Policy Objectives for Energy Storage Procurement

1. Policy Objectives for Energy Storage Procurement CPUC Energy Storage OIRJanuary 14, 2013

2. Accomplishments of the Storage OIR to date • Phase 1 • Regulatory matrix and barrier analysis • End use framework • Road Map identifying key milestones • General analytical approach • Phase 2 • Developed several comprehensive Use Case documents • Developing approach to analyzing cost-effectiveness The Storage OIR has already succeeded in significantly advancing knowledge and coordination of storage regulatory policy in California

3. Some (non-IOU) comments we agree with….

4. On ensuring fair competition: “Storage should be allowed to participate in existing energy and capacity procurement efforts, and be afforded full recognition of its unique benefits.” • California Energy Storage Alliance comments in storage rulemaking “The benefits of novel technologies…may warrant short-term differentiation to allow such technologies to compete fairlywith existing resources.” - CPUC comments to FERC NOI on Energy Storage, emphasis added

5. On market solutions that benefit ratepayers: “Ratepayer funding should not generally be used to protect a competitive developer from exposure to market forces and challenges.” - CPUC Comments to FERC NOI on Energy Storage “Picking arbitrary procurement target levels, such as a MW level or a percentage level would most likely result in sub-optimal market solutions and increase costs to ratepayers without yielding commensurate benefits.” - Division of Ratepayer Advocates, Comments to Phase 1 Workshop

6. In summary: • The Storage OIR should facilitate a level playing field such that Energy Storage resources may fairly compete in markets and solicitations. We agree: • This should be the objective of the Storage OIR.

7. What should we do? • Continue to focus on removing barriers to fair valuation and participation. • Improve and refine methodologies to analyze cost-effectiveness. • Develop methods to appropriately value benefits. • Recognize that many benefits that storage resources provide are reflected in market prices. • Recognize that many non-monetized benefits that storage resources provide are also provided by conventional resources. • Avoid arbitrarily assigning value to benefits. • Continue to use demonstrations, pilots, and studies to fill in knowledge and experience gaps.

8. Framing the question of procurement targets • What is the problem we want to solve? • It is the proper role of the regulators to provide that: • Regulatory barriers do not prevent fair valuation and consideration of storage resources • Competitive markets allow fair participation and compensation for storage resources • Utility procurement rules allow fair participation, evaluation, and selection of storage resources

9. Framing the question of procurement targets • A procurement target should only be adopted as a last resort under exceptional conditions • If regulatory barriers cannot be resolved • If unfair competitive markets cannot be reformed • If utility procurement rules cannot be made neutral • Any argument in favor of procurement targets must explain why one of the above conditions is true. • Any target should be defined to minimize disruptions to the competitive markets, and to procure only what would have been procured had fair competition been possible.

10. Framing the question of storage as a “preferred resource” • A designation of “preferred resource” would explicitly endorse special treatment for storage. • This contradicts the general principle of technology-neutral policies. • An argument in favor must justify this deviation and explain: • Why storage deserves special treatment • Why competitive markets and solicitations are not properly functioning • How cost-effective procurement can be guaranteed without direct competition from other technologies that can meet the same grid needs • In absence of such justification, special treatment constitutes a subsidy to a private developer. • The term “preferred resource” remains completely undefined and must be clarified before any consideration of such a designation • The practical implications of this policy must be explained: how would the treatment of storage change under this policy? • Which forms of storage are included? How will this determination be made? • Some forms of special treatment would be especially disruptive to competitive markets and solicitations, without commensurate benefit. The policy must explicitly exclude these distortionary forms of special treatment. • Highly disruptive: targets and set-asides

11. Storage pilots have a critical role • Pilots are different from general procurement • A pilot project tests an emerging technology’s capabilities in the field to solve a specific problem. This is different from reliably meeting customer load while minimizing ratepayer costs. • Pilots by definition are new and unproven technologies or applications. They may or may not be cost-effective relative to existing solutions. • Developing effective storage pilots • Focus on a specific set of economic or operational questions in response to a defined knowledge or experience gap. • Be modest in scale, scope, and level of ratepayer investment. (Seek co-funding where possible.) • Understand the risks of an unsuccessful implementation: will grid problems be exacerbated and/or be time-consuming to resolve with an alternative solution? • Given the diverse functions of storage, a effective portfolio of storage pilots should investigate a wide range of storage applications. • The wrong way to do pilots • Don’t assume cost-effectiveness. (If the technology or application is already proven and cost-effective, it should compete in general procurement solicitations) • Don’t be over-ambitious. (Cost and performance outcomes are uncertain.) • Don’t confuse pilots with general utility procurement. (A project that is commercial-ready and cost-effective should compete in general procurement processes)

12. Conclusions • Significant work is occurring in multiple forums to resolve barriers and ensure that storage can compete fairly against conventional resources. • In California, competitive markets and solicitations are widely supported as delivering solutions that offer the highest value to ratepayers. • An argument in favor of special treatment for storage must clearly articulate the regulatory or market failure, and why that failure cannot be resolved. • Without such justification, special treatment for storage constitutes a ratepayer-funded subsidy to the developer. • The Storage OIR has already resulted in significant accomplishments, and should continue its important role of analyzing storage and coordinating storage policy issues across multiple forums