Energy Markets Explained: Deregulated vs. Regulated Markets
Every day, you make decisions involving the power grid.
Those decisions are likely automatic. You switch lights on and off. You use appliances like coffee machines and blenders to make mornings a little more bearable. All of this requires energy, and usually, our energy consumption occurs habitually and without a second thought.
But how that energy gets to you — as well as how much you pay for it — is worth some extra consideration, because those factors depend on whether you live in a deregulated or a regulated energy market.
To get a better sense of how deregulated markets work, it’s easiest to compare them with regulated markets first.
A single utility owns the entire power supply chain. The utility ensures that power is generated, sent to the grid, and finally reaches homes and businesses. This means customers have little to no choice in who generates their power and how much they pay for it.
The utility controls distribution and the maintenance of wires and poles, but companies known as Retail Electricity Providers (REPs, aka suppliers) provide the delivery, or supply, of electricity to customers – homes and businesses.
Simply put, deregulation breeds market competition among various power providers. Said competition creates a downtick in prices and provides customers with more purchasing options rather than relying on a single utility monopoly.
Where To Find Deregulated Markets
The “better choices, better prices” bit of deregulated markets has probably raised a few pensive eyebrows by now. But here’s the catch: not every state operates under a deregulated market. Deregulation laws vary according to state, and those laws aren’t always consistent. Zooming into the fine print of the laws can get muddy, since not every city or region in deregulated states is itself deregulated. Austin, Texas is a good example of this — Texas was one of the first states to adopt deregulation laws, but its capital city Austin remains regulated.
Deregulated energy markets are available in all or part in 27 states.
What’s The Big Deal With Deregulation?
Deregulation promises better options, lower prices, and happier customers. Sounds like a pretty sweet deal, right?
That depends on who you ask. If you Google “is a deregulated energy market better than a regulated one?”, you’ll be bombarded with information from both sides of the coin. Let us break it down for you.
Win for Deregulation
As we mentioned earlier, the benefits in regards to consumer choice are clear: deregulation offers more options and better prices. However, making a decision in the face of so many choices can be overwhelming, especially for business and building owners. Already slammed with an ever-growing to-do list, some people would rather just have the decision made for them.
Another plus to deregulated markets? Suppliers will often bend over backwards to provide their customers with superb customer service, loyalty programs and incentives to join or stay. In a state like Texas with 100s of suppliers, you will commonly see free months of power for first time residential customers or energy efficiency rebates for businesses.
Finally, it’s typical to see more renewable energy options within deregulated options. Energy suppliers often provide an easy, low-cost way to move your home or business to renewable power. More advanced solutions such as rooftop solar–while certainly not prohibited in regulated markets–are much more cost-effective and common in deregulated states.
Cons for Deregulation
Despite its apparent bonuses, deregulation hasn’t come without its fair share of controversy. The Sarbanes-Oxley Act of 2002 was enacted to crack down on corporate fraud. It went into effect after energy giant Enron’s financial misconduct, and that’s just one example of fraud and market manipulation in the energy sector.
Critics have also argued that deregulation doesn’t actually lower prices, though evidence supporting this claim varies. A recent Ohio State University study details that while energy prices are on the rise nationwide, deregulated states only saw prices increasing by 47% over the last two decades, while regulated states saw a 66% increase.
Texas has seen the most stable decline in their power prices partially due to huge amounts of wind power coming online but also because of the 100s of suppliers making Texas the most competitive market in the country.
Deregulated states only saw prices increasing by 47% over the last two decades, while regulated states saw a 66% increase
Deregulation: Growth and Gains
The benefits of a deregulated market touch almost all facets of our lives. Improved energy technologies, like eco-friendly innovations and Internet-connected equipment sensors, have also emerged as a result of staunch market competition. That same competition also drives prices down, as REPs work to win the hearts and wallets of customers with the most affordable prices. This blend of competition and innovation has also been lauded as a catalyst for city and state-wide economic growth in deregulated areas.
What’s more, REPs that operate in deregulated markets are known to offer superior customer service — again, the competition is to thank for that, as companies run the risk of losing customers to other power providers should their services fall flat.
Overall, deregulation shows promise in delivering high quality energy services at low costs, propelling us into an innovative, energy-efficient future.