Executive Summary:

• CAISO’s stakeholder process is bringing substantial policy and market design changes to fruition in 2025.
• Many of the most significant changes involve battery energy storage system operations - including state-of-charge management and changes to the bid cost recovery mechanism.
• Other wider-reaching changes involve reform of the interconnection process and changes to how Resource Adequacy procurement targets are determined - each of which will likely benefit batteries.

Subscribers to Modo Energy’s Research will also learn:

• How policy changes and initiatives are introduced and actually progress through the stakeholder process in CAISO.
• About the motivations behind ongoing initiatives, and what their likely outcomes will be.
• How the timeline differs for different types of initiatives - and what the timeline looks like for issues currently moving through the stakeholder process.

How CAISO’s stakeholder process works

California Independent System Operator (CAISO) operates the state’s wholesale electricity market and transmission system - relying on a structured stakeholder process to refine policies, develop market designs, and align grid operations with regulatory mandates.

The process allows for stakeholders to engage and contribute to key decisions that shape California’s energy market operations.

CAISO first identifies market inefficiencies, reliability concerns, and policy gaps that require action.

Stakeholders can submit policy initiative proposals - which CAISO reviews, documents, and tracks in its policy initiatives catalog.

Next, industry participants get involved by sharing their input through working groups, technical forums, and public comment periods. These meetings are open to the public - to ensure transparency and broad participation.

Then, the grid operator drafts and refines proposals based on stakeholder input, internal modeling, and regulatory requirements. Subsequently, CAISO evaluates policies for alignment with its strategic goals, and assesses their impact on market efficiency and system reliability.

Finally, proposals may require approval from the Federal Energy Regulatory Commission (FERC) and CAISO’s Board of Governors, and coordination with California Public Utilities Commission (CPUC), before being implemented.

The stakeholder process incorporates input from a diverse range of market participants.

CAISO’s stakeholder process aligns with CPUC’s broader goals to support grid reliability, clean energy, affordability, and fair market access.

What changes are currently going through the stakeholder process?

Storage design and modeling enhancements

In 2025, CAISO plans to review state-of-charge and outage management, storage uplift redesign, default energy bid optimization, and distribution-level storage integration. Key enhancements involved:

State-of-Charge (SOC) management

Goals: Stakeholder meetings will explore plans to introduce a system-wide State-of-Charge tracking mechanism to better manage availability across storage assets. Stakeholders discussed implementing a biddable SOC model, where operators could submit bids and offers based on their available SOC rather than power capacity.

Another area of focus is to improve SOC definitions and calculations. This is to enhance dispatch accuracy and prevent unexpected resource unavailability, particularly during tight system conditions.

Impact: Introducing SOC-based bidding will enable the market to better utilize storage resources during high-demand periods. Battery operators will have more control and flexibility over how their resources participate in the market.

Bid Cost Recovery (BCR) and Default Energy Bids (DEB)

Goals: On January 25, 2025, FERC approved CAISO’s tariff revisions for Real-Time Bid Cost Recovery (BCR) rules for energy storage. For more details on BCR and CAISO’s tariff changes, visit our prior article.

Stakeholders acknowledged the revision limits storage from gaming the market, but noted it does not fully resolve market inefficiencies.

As part of the 2025 policy initiative, stakeholders will conduct a comprehensive review of the BCR framework for batteries—evaluating whether it is still necessary and, if so, under what specific conditions it should apply.

Another key topic was refining Default Energy Bids (DEB) for both standalone and hybrid storage to better reflect costs and price differences between Day-Ahead and Real-Time markets.

Impact: At the system level, the idea is to reduce market inefficiencies and ensure participants offer energy at prices reflecting their operating costs. Battery operators might see a reduction in their BCR payments - which currently accounts for about 4% of their annual revenues.

Outage management

Goals: One goal is to address non-linearity, where battery performance does not scale proportionally, especially when their state of charge is nearly full or depleted. This can impact charge/discharge efficiency, response times, and reliability during critical grid conditions.

Another objective is to ensure the market model recognizes storage-specific outages, such as voltage imbalances and charging inefficiencies. The initiative also aims to enable dynamic outage updates, allowing battery operators to better communicate real-time constraints to CAISO.

Impact: Better accounting for non-linearity would help improve the performance and monitoring of batteries. In turn, this will lead to better market reliability. Battery operators will benefit from fewer penalties and lost revenue caused by misaligned market expectations.

Distribution-level storage and demand response

As part of the stakeholder process, CAISO is advancing two major policy initiatives to improve demand response (DR) participation and enhance the integration of distributed-level and behind-the-meter storage.

The goal is to remove existing caps and barriers to allow these resources to contribute more effectively while increasing their operational flexibility.

Goals: One focus is potentially refining market rules for distribution-level storage assets and co-located storage.

Currently, storage connected at the distribution level operates under different ISO tariffs than transmission-connected storage. These batteries must follow both local operator rules and CAISO wholesale market rules - which causes mismatches between schedules and real-time dispatches.

The policy aims to better align frameworks for distribution and transmission level battery energy storage systems.

Current market rules also overlook the unique parameters and challenges faced by co-located storage resources. CAISO and stakeholders plan to refine settlement processes to ensure fair compensation.

Additionally, the initiative may evaluate DER participation in the Western Energy Imbalance Market (WEIM) and Extended Day-Ahead Market (EDAM). CAISO will also explore models for demand-side resources to bid into Real-Time markets and develop rules for non-traditional resources like hydrogen electrolyzers.

Impact: These initiatives will likely increase financial incentives for distribution-level and co-located storage assets in CAISO’s wholesale markets. Expanding demand response programs will help CAISO manage load variations better as renewable energy penetration grows, and reduce reliance on additional system capacity.

Interconnection process reform

In 2025, CAISO will implement FERC-approved interconnection reforms to streamline and improve the process of integrating new energy resources.

These reforms include transitioning to a cluster study approach to expedite processing, stricter financial readiness and site control requirements to prioritize viable projects, a zonal approach to transmission capacity to optimize existing infrastructure, and cost allocation reforms.

CAISO and its stakeholders are also working on additional reforms to implement alongside the FERC recommendations.

For instance, track 3 reforms address project prioritization within clusters, modifications to the Transmission Plan Deliverability (TPD) allocation process, and clarifications for long lead-time generation and storage resources.

CAISO’s goal is to prioritize projects in the queue that can proceed without triggering major reliability network upgrades.

Impacts: The proposed changes will likely streamline interconnection, and prioritize projects with a higher chance of becoming operational. The reforms will help expedite the integration of new resources and reduce delays.

Resource Adequacy modeling and program design

Slice of Day Implementation

Goals: In 2025, CAISO transitioned to the Slice of Day (SOD) framework for Resource Adequacy (RA). Finalized in 2024, this change was introduced to better account for the contributions of variable energy and duration-limited resources.

This policy shifts from a single peak-hour evaluation to an hourly system in order to ensure enough capacity is available for every hour of the day.

Slice of Day breaks the day into multiple time slices. Each load-serving entity (LSE) must procure enough capacity to cover energy needs plus reserves during all 24 hours of CAISO’s tightest day each month.

The tightest - or ‘worst’ - day is defined as the day of the month that contains the hour with the forecasted highest coincident peak demand.

Impact: This shift changes how resources are valued, as their reliability contribution will now depend on how well they perform across all hours, rather than just during peak periods.

The Slice of Day framework brings both challenges and opportunities for energy storage.

Load-serving entities must now account for energy storage charging needs. The LSE must ensure a 4-hour battery scheduled for evening use has excess capacity earlier in the day for charging.

Slice of Day also credits batteries that can cycle multiple times per day for their Resource Adequacy contributions, creating new opportunities.

Resource Adequacy policy initiative

Goals: In 2025, CAISO and stakeholders are developing a straw proposal to refine loss of load expectation (LOLE) modeling, resource accreditation, outage management and performance incentives for Resource Adequacy.

One major change under discussion is shifting from the Net Qualifying Capacity (NQC) method to an Unforced Capacity (UCAP) model. This adjusts a resource’s accreditation based on historical performance and outage rates.

Another proposal introduces Measuring Unavailable Resource Adequacy (MURA), which penalizes resources that fail to meet RA commitments during critical periods.

Impact: Shifting from Net Qualifying Capacity to Unforced Capacity will disadvantage four-hour battery storage by lowering its eligible RA capacity and reducing RA payments.

Additionally, stricter guidelines will increase non-delivery risks for generation operators. UCAP accreditation changes and MURA performance incentives place greater emphasis on reliability, flexibility, and real-time availability for batteries.

Extended Day-Ahead Market implementation

Goals: CAISO is actively advancing its Extended Day-Ahead Market (EDAM) initiative, aiming for a comprehensive launch in 2026.

The EDAM expands CAISO’s Day-Ahead market to other Western utilities to buy and sell electricity in a coordinated manner. EDAM aims to strengthen grid reliability, lower electricity costs, and enhance renewable energy integration by optimizing flows and sharing resources across a larger footprint.

EDAM onboarding and integration testing will commence in 2025. The stakeholder process is currently underway to finalize participation rules for balancing authorities.

ISO staff and stakeholders are developing a uniform carbon accounting process to align states with carbon pricing and those with alternative carbon reduction policies. Stakeholders are evaluating various pricing mechanisms in the EDAM, including fast-start pricing and scarcity pricing.

Impact: By optimizing resource commitment and scheduling over a larger area, EDAM can better manage variability and uncertainty, particularly with growing renewable integration.

For battery owners, the expanded market enables broader opportunities for arbitrage and ancillary service support. But, operators may need to adjust to new market rules and adapt participation strategies to maximize revenues.

New standard for maintenance and operation of BESS facilities

In January 2025, California Public Utilities Commission (CPUC) proposed a plan to improve the safety of battery energy storage facilities.

This proposal has arisen in the aftermath of multiple fire and safety incidents at battery energy storage system (BESS) facilities. Most recently, there was a fire at one of the largest battery sites operating in CAISO - Vistra’s Moss Landing - which forced more than 1,000 residents to evacuate and released toxic gases into the air.

Unlike the typical stakeholder process where CPUC directs CAISO to implement changes, this proposal was fast-tracked and published just weeks after the Moss Landing fire. Given the high priority of addressing BESS safety risks, CPUC took direct action to ensure immediate regulatory oversight.

Goal: CPUC aims to implement Senate Bill (SB) 1383 to establish new maintenance and operation standards for BESS facilities.

BESS facility owners will also be required to develop emergency response and action plans.

CPUC will review the proposal for consideration during its Voting Meeting on March 13, 2025. This meeting gives stakeholders and the general public a chance to comment on agenda items.

Impact: By enforcing stringent operation standards, the policy aims to protect the safety of California residents, while enhancing grid reliability and increasing batteries’ role in supplying power. For CAISO, these standards help prevent unexpected outages.

At the individual resource level, owners and operators may need to invest in safety, monitoring, and training to comply with new protocols. While this has upfront costs, it’s likely necessary to continue to enable public trust and support for future facility expansions in the longer run.

What does the 2025 set of initiatives indicate for the future?

With major regulatory shifts on the horizon, such as the implementation of the Extended Day-Ahead Market and Interconnection Process reforms, stakeholder input remains critical to shaping California’s energy market design.

The initiatives aim to balance multiple priorities of cost-effective operations, reliability, and fair market access. Additionally, many of the ongoing potential changes to market design will facilitate the development of more generation resources in CAISO - and will incentivize a continually more diverse set of technologies.

The process is an ongoing dialogue between regulators, utilities, and industry players to maintain grid reliability and market efficiency as the energy mix evolves.