Dive Brief:

• California energy regulators Thursday approved an additional $40 million in funding from the 2023 gas cap-and-trade allowance auction to promote heat pump water heaters, on top of a previously authorized $44.7 million.
• The initiative, part of the California Public Utilities Commission's (CPUC) self-generation incentive program, which promotes existing and emerging distributed energy resources, is one of many efforts to cut carbon emissions from buildings by expanding incentives for electric appliances, CPUC Commissioner Clifford Rechtschaffen said at the agency's meeting.
• Regulators also voted to fine Southern California Gas Company (SoCalGas) $150,000 for using ratepayer funds on activities that "misaligned" with the CPUC's directions on advocating for energy efficiency codes and standards — an amount that environmental advocates say is disappointingly low.

Dive Insight:

California's building sector contributes around a quarter of the state's greenhouse gas emissions, and regulators see heat pump water heating systems as a promising tool to reduce that. Heat pump systems tap into the electric grid to heat water, and as the state's electricity mix grows cleaner, they can offer a cleaner and more efficient alternative to natural gas water heating, according to the CPUC. 

Approximately 800,000 water heaters are replaced every year in California, and under the agency's program, customers can receive incentives for installing heat pump water heaters — up to $4,885 for low-income, single-family residential customers and $3,800 for other single-family residential customers. 

The heat pump water heater systems are required to operate in a way that shifts electricity demand to off-peak hours on the grid, and reduces greenhouse gas emissions, in order to be eligible for the incentives. Using a technology called a "thermostatic mixing valve," these systems can pre-heat water when electricity demand is low, essentially allowing them to provide energy storage services. 

"The goal of the incentives [is to] reduce the upfront purchase price, make it comparable to a new gas hot water heater," Rechtschaffen said. Regulators want contractors to be comfortable with the technology, he added.

"[M]ost people, when they replace a water heater, they do it in an emergency. There's a failure and they need to do it right away. And they may not be very familiar with the technology — but if the price is the same and the contractors know this, we have a real good chance of getting these systems adopted," he said. 

In addition, customers who receive the incentives will need to enroll in a demand response program aimed at reducing electric demand during severe heat waves or other emergencies. 

California's self-generation program, which was established in 2001 to reduce peak energy demand, has previously driven the uptake of fuel cell technology as well as the behind-the-meter energy storage market, CPUC President Alice Reynolds said. 

By pre-heating water during daytime hours, "heat pump water heaters can take advantage of a cleaner energy supply, which reduces overall greenhouse gas emissions and increases reliability at times when we need it for the grid," she added. 

Regulators also narrowly voted in favor of issuing a $150,000 financial penalty against SoCalGas for using ratepayer funds on activities that "misaligned" with their intent for the state's investor-owned utilities to advocate for more stringent energy efficiency codes and standards. 

In November 2020, the CPUC's Public Advocates Office recommended that regulators fine SoCalGas around $255 million for using ratepayer money to oppose stricter energy efficiency codes and standards, saying in a brief filed with the agency that the utility had been part of "a concerted effort" to undermine the state's energy efficiency goals. 

As an example, the office said the utility had used ratepayer funds to push for delaying a California Energy Commission rulemaking on residential instantaneous water heaters. A 2014 presentation made by SoCalGas senior management suggested that these building energy efficiency standards could cause the utility opportunity costs of as much as $17 million annually by 2020. 

"SoCalGas' actions were in direct conflict with the commission's authorization for using ratepayer funds to support stricter codes and standards or local government reach codes, in order to achieve increased energy savings," Rechtschaffen said at the meeting. 

The commission's decision, however, did not accept the advocates office's contention that SoCalGas' violations were "continuing." Instead, it concluded that the utility should be fined a penalty of $150,000 — or $15,000 for 10 separate violations. 

"We respect the CPUC decision on this issue. Under new leadership, SoCalGas is focused on a business strategy that is sustainable and aligned with California reaching its climate and clean air goals more quickly and more equitably," SoCalGas spokesperson Christine Detz said in an emailed statement. 

Two of the five CPUC commissioners — Commissioners Genevieve Shiroma and Darcie Houck — voted against Rechtschaffen's decision, instead voicing support for a separate proposal, from an agency administrative law judge, that would have required SoCalGas to return the ratepayer funds but stopped short from imposing a financial penalty. 

Sara Gersen, clean energy senior attorney with Earthjustice, said the financial penalty was disappointing, "because what this does is give SoCalGas the regulatory certainty to know that it can ignore the commission's decisions, and the consequences for those violations are negligible." 

On California's broader efforts to electrify its built environment, Gersen acknowledged that the state is making progress, but not at the necessary pace.

"It's still going to be an enormous project for the state to transition the existing building stock from relying on appliances that burn fossil fuels to modern, clean electric appliances," she added.