in the ACC but implemented in a myriad of ways in the individual proceedings governing EE, DR, SGIP, etc. Contracts will need to be flexible to adapt to this dynamic landscape.

These are just some examples of the possible impacts of this monumental change. Can you think of others? We'd love to hear from you.


Resolution E-5077. Adopts updates to the Avoided Cost Calculator for use in demand-side distributed energy resources cost-effectiveness analyses. 

CPUC - 2020 POLICY UPDATES TO THE AVOIDED COST CALCULATOR Decision 20-04-010 April 16, 2020.

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