California has a plan to pay efficiency providers to help prevent blackouts

Companies that want to help households and businesses use less electricity could get a big boost from a decision in California next month.

After two summers in a row of grid emergencies, California utilities and regulators are searching for all kinds of ways to prevent the risk of blackouts in summers to come. The latest idea? Cut the complexity from the utility programs that pay such companies for reducing energy use when the grid is under the most stress.

The proposal is to let those companies experiment with business models that could offer residential and commercial customers energy-efficiency retrofits and upgraded appliances and equipment, or outfit them with batteries and electric vehicle chargers that can store and shift energy use. Then measure the hour-by-hour results and pay the companies every month for their demonstrated contributions to stabilizing the state’s grid.

As for how much of that value they choose to share with customers, it’s up to the companies involved — although presumably the more generous the share, the more customers they’ll be able to sign up. 

This is something that’s never been done in quite this way before. It’s based on a novel approach to using real-world data from smart meters to prove the effectiveness of what customers and companies are doing to shift energy consumption to more opportune time periods. The method has already been successfully implemented in four Northern California counties, giving state regulators confidence that it could be rolled out statewide in time for the summer of 2022. And proponents say it would be much easier and quicker to implement than other programs to shore up the grid.

Called the Market Access program, it is one of several initiatives the California Public Utilities Commission proposed late last month to help the grid stand up to summer power grid emergencies. The commissioners will vote on December 2 whether to adopt Market Access and the other proposed programs. Update: The CPUC approved the proposed decision, including the Market Access program, by unanimous vote on Dec. 2.

Some of the CPUC’s grid-resilience proposals aim to provide more electricity supply when it’s needed — for example, ordering the state’s utilities to contract for hundreds of megawatts of batteries, microgrids and backup power plants. Market Access, on the other hand, would be a ​“demand-side flexibility” program, aiming to reduce and shift demand for energy.

The Market Access program would invest $150 million — nearly a quarter of the state’s annual spend on energy efficiency — to pay companies for the measurable energy reductions they’re able to achieve with their residential and commercial customers.

The pilot programs that kicked it all off

Market Access is based on the​FLEXmarket pilot programs rolled out earlier this year by Marin Clean Energy, one of the state’s many community choice aggregators. These city- and county-based entities have taken over energy procurement and energy efficiency for a growing number of customers of the state’s big three investor-owned utilities over the past decade.

Joey Lande, Marin Clean Energy’s manager of customer programs, said its FLEXmarket programs have already exceeded initial expectations. Participants include companies active in two traditionally distinct categories of demand-side efforts.

The first includes energy-efficiency providers like CLEAResult and Ecology Action, which traditionally earn money by reducing customers’ overall energy consumption. The second are demand-response providers such as OhmConnect and Wexus, which are traditionally paid for load reductions specifically when the power grid is under stress.

MCE’s FLEXmarket programs are unique in that they incorporate both types of demand reduction. Participating companies earn financial rewards both for general efficiency gains and for quick-responding load reductions, and they can pass savings along to participating customers. The size of the rewards companies earn depends on how valuable their reductions are to the grid during different hours of the day and different seasons of the year.

MCE has seen traditional demand-response providers ​“showing interest in energy efficiency, which rarely happens”; likewise, efficiency providers are starting ​“to explore the opportunity to upsell more demand flexibility in their projects,” Lande said. ​“That’s what we wanted to see: to break down some of the barriers between demand flexibility and energy efficiency.”

California has been steadily shifting its energy-efficiency policies, with an eye on breaking down the barriers between traditional efficiency initiatives and investments that match demand patterns to the state’s increasingly solar-influenced grid supply patterns. A CPUC decision in May implemented a ​“total system benefit” approach for measuring the value of energy efficiency, geared to assess the long-term value of efficiency equipment and installations based on the costs they can avoid. Those avoided costs go beyond energy not used; they also encompass avoided grid infrastructure costs, greenhouse gas reductions, and other values tied to the specific time periods when the efficiency gains are achieved.

The value that can be gained from using less energy is far greater during hot summer evenings, when solar power is fading from the grid while demand remains high. These are the same moments that led to rolling blackouts in August 2020 and multiple calls for emergency conservation in the summer of 2021.

The technology that Marin Clean Energy uses for its program measures these values using the CPUC’s Avoided Cost Calculator, the state’s designated metric for determining the impact of a wide array of demand-side programs, potentially including net-metered solar.

Here’s a chart that illustrates the difference in hour-to-hour values during the summer months, when California’s grid is under the greatest stress and MCE and other energy procurers are paying the most money to secure electricity supply for their customers. That peak summer value equates to an average of $150 per megawatt-hour of avoided demand for energy, according to MCE’s Lande.

To drive even deeper reductions in demand during grid emergencies, MCE offers participating companies additional payments when their customers respond to ​“resiliency event” load-reduction requests — in other words, when they act quickly to help avoid a potential blackout. In the summer of 2021, MCE set those additional payments based on the prices set in state grid operator CAISO’s day-ahead energy market, but it is considering paying higher rates in coming summers, Lande said.

The CPUC’s proposed Market Access program would use a similar hour-to-hour measurement system with payments grounded in total system benefit and would include a larger ​“kicker” payment for peak savings delivered through the summers of 2022 and 2023.

What’s more, where other programs pay companies fixed rates for installing efficiency equipment or promising to reduce loads during emergencies, MCE’s program ​“is only paying for metered impacts,” Lande said, with a variable hourly value assigned to those impacts. The combination of metered measurement and payments based on total system benefit represents a ​“responsible use of ratepayer funding,” he said. Companies are only rewarded for measurable grid benefits.

This approach also opens up funding to a wider range of companies willing to take on the challenge of equipping customers to reduce and reschedule their electricity use in ways that benefit the grid. ​“It opens the door to known — and unknown — solutions to take us where we need to go and provides a real stimulus to investing in high-quality projects,” Lande said.

How an hour-to-hour reward program works

What makes this hour-to-hour payment structure possible is the emergence of a new way to measure and value load reductions at the individual customer level, said Matt Golden, the CEO of Recurve and one of the chief designers of the methodologies that underpin the CPUC’s proposed Market Access program.

“This is the version of pay-for-performance we’ve always wanted,” he said, referring to a method of paying for energy efficiency that’s been mandated by California law for years now but has yet to be implemented in a major way. Recurve has spent the past decade working with the CPUC, the California Energy Commission, the state’s biggest utilities, and energy agencies and researchers in other states to develop the open-source methods and open-source software to make this all possible.

The core concept, said Golden, is to use data coming from the smart meters that California’s utilities have installed for the vast majority of their customers, which can measure actual energy consumption at homes and businesses from hour to hour. Those real-world measurements can then be compared to an open-source model that determines how much those customers, and customers like them, would have consumed if they had not invested in efficiency improvements and load-shifting devices such as batteries or EV chargers and appliances that avoid turning on during peak hours, he said.

The following image demonstrates how the system works, using the official names of the open-source implementations involved. The first row shows the energy use of a group of customers engaged in a demand-flexibility program. The second row shows the system’s model of a control group of equivalent customers. The third row shows the difference between the two, which is used to determine how much of a payment the demand-flexibility company will receive.

Recurve and its open-source collaborators have developed transparently calculated (albeit computationally complex) methods to measure the impacts of avoided or shifted energy use. That allows efficiency contractors, demand-response providers, and solar, battery and EV-charging installers to install and control devices to manage home and business energy consumption to match predictable hour-by-hour values or respond to emergency load-reduction signals from utilities or community choice aggregators. Then these providers earn payments at the end of each month based on how they performed against the appropriately calculated comparison group.

This is actually much simpler than traditional efficiency and demand-response programs, which come with onerous rules designed for a world where real-time data wasn’t available. These rules have forced efficiency programs to use complicated formulas to pay providers and measure their performance.

But with smart meters, California now possesses the data needed to make real-world measurements and reward those customers and companies that can deliver the most valuable results, Golden said.

Recurve is already working with Marin Clean Energy and East Bay Community Energy, another community choice aggregator, to implement the methods that the CPUC’s Market Access program would make available statewide, he said. The company is also working with Calpine Energy Solutions, an energy solutions provider that could extend the same service to other CCAs in the state, as well as with the state’s largest utility, Pacific Gas & Electric, on projects using the same underlying technology.

If the CPUC votes to approve the Market Access program, PG&E and the state’s other big utilities, as well as efficiency-program administrators such as CCAs and local government regional energy networks, will be tasked to set the structures by which the $150 million in funding will be made available.

If the program is successful, it could potentially get a budget boost down the line. Based on the results of MCE’s FLEXMarket implementation, the CPUC wrote in its Market Access proposal that an expanded annual budget of $300 million could be considered in future years.

A new approach to energy efficiency measured at the meter 

Utilities need rules to ensure they aren’t spending customer funds on efficiency efforts that aren’t delivering. But in Golden’s view, the rules now in place have outlived their usefulness; they involve overly complex structures that can actively discourage the most effective investments.

The two big problems, he said, are misaligned incentives and lack of transparency into outcomes. Companies that help customers save energy are paid average values for the efficiency measures they take, which means they don’t realize any upside for delivering better results. That gives them an incentive to increase their margins by cutting costs instead of seeking out and engaging in projects that could save more energy, he said. The situation is made worse by the fact that performance evaluations take years and come in forms that are opaque even to companies in the market, according to Golden.

Lande agreed that traditional efficiency programs tend to be focused on money spent rather than results obtained. Since it has been so hard to measure the real-world impact of different efficiency efforts, programs have resorted to paying contractors based on the costs of the product they install or on generalized calculations of what a preset list of efficiency projects can be expected to achieve in reduced energy use.

But that approach ​“presumes that people need to buy something to have an impact,” he said.

MCE’s FlexMARKET program and the proposed Market Access program rethink that approach by paying for measured results, Lande said. That gives participants an incentive to go after more cost-effective opportunities.

Basing payment on measured results also eliminates the need for cost-benefit tests that have long stymied utility efficiency programs in other states, according to energy-efficiency analysts such as those at the industry group American Council for an Energy-Efficient Economy. For example, many state energy regulators deduct the value of private investments that home and business owners make from the energy-efficiency value they provide the grid, which discourages just the type of ​“deep” retrofits that many efficiency experts say are needed to fight climate change.

The CPUC’s proposed plan would break from this practice by waiving these standard energy efficiency program cost-effectiveness requirements for the Market Access program. Given that it would measure and pay for energy savings as recorded at the smart meter, rather than estimating them, ​“this type of program is very low risk to ratepayers regardless of cost-effectiveness score,” the CPUC’s proposal noted.

“This is a complete innovation,” Golden said. ​“No other program has been structured that way before.” 

The problems with demand-response programs as they exist today

Demand-response programs can suffer from complexity problems similar to those for efficiency programs, said Andrew Krause, director of innovation for Northern Pacific Power Systems, a company that installs solar, battery and EV charging in Northern California. His company signed up more than 250 customers to MCE’s FlexMARKET peak-reduction program in summer 2021, using a relatively simple process that pays them for shifting load to meet MCE’s grid needs.

“With limited notice, we were able to tap our customer base to identify eligible customers and enroll them in this program to serve as another source of grid services,” he said. ​“Although the program mechanics were still in their pilot phase, the amount of time required to get started with our customers was minimal, and enrollment could happen incrementally.”

California’s existing statewide demand-response options, by contrast, require participants to pull together enough customers to reach hundreds of kilowatts of load reduction, bid those portfolios into programs months or years ahead of time, and take on the financial risk of failing to meet their load-reduction commitments. Most companies focused on demand reduction can’t do that.

“It’s incredibly hard to access that market, and even if you can, the financial benefit remains very low for us and our customers,” Krause said. In fact, major demand-response participants such as Enel X, CPower and Leap have expressed disappointment with California’s demand-response markets in the past several years, with many complaining that the current rules have barred them from earning revenue for the grid relief they say they’ve provided during the state’s grid emergencies.

Big companies such as Tesla, Sunrun, Sunnova and sonnen have dedicated in-house teams to manage the process of contracting with utilities and CCAs to provide solar- and battery-based virtual power plants in California’s markets, but smaller companies don’t have that kind of capacity. Said Krause, ​“I don’t see how current market requirements will support broad-based participation from small and medium system integrators like ourselves in a timely fashion.”

Current program designs also tend to center on individual technologies, whether they’re smart thermostats, EV chargers or batteries, he said. That limits the potential for combining multiple devices to maximize their load-shifting value.

The openness and flexibility of the Market Access approach ​“incentivizes us to get going and gain valuable on-the-job experience without locking ourselves into the wrong market strategy upfront,” Krause said.

This approach may better serve the CPUC’s goal of moving as quickly as possible to prevent blackouts in summer 2022, he added. 

Convincing customers to flex their power to help green California’s grid

The Market Access program and the other CPUC proposals up for a vote next month are aimed specifically at solving California’s pressing summer grid needs. At the same time, programs that expand efficiency and shift loads at key times could also help California achieve its long-term clean energy goals, according to a long-running research project by Lawrence Berkeley National Laboratory.

Enabling many more customers to shift their energy use en masse won’t just help the state balance an increasingly solar-powered grid. It will also help manage the new loads that will be added as vehicles and building heating are moved from fossil fuels to electricity, according to LBNL’s latest research.

Even in the face of an uncertain policy environment, California demand-response providers have been investing heavily in enrolling customers in programs and equipping them with devices that can automate their reductions in electricity use during grid emergencies. That’s true for OhmConnect, a startup that’s dedicated much of its $100 million investment from Sidewalk Infrastructure Partners to giving away 1 million free Nest thermostats to its California customers.

The way the Market Access program would align payments with measured performance is ​“important and useful,” said OhmConnect CEO Cisco DeVries. ​“The CPUC is stating that residential demand response works, that it is a reliable resource that can be counted on to stabilize the grid, and that we should be paying customers for what they’re doing.”

DeVries pointed out that the Market Access program would reward everyday energy-shifting, while several other programs proposed by CPUC would focus exclusively on dire, but rare, grid emergencies. (The biggest example of the latter approach is the CPUC’s newly created Emergency Load Reduction Program, which offers lucrative incentives of $2 per kilowatt of load reduction at high-demand times when the stability of the grid is under threat. It could be expanded from a commercial and industrial program to include residential customers under the CPUC’s current proposal.)

Paying only for emergency demand response a few times per year ​“doesn’t give us the money to engage with people long term, to get them enrolled, get them participating,” DeVries said. Historical experience in demand-response programs indicates that asking customers to cut air-conditioning use during only the hottest days of the year is far less effective and popular than giving customers opportunities to get paid for hundreds of smaller-value load reductions throughout the year, as OhmConnect does, he said.

According to DeVries, a successful program should be designed as ​“an on-ramp to large-scale flexible demand that stabilizes the grid, and not simply a stand-alone cul-de-sac that just operates on occasional emergencies.” In other words, programs that give customers more ways to save money and help the grid more often are far more likely to become popular enough to make a difference on the grid.

Next up: Taking hour-to-hour reward programs nationwide?

California has long been a trendsetter in energy-efficiency regulations as well as tackling the challenges of managing an increasingly clean-energy-powered grid. Andy Frank, president and co-founder of New York-based home efficiency provider Sealed, said that the CPUC’s Market Access proposal could presage a similar nationwide energy-efficiency initiative — if the Build Back Better budget reconciliation package being debated in Congress passes.

That’s because the bill in its current form includes $5.9 billion in funding for Department of Energy–managed rebates for state energy-efficiency programs, dubbed the Home Owner Managing Energy Savings (HOMES) plan. It ​“would essentially be a national version of the Market Access program,” he said.

As described in the legislation, this program would allow DOE-approved ​“open-source advanced measurement and verification software” to measure the monthly or hourly shift in energy use caused by energy-efficiency retrofits. That’s a description of the open-source software developed by Recurve, in part through DOE funding, that’s now being used by MCE and considered by the CPUC for its Market Access program.

The HOMES proposal would also authorize rebates to be shared with contractors or aggregators, as would the Market Access program, which means that ​“companies like Sealed would get paid based on the measured savings production,” Frank said. The program would authorize up to $2,000 per home for retrofits that save 20 to 40 percent of total energy use, and up to $4,000 per home for those that save 40 percent or more.

If the bill is passed, ​“the DOE would write the rules for how it would work, how the savings are measured, and each state would individually implement it,” Frank said. ​“It’s something that every state should be doing because it works and it’s common sense.”