California electricity buyers have another market development to watch: the return of a potentially historic El Niño weather pattern.
El Niño occurs when ocean temperatures in the tropical Pacific become unusually warm, altering weather patterns across North America. Current forecasts suggest a particularly strong event during the winter of 2026–2027.
For commercial and industrial electricity buyers, this matters because weather influences both the supply of electricity and the demand for it.
Changes in snowpack, hydroelectric generation, cooling demand, and natural gas consumption can all affect California electricity prices.
The challenge is understanding how these factors interact and what they mean for your energy purchasing strategy.
California relies on a diverse mix of electricity resources, including solar, wind, hydroelectric, and natural gas generation.
Hydroelectric power is particularly sensitive to weather. Snow that accumulates in the Sierra Nevada and other Western mountain ranges provides water for hydroelectric generation as it melts. The amount of snow, when it melts, and how reservoirs are managed all affect how much water is available to generate electricity. These conditions can influence how California’s electricity market performs later in the year.
The important variable isn't simply how much precipitation California receives. It's how much water remains available for electricity generation when demand is highest.
If hydroelectric production underperforms, California may need to rely more heavily on natural gas-fired generation.
Because natural gas generation often helps establish wholesale electricity prices, reduced hydro availability can put upward pressure on electricity costs.
Conversely, strong snowpack and healthy reservoir levels can help moderate those costs.
The other side of the equation is electricity consumption.
California's electricity demand is particularly sensitive to summer temperatures. When temperatures climb, air-conditioning loads increase across commercial buildings, manufacturing facilities, warehouses, and other businesses.
During prolonged heat waves, the grid may need additional generation to meet peak demand.
That can push more expensive generating resources into operation and increase wholesale prices, particularly in the day-ahead and real-time markets.
El Niño doesn't guarantee hotter California summers. Its strongest and most predictable North American weather effects generally occur during winter.
But the conditions that develop over the coming months, including snowpack, reservoir storage and regional temperatures, can influence how California's electricity market performs during the following summer.
For businesses with exposure to wholesale market prices, those developments deserve attention.
There are four important market factors to watch.
Hydroelectric generation. If snowpack is below normal or melts earlier than expected, hydroelectric output may be reduced during periods of high demand. Less available hydro can increase reliance on other generation resources and put upward pressure on wholesale prices.
Cooling demand. Higher summer temperatures increase electricity consumption and can create tighter supply conditions. During significant heat events, day-ahead and real-time prices may rise sharply.
Natural gas prices. When hydroelectric production declines, natural gas-fired generation often becomes more important. Changes in natural gas prices, pipeline constraints, and storage levels can therefore have a greater influence on electricity costs.
Forward market pricing. Electricity suppliers and wholesale markets incorporate expectations about future weather, generation availability and demand into their pricing. As forecasts change, prices for future delivery periods can change as well.
The key is that these factors don't always move in the same direction.
A wet winter could improve hydroelectric availability and help moderate electricity prices, while higher natural gas prices or an unusually hot summer could offset those benefits.
That's why energy buyers should avoid assuming that a strong El Niño automatically means higher or lower electricity prices.
The first step is to pay attention to the indicators that matter.
Monitor snowpack and reservoir levels. California's winter precipitation and spring snowpack measurements provide valuable information about potential hydroelectric availability. Conditions in the Pacific Northwest also matter because California's electricity market is interconnected with the broader Western grid.
Watch natural gas markets. Gas prices, storage inventories and regional transportation constraints can significantly affect California wholesale electricity prices, especially when hydroelectric generation is limited.
Understand your market exposure. Businesses with index-based contracts, day-ahead pricing, real-time exposure or pass-through provisions may be more directly affected by weather-driven price volatility than those with fully fixed-price arrangements.
Review future purchasing opportunities. Changes in weather forecasts can create movements in forward electricity prices. Depending on your contract structure and risk tolerance, it may make sense to evaluate opportunities to hedge portions of your future electricity requirements rather than waiting until an existing agreement expires.
None of this means businesses should automatically lock in electricity prices because El Niño is strengthening.
The right purchasing strategy depends on your load profile, current contract, budget objectives, and willingness to accept market risk.
But it does mean that weather developments should be part of your energy procurement discussions.
California energy buyers can't control the weather, but they can prepare for its potential impact on electricity markets.
A strong El Niño introduces uncertainty around precipitation, snowpack, hydroelectric generation and future electricity demand. Those variables can influence wholesale prices and create both risks and purchasing opportunities.
The goal isn't to predict the weather perfectly. It's to understand how changing weather conditions could affect your electricity costs and make informed purchasing decisions before those risks become expensive.
With more than 30 years of experience helping California businesses navigate energy markets, I've seen how quickly changing conditions can affect electricity purchasing decisions.
If you'd like to understand how El Niño and other market developments could affect your electricity costs, it’s worth a quick conversation.
We can review your current contract, market exposure, and future purchasing requirements to identify risks and opportunities specific to your business.