5 reasons you should care about California’s new energy storage mandate

California energy regulator on Thursday approved what is the country’s first and very ambitious mandate for using storage technology to complement the growing amount of renewable energy flowing into the grid. The California Public Utilities Commission voted five to zero to approve the mandate, and it’s a big deal because it will rev up a new market for various technologies for banking electricity.

There are a wide variety of technologies just in the battery sector alone, and some are venture-backed startups that have been waiting for California to set the mandate. Here is what you should know about the new program and why you should care:

1). What is new? The mandate requires California’s three investor-owned utilities, Pacific Gas and Electric, Southern California Edison and San Diego Gas & Electric, to collectively buy 1,325 MW of energy storage by 2020. On top of that, municipal utilities and utility districts will have to procure energy storage that equals to 1 percent of their projected 2020 peak electricity demand and do so by 2020. All the energy storage projects that are under contract under this mandate will have until the end of 2024 to complete their installations.

2). Why do we need it? California wants 33 percent of its power supply to come from renewable sources, such as wind, solar and geothermal, by 2020. The problem is wind and solar projects don’t produce electricity steadily around the clock, so the state’s electric grid will get intermittent infusions and drop-offs of renewable electricity. That’s bad for the grid, which needs to maintain a balance of supply and demand to avoid blackouts and other problems.

By storing electricity utilities could have greater control of the amount and rate of power that flows through their transmission and distribution networks.

The electricity to be banked by energy storage equipment doesn’t have to be solar, wind or other renewable energy. Storage projects could soak up power from fossil fuel power plants when demand is low and sending it to the grid when demand spikes. This way, utilities could avoid building more power plants and investing in expensive grid upgrades over time as the population and energy use grows. They also could draw power from storage to maintain certain characteristics of the grid, such as its frequency, instead of turning to natural gas power plants like they usually do.

3). Who benefits? Storage technology creators and companies that develop and build storage projects will be lining up to win business from utilities. Banks or other investors who are willing to gamble in this new market, which to them also means making bets on unproven technologies, could also be winners.

There will be a lot of tussles among investors, project developers and technology companies over how to structure a project, its financing and expected returns. All the questions and challenges of this new energy storage market could very well mirror what has happened in the solar market.

Five years ago, many solar power projects designed for serving utilities were proposed by solar technology companies or newly formed project development companies. And they all had a really tough time lining up money to finance their projects. Since then, we have seen a growing number of  traditional power companies investing in solar power plants. We also have seen a rise in rooftop solar generation that gives consumers the ability to produce their own power and leaves utilities wondering what changes they will have to make in their business plans to stay profitable.

4). Concerns: The mandate is the baby of the newest member of the commission, Carla Peterman, who was able to line up support from all her fellow commissioners to set this mandate in place. But two commissioners, Michael Peevey and Mark Ferron, on Thursday pointed out some potential issues and solutions that they said would help to reduce friction in the program’s rollout.

They emphasized the need to give utilities flexibility to meet the mandate at ” a reasonable cost” and standardize the bidding and contracting processes to make it less costly for smaller project developers. The exclusion of large-scale pumped storage — pumping water to a reservoir and using that water for electricity generation later — also takes away a cheaper and proven way of storing energy for ratepayers. Peevey added that the rules aren’t clear on how energy storage being installed at homes and businesses could help utilities meet their mandate.

Peterman pointed out the vote on Thursday only kickstarted the mandate and doesn’t prevent what will surely be many more efforts by the commission to modify the program as they learn lessons about how to make the program work. The exclusion of large-scale pumped hydro projects is meant to help promote the use of newer — and often more expensive — storage technologies. The majority of the pumped storage projects are 500 MW and over. Smaller pumped hydro projects that are less than 50 MW would qualify to meet the mandate.

5). What’s next: The utilities commission’s vote on Thursday starts the clocking running for utilities to begin the process of buying energy storage capacities. First, the three big utilities will have until March 1 next year to come up with their own plans on how they will comply with the mandate. The plans will be a blueprint for energy storage developers to draw up projects and submit their bids.

The first bidding process will start by the end of 2014 and continue every two years. The commission has interim targets for the utilities to meet from 2014 to 2020. For example, the three utilities will look at buying a total of 200 MW of energy storage for their first set of purchases. The utilities will be able to defer their purchases under certain conditions.