Deregulation in the energy market brought competition to utilities and unbundled generation, transmission and distribution of electricity and also natural gas. Where the market is deregulated, consumers are able to purchase their electricity or natural gas from any retail electricity provider (REP) or supplier that offers their service in that area. This generally led to more competitive energy prices.
Advantages of a Deregulated Market
Electricity and natural gas market deregulation gives consumers more options of where to purchase their electricity and natural gas. Energy suppliers now even offer a choice of what type of electricity you can purchase in respect to how the electricity was generated, i.e. you can pick a renewable or “green” power plan. You can even set a limit on how dirty your electricity can be. In other words, you may have the option of choosing coal to oil, natural gas or nuclear generated electricity.
Retail suppliers in deregulated markets compete by offering lower rates, different rate structures and special incentives like time-of-use rates. They tailor their plans to specific groups of customers offering better individual solutions depending on the customers’ behavior or conscience.
With more competition entering the market, electricity prices are getting more and more competitive. Independent energy suppliers purchase electricity on the wholesale market and they can offer cheaper rates.
A Long-Held Monopoly
Utility companies have been holding a monopoly to supply energy consumers in their geographic areas since the 1930’s. At the same time gas and electric companies owned the infrastructure to supply their customers and typically also the power generation plants.
This monopoly existed for decades until Congress passed the Public Utility Regulatory Policies Act (PURPA) in 1978. The law ended the power generation monopoly by encouraging non-utility power producers to enter the market and by favoring more power sources such as renewable and co generation.
The energy market in the United States was eventually deregulated with the Energy Policy Act of 1992 and consequent Federal regulations in the following years. In the mid-1990’s, the first states started to deregulate their markets while choices for consumers remained very limited.
When California started partial deregulation, this move was considered one of the reasons for the California energy crisis of 2000 and 2001. While there were many other factors causing an extreme increase in electricity prices in California, other states remained hesitant in opening up their markets.
In 2002, the electricity market in Texas was mostly deregulated and quickly became an example for the rest of the country. While the new law did not meet the expectation of lowering electricity rates and still left a significant amount of consumers in a regulated market, it effectively ended the decades long electricity monopoly.
Texas currently ranks first for energy market deregulation. Approximately 85% of the state population have access to an energy choice; at least in the electricity market.
Today’s energy markets are still mostly regulated throughout the United States. States across the country have a wide spectrum of very different approaches and different levels of deregulation.
While some states only allow large industrial or commercial customers to choose their suppliers, other states limit natural gas and electric choice programs to residential costumers.
In some states only, the electric market is deregulated while in others deregulation only applies to natural gas. In a few states both markets are deregulated. However, no state is entirely deregulated. Some states with deregulated markets even went back to a regulated market or dropped plans of deregulation.
While not all states are deregulated, deregulation laws vary significantly from state to state. They even differ between certain areas and cities within a state. This limits competition and is considered part of the reason the average difference in energy prices in regulated and deregulated areas is not very big.
Even in deregulated areas only about 40% of residential consumers utilized the choices provided and switched providers. Many utility customers never even considered switching providers.
While there’s concern that deregulation would raise electric prices, long-term trends don’t confirm this concern. Data collected by the U.S. Energy Information Administration shows the increase in electricity rates has slowed in deregulated states. While energy cost has been rising over the years, deregulation was able to offset some of that cost.
Energy prices are expected to rise further over the next years. As prices in deregulated areas are expected to grow slower, the difference in prices between regulated and deregulated areas is expected to grow.
As some states in the U.S. have put their energy market liberalization plans on hold, the recent trend is for more states to open up (some of) their markets. The latest state going to the polls about energy market deregulation was Nevada in November 2018. The plan to create a competitive energy market to replace NV Energy's monopoly by July 2023 failed after voters rejected the measure.
The Nevada vote to remain regulated is only part of the story. More and more large corporations are paying million dollar exit fees to leave the regional monopolies and choose their own suppliers. It is a good example for a trend towards more exceptions from regulation for wealthier customers.
While deregulation is being pushed by lobbying groups and organizations that benefit from deregulation, utility companies such NV Energy are spending millions to lobby against deregulation. Both sides have increased their spending over recent years. Money that was not spent on the nation’s aging power infrastructure.
The Nevada example shows a trend where support for deregulation also depends on how well a utility is doing their job in their assigned area. NV Energy had an ambitious renewable energy plan at the time of the vote that helped get the support it needed from environmental groups and a majority of the voters. As utilities across the nation are adapting their business models more to the needs of their customers, even in non-competitive markets there is less pressure for deregulation.
With more renewable energy entering the market and the installation of independent micro-grids and energy storage, new solutions are necessary. This may drive further deregulation but it will also influence regulated markets. Policies on the adoption of renewable energy have a great potential to introduce new models of deregulation that may be easier to adopt. Learn more about energy deregulation in our guide!