Regulated vs. Deregulated Electricity Markets
- January 9, 2018
Traditionally, regulated electricity markets existed across the United States, restricting customer choice. It wasn’t until the 1970’s that the idea of deregulation came into play, with the passage of the Public Utilities Regulatory Policies Act. This act began an age of restructuring for the energy industry. Consequently, in 1992, the passing of the Energy Policy Act opened the market further. The Energy Policy Act’s goals were to increase the use of clean energy and energy efficiency. It broadened choices for utilities and created new rate-making standards. Since then, deregulated energy markets have spread across various states’, but what are the differences and what does the future hold for electricity markets?
What is a regulated electricity market?
A “regulated electricity market” contains utilities that own and operate all electricity. From the generation to the meter, the utility has complete control. The utility company owns the infrastructure and transmission lines then sells it directly to the customers. In regulated states, utilities must abide by electricity rates set by state public utility commissions. This type of market is often considered as a monopoly due to its limitations on consumer choice. However, its benefits include stable prices and long-term certainty.
What is a deregulated electricity market?
A “deregulated electricity market” allows for the entrance of competitors to buy and sell electricity by permitting market participants to invest in power plants and transmission lines. Generation owners then sell this wholesale electricity to retail suppliers. Retail electricity suppliers set prices for consumers, which are often referred to as the “supply” portion of the electricity bill. It often benefits consumers by allowing them to compare rates and services of different third party supply companies (ESCOs) and provides different contract structures (e.g. fixed, indexed, hybrid). Also, in a deregulated market, there is an increased availability of renewable sources and green pricing programs.
While deregulated electricity markets offer a broader range of renewable energy options, there are still options for consumers in regulated states to reap the environmental and economic benefits of green power. For instance, Power Purchase Agreements allow for the investment in a project outside of your state, providing benefits through renewable energy certificates (RECs). Although unable to incorporate renewables directly into your electricity supply contract like in deregulated markets, the green options are growing for regulated markets.
As seen below, the United States stays fairly divided on deregulated vs. regulated electricity markets. Deregulation gained large support when it was introduced in the 1990’s, but has been met with some challenges along the way. For example, the California energy crisis in 2000 led to many states worrying that total deregulation may cause market manipulation. But the increase in consumer control over decision-making pushes the growth of deregulation.
While there are many differences in regulated vs. deregulated electricity markets, most states see the most benefit with having a combination of the two.