On February 12, the California Public Utilities Commission (CPUC) issued an order adopting two pilots to test two frameworks for procuring distributed energy resources (DERs) to avoid or defer utility distribution investments by the state’s three investor-owned utilities.  The first framework, coined as the Partnership Pilot by the CPUC, is a five-year pilot establishing a DER distribution deferral tariff with a tiered payment structure open to any DER customer type. The Standard-Offer-Contract Pilot, the second framework, is a three-year pilot that will offer standard offer contracts to in-front-of-the-meter DERs.  The adoption of these frameworks is a continuation of the CPUC’s effort to implement Public Utilities Code Section 769, which took effect in 2015 and requires the CPUC to, among other things, identify mechanisms for the cost-effective deployment of DERs that satisfy distribution planning objectives.

The deferral projects chosen for the two pilots will be identified through each utility’s Grid Needs Assessment (Assessment) and Distribution Deferral Opportunity Report (Report).  The Assessment and Report for each utility are currently utilized as part of the Distribution Investment Deferral Framework (DIDF), which is the annual process that the CPUC has used to procure DERs to avoid or defer utility distribution investments.  As part of the existing Report, the utilities use three prioritization metrics to evaluate distribution investment deferral opportunities: cost effectiveness, forecast certainty, and market assessment.  Opportunities that have the greatest chance of deferring investment for 10 years are ranked Tier 1, while opportunities with a lesser chance and the least chance are ranked Tier 2 and Tier 3, respectively.  However, in the February 12 order, the CPUC noted that the DIDF Request for Offer (RFO) process has had several challenges, including under or over procurement of DERs and a lack of success procuring behind-the-meter resources.  To evaluate the performance of the pilots, the CPUC authorized its Energy Division to invite party proposals on evaluation and off-ramp criteria and to hold a workshop on those proposals no later than May 12.

The CPUC’s adoption of the two pilots is the result of a two-year process to refine the mechanisms for procuring DERs to meet near-term distribution grid needs—a process that included input from CPUC staff, the utilities and interested stakeholders.  As part of that effort, the Partnership Pilot in particular coincides with the CPUC’s approval of six guiding principles with respect to DER tariff design.  Those principles include, inter alia, (a) ensuring a level playing field for DERs in comparison to traditional infrastructure investments, while also achieving technology neutrality across all DERs; (b) leveraging private investment in DERs, including existing DERs, to achieve distribution deferral benefits at the least marginal cost to ratepayers; and (c) improving the deployment and utilization of cost-effective DERs for distribution deferral purposes to maximize savings to ratepayers and encourage innovation.

       A. Partnership Pilot

As adopted, the Partnership Pilot allows customers with eligible DERs to enroll in the tariff and use their DERs to operate in response to dispatch signals communicated from a utility.  The order requires customers to partner with approved DER aggregators to dispatch their resources. By May 12, the utilities are required to file an advice letter with the CPUC detailing the elements of the aggregator prescreening application, including consistent minimum provider requirements that reflect technology neutrality and do not inhibit new market entrants’ viability.  An aggregator’s approval will remain effective for two years.

The initial tariff budget for the Partnership Pilot is set at 85% of the cost cap, or deferred value, of the identified traditional distribution investment, in an effort to ensure savings to ratepayers.  The CPUC approved three payment tiers as part of the tariff.  The first tier, Deployment, will have an initial allocation of 20% of the tariff budget, and will require utilities to pay providers to install DER solutions and commit to dispatch in accordance with the terms of their contracts.  Existing resources will not be eligible to receive a Deployment payment.  For the second tier, Reservation, 30% of the tariff budget will be allocated; and under this tier, utilities would pay providers to reserve specific amounts of capacity and energy during specified timeframes.  The CPUC allocated 50% of the tariff budget to Performance, the third tier, whereby utilities will pay providers when resources are dispatched according to their contracted criteria.  Contracts awarded under the Partnership Pilot may last for up to 10 years, and existing resources will be eligible to receive both Reservation and Performance payments.

For the Partnership Pilot, the February 12 order requires the utilities to propose at least one Tier 1 deferral opportunity, as well as two Tier 2 or Tier 3 deferral opportunities, one of which should address a grid need forecasted to occur in four to five years.  Such opportunities will be identified in the Report filed annually by the utility on August 15.  Each utility is required to submit an advice letter to the CPUC by November 15, 2021 that identifies the proposed subscription periods for DER solutions, with the first such period scheduled to launch on January 15; and the letter must also state the final cost caps for the deferral opportunities.  During the subscription period specific to each planned investment, the utilities will be required to accept DER provider offers and execute contracts starting when offers meet or exceed 90% of the deferral need (the acceptance trigger), and must close the subscription period when offers equal 120% of the need (allowing a 20% procurement margin).

       B. Standard-Offer-Contract Pilot

For the Contract Pilot, the utilities are required to identify at least one Tier 1 deferral opportunity with a final cost cap by August 15 on an annual basis.  The utilities will provide notice of the DER services needed to defer planned investments along with a price sheet to procure the DER services.  Providers will then submit pricing sheets indicating their willingness to accept price levels at different percentages of the cost cap. When 90% of the deferral need is met by provider offers, the utilities will sign contracts with the providers.

The Technology-Neutral Pro Forma (Pro Forma) contract that is currently utilized in the DIDF to procure DERs will serve as the base contract with the providers, but the utilities are required to submit proposed changes to the Pro Forma by May 12 after meeting with relevant stakeholders.  However, each provider’s contract will be project-specific, identify compensation, and address contingencies including nonperformance of the developer in providing distribution services.  While the CPUC does not specify a permissible contract length in the February 12 order, utilities may also seek to award contracts of up to 10 years, subject to CPUC approval, consistent with the current DIDF RFO process.  Following two annual evaluations, the CPUC will determine whether the pilot is a success and should be continued or be terminated, based on the pilot metrics discussed above.

The CPUC’s February 12 order can be located here.

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Jonathan Wright

Jonathan Wright is a member of the firm’s Energy Industry Group, and counsels industry clients on a diverse range of transactional and regulatory matters. Mr. Wright counsels developers, investors and lenders in the development and financing of energy infrastructure assets, as well as…

Jonathan Wright is a member of the firm’s Energy Industry Group, and counsels industry clients on a diverse range of transactional and regulatory matters. Mr. Wright counsels developers, investors and lenders in the development and financing of energy infrastructure assets, as well as mergers and acquisitions, with a particular focus on renewable generation and battery storage facilities.

Mr. Wright also counsels clients on electric and natural gas matters before the Federal Energy Regulatory Commission, where he previously served as an Attorney-Advisor in the Office of the General Counsel. He specializes in matters involving electric generation interconnection, wholesale electric market design and participation, mergers and acquisitions involving jurisdictional assets, and natural gas pipeline rate proposals.