California and the Duck Curve

and why Florida has a far better path ahead for solar

No state has embraced solar energy like California: US Energy Information Administration data show it with more than 38 percent of the country’s installed residential rooftop solar installations, as well as 35 percent of commercial and industrial systems.

The rooftop share is nearly five times second place Arizona’s. C&I is more than three times number two New Jersey’s. And California is still expected to extend its lead in coming years, despite recent cutbacks in rooftop subsidy under its “net metering” system.

California’s rooftop and commercial solar owners have slashed their utility bills, which are otherwise among the highest in the US. And they’ve pushed forward the state’s renewable energy and decarbonization goals.

Unfortunately, the state’s solar deployment has also created a major imbalance—in the shape of a duck.

In the mid-1990s, California stripped power generation from its regulated utilities, with the exception of large hydro and nuclear plants. Instead, Edison International, PG&E and Sempra Energy basically became power grid companies. The state set up the California Independent System Operator (CAISO) to run the system. And owners of power plants competed to provide the least cost electricity to consumers and businesses.

In the later 1990s, 15 other states and the District of Columbia adopted some version of the California model. Then came the implosion of Enron and an historic power crisis. But the state stuck to its new system, even as it began aggressively pushing solar deployment with new incentives and regulation for utilities.

By 2015, CAISO was consistently making an ominous observation: By pushing electricity prices ever-lower during the day, solar was actually creating system imbalances and triggering much higher prices when the sun went down, and Californians returned home from work.

Plunging electricity prices made it impossible for 24-hour “baseload” natural gas, hydro and nuclear plants to run economically during the daylight hours. And as a result, operators were shutting them down in favor of “peaker” facilities, which could be started up at night and then shut down when the sun came up.

The peaker plants were far more expensive to run than the baseload facilities they replaced. And they were also over time less reliable, since every start up and shut down created wear and tear on parts, as well as a potential negative event if something didn’t work.

The simple graphic CAISO used to make its point came to be known as the “duck curve,” which tracks the wholesale price of electricity over a 24-hour period. And the trends that were already well established in 2015 have only become more pronounced since. In fact, we’ve actually seen California wholesale prices go negative during the day due to a surplus of solar, only to spike at night.

The state’s solution to the challenge has been an unprecedented effort to ramp up battery storage, for individual homes and businesses but especially at the grid level. Companies with major projects in operation and under construction include AES Corp and Vistra Energy, which recently built a large facility backed by a long-term contract with PG&E.

Installing and operating massive battery level storage in California will be a profitable business for many years to come. But it’s fair to say battery storage capability is neither technically capable nor widely deployed enough to sure the state’s duck belly problem. And with the future cost of battery metals highly uncertain, it will also likely be quite expensive, despite the immense financial incentives of the Inflation Reduction Act.

That’s will force California to rely on conventional sources of energy for years to come. Earlier this year, the state’s governor overrode fierce anti-nuclear opposition to reach a deal with PG&E to keep the Diablo Canyon facility open. And last week, AES Corp and California’s Department of Water Resources reached a deal to keep the 2.3-gigawatt Southland power plant open and under a profitable contract through 2026.

The natural gas-fired facility was originally supposed to be shut down at the end of this year. But with the state repeatedly experiencing power shortages during periods of peak demand—especially in summer—there’s a growing realization of the limitations of a system that’s increasingly dependent on solar alone to keep the lights on.

Given California’s duck curve problem, it’s no wonder other states are increasingly taking different roads when it comes to solar. And in the 35 states where electricity generation is still regulated, I expect companies to take a hard look at the NextEra Energy model in Florida.

At the company’s Q1 earnings call last week, management called solar the lowest cost electricity source, forecasting hundreds of millions of dollars of savings for customers in coming years. And it doubled planned deployment at its regulated Florida Power & Light utility over the next 10 years, which would take solar’s current 5 percent share to 35 percent by 2032.

NextEra’s solar deployment plan is the major driver of its long-run earnings growth guidance, which the company affirmed in full last week. Cost savings and improved resiliency mean its path enjoys support of Florida regulators and politicians, who are not otherwise inclined to support “green” energy. And the company has wisely diversified its solar panel supply chain, limiting exposure of its plans to a suddenly tariff-happy US Congress.

That’s a model customers, regulators, politicians and investors alike can get behind. And it’s happening in a small government state—Florida—that unlike California never deregulated its electricity sector or imposed renewable energy quotas on utilities.