California Legislature and Governor Cut Funding for a Program that Reduces Energy Bills

Governor Newsom and the California Legislature created a program in 2022 to help avoid power outages while reducing electric rates, and the design is so successful that Demand Side Grid Support has become a global leader. Now, three years later, they are defunding the program, losing a key strategy for keeping energy costs down at a time when affordability solutions are greatly needed.

SACRAMENTO-In the final days of the 2025 California Legislative session, among the important issues still up in the air was whether California would fund the innovative Demand Side Grid Support (DSGS) program to ensure its success and secure its position as the largest virtual power plant (VPP) in the world. As of the morning of September 10-the third day before the deadline for the Legislature to pass bills-funding for the program has been cut from the Cap-and-Trade reauthorization proposal.

"They are shutting down the biggest virtual power plant in the world," said Kate Unger, senior policy advisor for the California Solar & Storage Association. "This program helps keep the lights on and reduces energy bills at the same time, and it's being killed just when it's needed most."

DSGS was created in 2022 through AB 205 as part of Governor Newsom's and the Legislature's efforts to address the need for new emergency reliability resources to shore up California's grid. The Governor and Legislature took this wise step in the wake of the grid emergencies in 2020 and 2022-the first of which resulted in actual blackouts, and the second of which resulted in extremely close calls and required last-ditch efforts like a California Governor's Office of Emergency Services cell phone alert asking residents to conserve power on September 6, 2022.[1]

One of DSGS's signature success stories is its program option for behind-the-meter batteries participating in VPP fleets. Launched just over two years ago in August 2023, the DSGS battery VPP already has over 720 megawatts of customer battery capacity enrolled. The Brattle Group predicts that if DSGS is funded and continues, the battery VPP option can grow to 1,300 MW in the next three years.[2]CALSSA believes this to be the largest VPP in the world.

The DSGS battery VPP also creates a new opportunity for energy cost savings. A newly released assessment of the battery VPP option by the Brattle Group concludes that it can provide significant savings to California.[3]Every dollar put into the program results in up to two dollars in customer rate reduction. This means that investing in DSGS would save more money for California ratepayers than simply returning money to them through the Cap-and-Trade program's climate credit.

An Assembly proposal released in August for reauthorizing Cap-and-Trade as Cap-and-Invest provided for a small amount of Cap-and-Invest revenues from electric corporations' greenhouse gas allowance allocations to be used to fund DSGS starting in 2026.[4]This new investment into DSGS is acutely needed. The program currently has sufficient funding for the 2025 program season, but not enough to pay incentives to all participants in 2026.[5]

However, the California Legislature and Governor are turning away from the largest VPP in the world. While they are actively negotiating a deal on Cap-and-Invest, current bill language (AB 1207) removes the DSGS funding, nearly guaranteeing that the program will contract and fade out starting next year.[6]

DSGS recognizes that customer batteries can reliably respond to energy shortages and compensating them for doing so can cost less than other alternatives. The DSGS battery VPP option pays for capacity actually delivered. Its compensation rate is less than the cost of new incremental Resource Adequacy (RA) capacity-and RA capacity costs have been climbing at an accelerating rate.[7]DSGS is also less costly and less polluting than natural gas power plants whose lives have been extended as reliability capacity at a cost of up to $1.2 billion.[8]

In addition to being more affordable than other options for capacity, DSGS also helps avoid blackouts that are devastating to our economy. While California has managed to avoid similar grid emergencies since 2022, the accelerating impacts of climate change mean that grid reliability will continue to be a top priority for our state, and DSGS continues to be the smart reliability solution.

"Our state's leaders are squandering a huge opportunity by turning away from this smart, money-saving program," said Unger. "Without new funding, we have lost the opportunity to solidify California's position as an innovator and world leader in using customer batteries to save money for all of us."

[1] https://news.caloes.ca.gov/state-officials-sent-cell-phone-alerts-to-protect-public-safety-amidst-ongoing-record-heat-energy-grid-shortfalls/. Governor Newsom also issued a Proclamation of a State of Emergency on August 31, 2022. https://www.gov.ca.gov/wp-content/uploads/2022/08/8.31.22-Heat-Proclamation.pdf.

[2] https://www.brattle.com/wp-content/uploads/2025/08/The-Demand-Side-Grid-Support-Program-An-Assessment-of-Scale-and-Value.pdf. The program has seen dramatic growth just from May to August this year and is now about 3 times the capacity enrolled in 2024. https://dsgs.olivineinc.com/faq/#program.

[3] https://www.brattle.com/wp-content/uploads/2025/08/The-Demand-Side-Grid-Support-Program-An-Assessment-of-Scale-and-Value.pdf. The Brattle Group report includes only energy and capacity value, and DSGS can provide additional sources of value, including avoided transmission and distribution infrastructure costs, adding to the benefit-cost ratio.

[4] https://www.politico.com/f/?id=00000198-c33f-d0bd-a1db-fbbfd4ce0000.

[5] https://dsgs.olivineinc.com/faq/#acc-w21g721-1. This information, it should be noted, was provided

in May 2025, before dramatic growth in DSGS enrollment over this season so far.

[6] https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202520260AB1207.

[7] 2023 Resource Adequacy Report, California Public Utilities Commission, August 2025, pages 25-29. https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/resource-adequacy-homepage/2023-resource-adequacy-reportv2.pdf.

[8] https://calmatters.org/environment/2023/08/southern-california-natural-gas-plants-remain-open/.