A compressed air energy storage (CAES) system utilizes compressed air stored in a cavity for electric power and cold production. During periods of excess power production, atmospheric air is compressed then cooled in stages using energy from a motor/generator. Condensed water is then separated from the air which is then stored in a cavity. When there is an energy demand from the CAES system, the stored compressed air is heated using heat from an external low grade energy source such as refrigerated substances, surrounding water, surrounding air, waste heat sources and solar energy. The heated compressed air is then expanded through a plurality of expansion stages to provide mechanical power to the motor/generator for generating electricity.