What would deregulated energy look like?

| 25th February 2019
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Energy deregulation offers the opportunity not only for more competitive energy rates but also allows some to choose from more renewable and green energy options.

Deregulation also means more choice for consumers. In markets with competition, customers can purchase green, renewable energy if they like.

Today, the energy markets in most states in the USA are what are called regulated monopolies, meaning consumers only have one choice for where they get their electricity.

This setup has its roots back in the early 1900s, and the US energy market has operated under regulation since that time, although numerous changes were made along the way.

The energy market became dominated by monopolies because of the massive costs of building infrastructure to deliver energy to customers. Few companies can make such huge investments, and having duplicate infrastructure would be less than ideal.

Electricity generation

For these reasons, the government allowed energy companies to become monopolies. Because monopolies have no competition, however, they can charge whatever they want.

To prevent utilities from increasing prices by too much, the government set up commissions to regulate them and decide the prices that utilities charge.

This system worked well for some time, but it also had drawbacks. Monopolies are less likely to innovate and find ways to reduce prices, and consumers have no choice in where they get their energy. By the 1990s, people began calling for reduced regulation of the energy market.

Today some states have deregulated energy markets, although it is still not the norm. Less than half have deregulated both their gas and electric markets. Some have deregulated just electricity, some have deregulated just natural gas, and they're deregulated to varying degrees.

The National Energy Policy Act of 1992 helped pave the way for deregulation. It made it easier for companies to enter the market and compete in electricity generation.

Competition

Order 888 from the Federal Energy Regulatory Commission helped separate power plants from electricity transmission businesses. This meant that private electricity generators could sell their energy wholesale to utilities who would then transmit it to customers.

Deregulated energy markets operate more like the markets for most other goods. They're open for competition, and customers can choose where they want to buy their energy from.

The utilities that send electricity to customers are like retail stores, which sells goods from numerous suppliers to customers. Generation companies that sell power to utilities are like the suppliers that sell goods to the retail stores.

In a deregulated energy market, customers pay the utility for their electricity but can choose which supplier provides that energy.

Energy deregulation has several benefits. The presence of competition encourages utilities to innovate to win over customers.

Renewable energy

Companies are encouraged to differentiate themselves from the competition by introducing unique programs, improving their customer service and offering energy from alternative sources. It also incentivizes them to lower their prices to beat out the competition.

Deregulation also means more choice for consumers. In markets with competition, customers can purchase green, renewable energy if they like. Even if these choices are more expensive than others, some customers may choose them to reduce their carbon footprints and encourage the growth of the renewable energy industry.

So, what would a future with completely deregulated energy markets look like? It's difficult to say precisely what would happen in this scenario, and this uncertainty has slowed the transition to full deregulation.

On the one hand, deregulation may result in a future in which utilities serve mainly as transmission and distribution companies.

Private companies would handle generation and sell their energy wholesale to utilities. The markets would likely have more renewable energy and other non-traditional energy sources. Consumers may also enjoy lower prices brought about by competition.

Farmers

Some worry, however, that deregulation could lead to price increases and unreliable electricity. This is what happened in the deregulated market of California in the early 2000s.

Several flaws in the design of retail choice programs caused this. The law prevented utilities from owning generation or signing long-term contracts, forcing them to buy energy on the short-term market. This left them vulnerable to price spikes.

California also left wholesale prices unregulated but put a cap on what utilities could charge customers, meaning that, in some scenarios, utilities could lose money. Because of these rules, manipulations of the market led to rapidly rising prices and blackouts.

Since then, states have learned from these mistakes. Eliminating rules such as those that caused California's energy crisis has resulted in deregulated energy markets that lower prices and give consumers more choice.

Low-income customers

Some markets, such as that of Germany, have been successfully deregulated for some time. In Germany, deregulation has encouraged smaller energy producers, such as farmers who install renewable energy resources on their farmland, to enter the market.

Meanwhile, some note that while competition is beneficial, leaving energy companies completely unregulated can result in other issues. If no regulations are present, energy companies may start using cheap, environmentally harmful sources of energy.

They might also stop offering programs such as those that help low-income customers afford energy. A potential solution to this is to leave the markets open to competition but require certain amounts of renewable energy, low-income program and other initiatives.

Even if we don't ever see an energy market with absolutely no regulation, we can still gain benefits from reducing regulation and encouraging competition. That seems to be the way the energy market is heading.

This Author

Emily Folk is a conservation and sustainability writer and the editor of Conservation Folks.

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