AWE takes place in the Investigations Sector, a closed sector of the Oldest House formerly used to investigate various Altered World Events. Jesse is summoned to the sector by an apparition of Alan Wake (the protagonist of Remedy Entertainment's eponymous video game), where she discovers that the sector was closed off several years prior after a major breach of containment. In the sector, Jesse learns of the Bright Falls AWE (the Altered World Event encompassing the events of Alan Wake), including Cauldron Lake, a naturally-occurring Threshold in the town of Bright Falls which enabled artists' works of art to rewrite reality. Dr. Emil Hartman, a psychologist, attempted to study and control the lake's power via troubled artists kept at his clinic. However, after attempting and failing to do so with Wake, Hartman was confronted by agents of the FBC, who took all of Hartman's research.
Hartman ultimately resorted to diving into Cauldron Lake himself in a final attempt to study the forces within it. He was immediately taken over by the Dark Presence (known to the FBC as "the Shadow"), a monstrous entity and the antagonist of Alan Wake, after which he was contained by the FBC at the Oldest House. However, Hartman soon breached containment, forcing the FBC to abandon most of the sector. During the Hiss invasion, the Hiss entered the sector and took over Hartman and the weakened Dark Presence; the Hiss and the Presence amplified one another, twisting Hartman into a monstrous entity. Inside of the sector, Jesse is contacted by Frederick Langston, who tells her to eliminate Hartman so that the sector can be retaken. All the while, Jesse visits the Oceanview Motel, where she experiences visions of Alan through a doorway marked with a spiral.
Eventually, Jesse is able to reach the Bright Falls AWE area of the sector and kill Hartman, ending the threat. Langston then informs her that the FBC has received a possible AWE report from Bright Falls, but notes that the date of the report is several years in the future.