Will California fund or kill its thriving virtual power plant program?

California lawmakers face a make-or-break choice about the state’s biggest and most successful virtual power plant program: Give it enough money to keep running this summer or scrap it altogether.

The administration of California Gov. Gavin Newsom (D) has proposed ending the four-year-old Demand Side Grid Support program, which pays homes and businesses to send rooftop solar power back to the grid or reduce their energy use during times of peak electricity demand. DSGS has more than 1 gigawatt of capacity, making it one of the biggest VPPs in the country.

The proposal has set off alarm bells for environmental advocates and clean energy companies, which say that eliminating the program would be a costly mistake. And some state lawmakers briefed on the plan have questioned the logic of ending a program that’s successfully delivering grid relief.

A study conducted by consultancy The Brattle Group and commissioned by Sunrun and Tesla Energy, two companies with large numbers of solar-and-battery-equipped customers enrolled in the program, indicates that ​“DSGS is a significantly lower-cost alternative” to relying on costly fossil gas–fired power plants or other resources available during grid emergencies.

In February, the Newsom administration’s Department of Finance issued two budget proposals regarding DSGS. One proposes ending DSGS, which is administered by the California Energy Commission, and shifting its customers to another program administered by the California Public Utilities Commission — either a current program that has been far less successful to date or one that has yet to be created.

For the past two years, environmental and clean energy groups have been fighting to protect DSGS from a series of funding cuts ordered by the Newsom administration, and have so far been unsuccessful. ​“California has already invested years of effort and hundreds of millions of dollars to build out DSGS. It’s a model now for clean reliability,” said Laura Deehan, state director of Environment California, one of the dozens of environmental advocacy groups that have signed a letter protesting the plan. ​“We have to make sure we keep the lights on on the program and not abandon what’s already been built up.”

A coalition of industry groups that have enrolled customers in DSGS echoed that view in a March letter to state lawmakers. It warned that ​“dissolving an existing successful program and attempting to re-create the same type of program at a different agency causes delays, wastes public resources, and has no assurances that it will be as successful.”

Environmental and industry groups are throwing their weight behind the Newsom administration’s other budget proposal, which would instead increase DSGS funding. This alternative calls for shifting money from another, underfunded distributed energy program to DSGS, bringing its funding for the coming year to roughly $53 million, up from the $26.5 million now remaining in its budget.

This is still short of the $75 million that backers have been asking for, said Caleb Weis, clean energy campaign associate at Environment California. But it should be enough to ensure enrolled customers are ready to help the grid through what’s expected to be a much hotter summer and fall season than the state has seen over the past two years, he said.

“The DSGS program kicks on when the primary alternative would be importing expensive energy from out of state or firing up expensive peaker plants that are dirty and cost money just sitting there, not being used,” he added. Meanwhile, DSGS ​“has clean assets that are ready to protect the California system during times of extreme stress and high cost. It’s almost a no-brainer to use this.”

Supporters of the proposal to end DSGS have been less vocal. While the state has underscored that DSGS was always meant to be temporary, few other justifications have been offered for ending the program before its original 2030 sunset date — and no major stakeholders have come out in support of that plan.

The conversation around DSGS is heating up ahead of key budget decisions. California must pass its 2026–2027 budget by June 15, and that budget must be finalized before Aug. 31. Sometime between now and that deadline, state lawmakers will be forced to decide on the future of the program.

Committee questions scrapping successful program

Lawmakers raised concerns about the proposal to scrap DSGS during a March 5 hearing of the Senate Budget Subcommittee on Resources, Environmental Protection, and Energy at the state capitol.

“DSGS has largely been a successful program,” said Sen. Eloise Gómez Reyes, a Democrat who chairs the subcommittee. ​“Why is the administration proposing to start over?”

David Evans, a staff finance budget analyst at the state’s Department of Finance, responded that the ​“original vision and intent of the program was not allowed for it to be an indefinite, ongoing program.” He highlighted the state’s ongoing budget shortfall, which the Newsom administration had cited as the rationale for cutting DSGS funding in 2024 and 2025.

But Gómez Reyes pushed back on that justification, noting that the administration’s alternative proposal — shifting funds from elsewhere — could allow DSGS to successfully operate this year without impacting the budget.

“If something is successful, and it appears that this is a successful program, why don’t we continue … even if we intended it to be something that was temporary?” she said.