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Three bills have advanced through the California Legislature that are meant to increase the use of virtual power plants as a way to rein in energy costs. While good news for utility customers, that welcomed progress comes with its own dose of bad news: The most ambitious proposals were stripped out of one of the bills in a secretive process inaccessible even to the bill’s author.
Two of the bills, AB 44 and AB 740, cleared a key legislative hurdle with only minor alterations that will not significantly reduce their impact, according to Edson Perez, who leads California legislative and political engagement for clean-energy trade group Advanced Energy United.
But SB 541, the most pioneering of the three bills in question, was “gutted” last week via an opaque legislative maneuver, Perez said. Those amendments stripped the bill of important provisions that would have required the state’s biggest utilities to provide data to enable them to build virtual power plants into their grid investment plans.
Those provisions “would have helped California get the most out of its existing grid while saving ratepayers billions,” Perez said. “At a time of skyrocketing electricity bills and reliability challenges, California can’t afford to sideline tools that make the grid cleaner, more resilient, and more affordable.”
California has the highest electricity rates in the nation outside of Hawaii. Virtual power plants, which stitch together distributed energy like rooftop solar, home batteries, and EVs, can’t solve that problem on their own. But they can certainly help: A new report from think tank GridLab and Kevala, a grid-data analytics startup found that California could cut energy costs for consumers by $3.7 billion to $13.7 billion in 2030, compared to a base case, by using home batteries, EV chargers, and smart thermostats to avoid or defer costly upgrades to power lines and other infrastructure.
The changes made to SB 541 will dramatically reduce the savings it could offer, according to Sen. Josh Becker, the Democrat who authored the bill and chair of the Senate energy committee.
“We’re very disappointed,” he said.
The bill still includes measures to spur utilities to expand their use of VPPs, “so we can avoid overbuilding to meet the highest peaks in demand,” he said. “But we’ve missed an opportunity to do so much more by focusing on the other half of the problem — all this spending on upgrading poles and wires that can be avoided if we take better advantage of distributed energy resources.”
Becker said he didn’t know who was responsible for excising that portion of the bill or why they did it. The amendments were introduced during a process known as “suspense,” during which the Legislature’s appropriations committees can amend or shelve bills with no debate or transparency into how changes are made or by whom. Last Friday’s process ended up culling more than a quarter of the 686 bills under consideration, including high-profile ones like a proposal to streamline permitting for high-speed rail.
“We’re pursuing every avenue to keep that language alive,” Becker said of the removed text. But there’s little time for lawmakers to secure revisions before Sept. 12, the last day for the Legislature to pass bills this year.
For a handful of hours every year in California, often on the hottest days, electricity use soars beyond the usual day-to-day level and hits what’s known as peak demand. To meet these peaks, utilities have historically opted to build more power plants and power lines than they need on a daily basis — an expensive choice that is responsible for a large portion of utility bills.
But California can reduce demand peaks and make a big dent in those costs by taking advantage of solar-charged batteries, smart thermostats, EV chargers, and other devices scattered across homes and businesses. Individual customers are compensated for allowing the rest of the grid to use their energy resources, but if done right, a VPP’s benefits outweigh those payments.
A 2024 analysis from The Brattle Group found that VPPs could shave about 15% of California’s peak demand by 2035, saving utility customers about $550 million each year. Most of those savings would flow to those whose clean energy assets are enrolled in the programs, but customers at large would also see costs decline because utilities wouldn’t have to build as much infrastructure.
California badly needs to cut those costs. Average residential electricity rates in the state increased 47% from 2019 to 2023 and now stand at nearly twice the national average, largely driven by the effort to prevent power lines from sparking deadly wildfires. Pressure to expand power grids to serve data centers, EV charging, and home electrification is set to push rates higher still.
In the face of these rising costs, “making better use of what’s already on the grid rather than building something from scratch is a pretty important consideration,” said Ryan Hledik, a principal at Brattle and lead author of the study.
But California is not on track to meet its VPP targets. In 2023, the California Energy Commission (CEC), acting to comply with a law passed the previous year, set a “load-shift” goal of 7 gigawatts by 2030 for the state. But the CEC’s June progress report found that California’s demand-flexibility capacity barely grew over the past two years and remains at just over 3.5 gigawatts, or about half the 2030 goal.
The state isn’t likely to reach its 7-GW target under “business-as-usual” conditions, the CEC report found. That’s especially true if the policymakers decide to eliminate programs created after grid emergencies in 2020 and 2022, which have grown fastest in recent years compared to utility-managed VPPs. The report concludes that California needs “additional near-term strategies” to close the gap.
SB 541 was designed to help fill that gap.
In particular, the bill was meant to do two main things to incorporate load flexibility into how California manages its grid costs, Becker explained: Track progress toward state goals and embed VPPs into how the state’s major utilities invest in their power grids.
The amended bill still requires the California Energy Commission to create regulations to track the progress toward the 7-GW goal by utilities, community energy providers, and other “load-serving entities” supplying power to customers. “We need to know which load-serving entities are doing a good job of it, and learn from the best practices,” Becker said.
But the original version of SB 541 also called on the California Public Utilities Commission to create regulations to require the state’s three major utilities to share data on their low-voltage distribution grids, and use that data to discover how VPPs can reduce the cost of managing that infrastructure. Last week’s amendments entirely cut this portion of the bill.
Brad Heavner, executive director of the California Solar and Storage Association trade group, said that’s a missed opportunity. Today’s VPPs and demand-response programs are triggered to reduce pressure on the state’s transmission grid and generator fleets when energy demand exceeds supply, he said. In other words, they’re “focused on times when we may not have enough energy statewide,” which is “obviously important.”
But as originally written, SB 541 would have required a more proactive approach that integrates VPPs into grid planning.
“From an affordability perspective, most of the reason our rates have increased is due to utility overspending on the distribution grid,” he said. “VPP programs should be equally focused on using networked batteries to avoid the cost of expanding substations and other big infrastructure.”
Getting utilities to do this has been a longtime challenge. For more than a decade, California regulators have been under state mandate to press utilities to integrate rooftop solar, batteries, and other distributed energy resources — DERs in industry parlance — into how they invest in and manage their grids.
But as Hledik told a California Assembly committee in July in testimony supporting SB 541, “attempts to use load flexibility as a distribution system resource have had limited success.” Existing programs aimed at requiring utilities to seek out DERs that can replace or defer grid investments have failed to result in any significant projects.
SB 541 was designed to overcome those previous pitfalls, Hledik said, by requiring that “load flexibility opportunities be considered earlier and more comprehensively in distribution planning.”
The other VPP bills don’t take on distribution grid costs. AB 740 would require the CEC to adopt a virtual power plant deployment plan by November 2026, in collaboration with state grid operator CAISO, the utilities commission, and an advisory group representing disadvantaged communities.
”It doesn’t require them to implement anything specifically,” said Perez of Advanced Energy United. “But it does require that cross-agency deep dive that is just not happening right now.”
AB 44, which Advanced Energy United also supports, is “more surgical,” Perez said. It would order the CEC to adopt a method to value VPPs as a means of reducing “resource adequacy” requirements — the calculation of the grid resources needed to meet peak demand in future years.
Resource adequacy costs are rising across California. A handful of community choice aggregators (CCAs), the city- and county-level entities that procure clean energy for a growing number of the customers of California’s big three utilities, have worked with CEC to prove that their VPPs function well enough to count toward resource adequacy. The CEC has then reduced their requirements accordingly, which has allowed CCAs to cut their customers’ energy bills.
That’s a useful route to capturing the value of VPPs, Perez said. But it’s largely been done on an ad-hoc basis to date, and “there’s no clear process” for other CCAs to follow suit, he explained. “AB 44 tries to make that process more transparent.”
None of the bills have passed yet. If they can clear the Legislature by mid-September, Gov. Gavin Newsom (D) will have until Oct. 12 to sign the legislation into law.
This isn’t state lawmakers’ first attempt to pass VPP bills.
Similar efforts failed to advance in last year’s legislative session, as did bills aimed at restricting utility spending. Utilities earn guaranteed profits for every dollar they spend on power grids and other capital infrastructure, which incentivizes them to resist VPP policies that might reduce those expenses — and California’s utilities have political heft in state government.
But Becker, who is also pushing legislation to offset utility spending through public financing in this year’s legislative session, said the state’s utilities are already struggling to expand their grids quickly enough to serve large new customers like EV charging depots and data centers.
In other words, they can’t spend money fast enough to build the grid that’s needed right now. “We’re just trying to align the rules of the game to reward good behavior,” he said.
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