On September 6, 2022, it became clear that greater use of solar electricity without adequate storage capacity is insufficient for a sound energy transition. The California electricity market experienced wholesale price spikes due to extreme heat and massive demand for air conditioning. California’s Independent System Operator (CAISO) schedules most of the daily electricity demand by soliciting bids a day ahead, but some residual peak demand is settled in near real time. Electricity from natural gas “peaker” power plants can meet temporary demand peaks but at much higher cost. More storage capacity might have allowed utilities to better allocate electricity delivery over the course of the day, preventing the risk of major economic disruptions for firms and households. This episode foreshadows the challenges facing the US economy amid the transition toward renewable energy sources as outlined in US Energy Transition: The Path to Net Zero.

Insights for What’s Ahead

• The trend toward greater use of renewable energy needs to be balanced with investments in storage capacity to avoid price volatility and system blackouts. Utility firms could overcome supply-demand imbalances, especially those due to growing solar generation, by implementing storage capacity. But even industrial and business customers would benefit from utilizing some storage as backup on-site to avoid potential blackout conditions and disruption to their operation.
• Businesses that can develop their own electricity sources and set up their own microgrids stand to benefit from the added stability to their operations. Prior work by The Conference Board suggests that businesses seek to avoid energy price volatility by sourcing renewable energy. To the extent that they can do this without relying on utility-owned transmission infrastructure, they will be at a competitive advantage.
• States that don’t have a system for managing electricity price volatility and potential supply disruptions will become increasingly less appealing for business. Since most transmission infrastructure is privately owned, utilities need to fund the replacement and maintenance of equipment that is sometimes close to 100 years old and likely to fail. These significant investments will invariably put upward pressure on electricity rates for businesses and households, making California and states with similar problems less attractive for firms.