You might imagine that California, the land of energy efficiency, smart meters, rooftop solar panels and plug-in electric vehicles, would also be leading the country in demand response -- the term of art for turning homes and buildings into grid-responsive energy assets. But you’d be wrong.

In fact, California has lagged behind other parts of the country in creating the programs and markets to jump-start demand response. For the past four years running, it’s failed to meet a statewide goal of getting enough demand response to cover 5 percent of its system peak load -- and that’s just a measure of its inability to meet old-fashioned peak reduction from large industrial and commercial customers and power generators.

At the same time, California is in dire need of new forms of demand response to incorporate all its distributed grid assets -- solar panels, smart inverters, EV chargers, smart thermostats, energy storage, etc. -- into a grid that needs more flexibility and localized support. Last year, the California Energy Commission declared in its annual energy policy update (PDF) that the state has “not yet been successful at creating the right conditions under which DR can scale significantly, much less achieve its full potential.”

This week, a group of utilities, environmental groups, consumer advocates and demand response and smart grid companies filed a settlement agreement (PDF) meant to help unlock this potential. If approved by the California Public Utilities Commission, the settlement agreement could lead to new rules for valuing and paying for distributed demand response by as early as next year -- along with a roadmap to put these ideas into practice statewide by decade’s end.

Tuesday’s settlement also proposes to continue the Demand Response Auction Mechanism (DRAM) program, which allows distributed resources for bidding into CAISO’s existing demand response programs. Similar programs are now allowing building energy controls and behind-the-meter batteries to aggregate their capacity, but California has yet to come up with a commercial-scale program to do this.

In other words, the settlement lays out a plan for a wholesale (and retail) transformation of California’s demand response regulations. Part of the broader goal is to fix the already identified problems with California’s DR regime, to bring it up to speed with other more successful demand response regimes like those run by mid-Atlantic grid operator PJM, and meet the state’s existing 5-percent-of-system-peak goals.

But it’s also aimed at finding values for a whole bunch of distributed functions that don’t really have ways to capture revenue for these services today, noted Michael Panfil, the Environmental Defense Fund attorney who worked on the agreement.

“What we’ve been talking about is how to identify value of demand response when that’s not at all clear, and then integrate into forecast decisions,” Panfil said in a Wednesday interview. One of the key long-term goals of Tuesday’s agreement is to help state grid operator California ISO (CAISO) make use of a wide array of distributed resources under the control of utilities, demand response aggregators, energy services companies, or even individual customers, he added.

“Because there’s no market structure, how do we start identifying the demand response that’s out there, and what it can do? […] That hasn’t existed until now, and this settlement really calls for that,” he said.

Large-scale resources that serve CAISO’s system-wide needs are known as “supply resources,” in keeping with their role of replacing traditional generators at a grid-operator scale. The rest of the demand response out there, from old-fashioned one-way air conditioner and pool pump switches to the latest in automated and two-way communicating building controls, fall under the category of “load-modifying” resources.

Today, these load-modifying (LM) resources don’t get to recognize the full value of what they can do for the grid, Panfil said. Sure, they can be aggregated into megawatts of load reduction. But that doesn’t give them credit for how they might be reducing wear and tear on the local circuits they’re connected to, or how they could help the utility avoid building a new transmission line or upgrading a substation by reducing peak load, to name two pertinent examples.

Likewise, demand response that helps mitigate the steep bellies and ramp-ups of the state’s solar-driven “duck curve” energy profile should have some way to get rewarded for that feature -- even if it doesn’t meet the “flexible” resource requirements that CAISO is working on to solve this problem.

Part of the challenge facing the working groups to be set up by this agreement will be to come up with ways to “operationalize” these load-modifying resources, said Stephanie Wang, policy director for Clean Coalition, a nonprofit energy advocacy group.

“I would say that the settlement itself recognizes that there are benefits of CAISO being able to rely on load-modifying resources,” she said. “Part of it has to do with how are we going to value, and create mechanisms to monetize that value. The other part is operationalizing some of those load-modifying resources.”