No business wants to create a solution in search of a problem, particularly in the slow-changing energy industry. Instead, businesses want to find solutions for problems that exist and create ways to make money off their solutions.
Enter the exigent problem California is facing: it has too much solar energy. First, who thought that would be a problem in the country's largest state? Second, why isn't there a solution if utilities and regulators knew this problem was coming? The short answer is that energy innovators weren't going to create and install solutions for solar energy's variability until they knew the utilities and regulators had recognized the problem.
What's going on in California
California has made a big push into renewable energy in an effort to meet a 50% renewable energy goal by 2030. It's built wind and solar plants rapidly over the past decade, which combines with hydropower to provide clean energy to the state. The problem is that solar energy, in particular, isn't created evenly throughout the day or year and that's a challenge for the grid.
In March, before peak air conditioner season in the state, there was so much solar energy on the grid that the California Independent System Operator had to tell some solar farms to shut down because there was too much energy for the grid to handle. And that could lead to a blackout.
It's not as if the solar energy being produced is somehow a surprise or that utilities don't know when demand is coming, but the mismatch between when clean solar energy is produced and when it's consumed has become a problem. At low penetration levels, solar energy doesn't create this problem, but in California they're starting to reach the "problem" level because there's so much sunlight.
The opportunity to build Grid 2.0
What's happening in California is solar energy creating a problem for the grid. It's not a lack of energy, but rather a lack of energy at the time that energy is demanded by customers. The secret to the electric grid is that each instant it has to send enough electrons to every customer to work correctly. A day, an hour, a minute, or even a second mismatch between supply and demand and the system falls apart.
Since sunlight only creates energy while the sun is out, but doesn't create any energy at night and is at less than optimal production with even a little cloud cover, it creates a challenge for grid operators. What the utility needs to do is find a way to move units of energy from when they're produced to when they're needed. Or another way of thinking of it is moving demand to when energy is produced.
The massive opportunity for energy storage
It seems obvious that energy storage should fill this gap in supply and demand for the electric grid. After all, we can see the problem coming a mile away, so why not build energy storage on a scale to save the grid from these problems?
The simple answer is that there hasn't been a financial driver of energy storage until very recently. Even today, there aren't a lot of ways to make money off owning an energy storage system in a home or business. For utilities, there's been no economic need or regulatory driver to deploy energy storage on a massive scale. Until now.
What we're seeing is the emergence of a market that Elon Musk saw when he announced Tesla Motors' (NASDAQ:TSLA) Powerwall and Powerpack products. They could move energy from when it's produced to when it's needed in a relatively efficient manner. But regulators in states like California need to find ways to make energy storage economical for utilities and developers. It would clearly be valuable to have energy storage in place today, but until we got to the point where there was too much solar energy there wasn't much urgency for energy storage.
GTM Research recently noted that energy storage deployments rose 243% in 2015 to 221 MWh. And by 2020 they predict the market will be 1,662 MWh. There's an incredible opportunity in energy storage now that the problem has been identified.
The demand side of the equation
Moving the supply of energy from one point in time to another is important, but so is moving demand. And that's something that's never really been done on a grand scale in energy.
The concept known as demand response is a budding business in energy with EnerNOC (NASDAQ:ENOC) leading the charge. The company bids demand response into regional transmission organization PJM, so instead of utilities paying for wholesale power plants to produce more energy to meet demand they pay EnerNOC to reduce demand. The company just tells its partners to turn down the air conditioning or lighting or some other demand source. The effect is the supply and demand being matched, but this time the demand side is what's being adjusted.
Alphabet's (NASDAQ:GOOG) Nest has a similar platform with Rush Hour Rewards. It works with utilities to compensate customers for turning down the air conditioning at peak hours. It's not widely used yet, but this is the kind of platform that could bring demand response to the next level.
California's problem will create solutions
Concepts like energy storage and demand response have been lurking in the energy background for years as potential solutions for problems that are on the horizon. But now that California has so much solar that it needs ways to move energy supply to different times of the day or reduce demand at certain times, we could see a real business model emerge.
That creates a major opportunity for companies like Tesla Motors, EnerNOC, Alphabet, and other energy innovators to provide solutions to the energy industry.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (C shares), EnerNOC, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.