When the Federal Government passed legislation to open the U.S. electricity and natural gas markets for competition in the early 1990s, more and more states started to deregulate their energy markets, at least to a certain degree. With deregulation, electric and gas choice were introduced. Retail energy providers entered the markets and offered their services to customers that, until then, had no choice but to purchase their electricity and gas from their respective utilities.
Today, retail energy providers (REPs) offer their electricity and gas services in 30 at least partially deregulated U.S. states and the District of Columbia. Deregulation introduced competition to these markets, which brought many benefits to consumers, such as competitive pricing and improved customer service.
Buying Energy in A Regulated Market
If you live in a regulated state or area, you have no choice when it comes to signing up for an electricity or natural gas plan. When you decide to buy electricity or gas, you typically contact your local utility to have them deliver the energy to your home or business. In some areas, you may even have to call a single utility for both electricity and gas. The utility company takes care of everything, and you usually don't have to worry about finding the right plan or rate structure. Often enough, there is just one option. You also don't have any alternatives but pay the prices your utility asks for a kilowatt-hour (kWh) of electricity or a therm of gas. There simply is no other option unless you can generate the electricity yourself.
Still, the electricity or gas bill from your utility typically includes two separate charges. One is for the energy delivery to your home, and the other is for the energy supply, which includes power generation and transmission. Utilities don't generate the power but purchase it on the wholesale market, even when it's coming from a parent company. This supply cost typically gets passed on to the customer as a supply charge. The utility adds the charges for the cost related to the delivery of the electricity to your home. This distribution charge covers construction, maintenance, and operation of the delivery infrastructure such as poles, wires, substations, or meters needed to connect your home or business.
Buying Energy in A Deregulated Market
In deregulated markets, customers can choose their energy supplier. While some utilities are also energy suppliers, there are typically a number of retail energy providers active in these markets. Depending on your state, REPs are sometimes called alternate suppliers, third-party suppliers, or simply licensed electric suppliers.
You can shop around for the supplier you like with electric choice, with the best rate structure for your needs. You can search online or call your utility to find out what retail providers offer their services in your city. Once you pick a supplier, they will take care of switching you over to your preferred plan.
Your power or gas will continue to be delivered to your home by the local utility, which owns the power infrastructure in your area, regardless of who your energy supplier is. The reliability and functionality of your energy service are not affected by the switch.
When you switch suppliers, regardless if you've been with a different REP or with your local utility, you can save money on the supply portion of your electric bill. The delivery or distribution portion is handled by your utility and will remain the same. Typically, you'll receive one single bill from your utility with two separate sets of charges reflecting the supply cost from your REP and the delivery cost from your utility.
What Are Retail Energy Providers?
In competitive markets, consumers can choose what company supplies the energy to their homes or businesses. Retail energy providers offer their services based on utility service areas. That means their energy rates can vary depending on your local utility. Depending on how far your state is deregulated, retail energy providers may supply both electricity and natural gas. However, the term REP is often used to describe electric suppliers specifically.
Retail energy providers do not produce electricity; they purchase generators' power on the wholesale electricity market and sell it to their customers, just like utilities do. REPs often benefit from the power of scale, servicing customers in more areas than utilities with more consumers and aggregating their buying power.
Retail suppliers do not always offer cheaper rates than utilities. However, they do offer a bigger portfolio of plans and services, such as renewable energy plans, time-of-use billing, fixed and variable rates, or different term lengths that come with different rates. These plans are better cut to the various customer needs. In competitive markets, retail suppliers often offer incentives and focus on customer service to attract potential customers.
Utilities can also function as retail providers. In regulated markets, they purchase power from generators and sell it to their customers. At the same time, they deliver the energy in support of their utility function. Suppose you live in a deregulated market, but you have never switched to a retail energy provider. In that case, your utility will also purchase the power for you at the wholesale market rate. This rate gets passed on to you on your utility bill as a supply charge.
Retail Suppliers vs. Utility Companies
Utility companies do sell power to their customers in regulated markets or to those in deregulated markets who have never switched. However, their main purpose is to operate and maintain the distribution infrastructure, roughly from the point the electricity is converted to a lower voltage to the meter in your home. Your utility is responsible for your monthly meter readings, fixing power outages or gas leaks, or for physically connecting your home to the grid.
Retail suppliers don't own the physical energy infrastructure to generate, transmit or distribute the energy; they purchase the rights to large volumes of this electricity and resell the energy as a product to their customers in deregulated energy markets. The market price pays generators for the actual electricity and independent system operators (ISOs) or regional transmission organizations (RTOs) for the transmission of the electricity to the local utility.