Regulated and Deregulated Energy Markets, Explained
The words “energy deregulation” can spark a vocal response – some in favor, some vehemently opposed. Those in favor of the progressive wave of deregulation in the United States cite the fact that deregulated energy rates have fallen significantly more than regulated rates since 2008. Those against it will say deregulation is a throwback to the Wild West and reminds us of market manipulation cases (that occurred in California in 2003, for example).
Deregulation began in the 1970s with the passage of the Public Utilities Regulatory Policies Act (PURPA), which created a structure for Independent Power Producers. The market was then truly opened in 1992 with the Energy Policy Act, which eliminated restrictions on the price that would be charged for wholesale electricity. Deregulated states fell like dominoes for years, though the pace of new markets for consumer electric choice has slowed in recent years.
Regardless of your opinion, deregulation is here, and many large, multi-site energy users have operations that span both regulated and deregulated markets. With this in mind, it’s important to not only understand the differences between regulated and deregulated markets, but also the resulting impact on your purchasing strategy so that you can make the best procurement decisions for your organization.
Image Source: www.deregulationofenergy.com
Because you have little control over the rate you are charged in regulated markets (aside from optimizing your tariff), when many of our customers first engage with us they are thinking only about their strategy respective to deregulated markets.
This siloed approach misses an opportunity to think about the relationship between regulated and deregulated markets more holistically. Before I go into what you can do to optimize your energy procurement strategy by leveraging your position in both types of markets – that’s coming soon in another blog post as a follow-up to this intro – it’s important to start with an explainer on the difference between the two.
Regulated and Deregulated Markets 101
Regulated markets feature vertically-integrated utilities that own or control the entire flow of electricity from generation to meter. Examples in the U.S. include Florida, Colorado, Idaho, and Kentucky.
Conversely, utilities in deregulated markets must divest all ownership in generation and transmission, and are only responsible for:
1) Distribution, operations, and maintenance from the interconnection at the grid to the meter;
2) Billing the ratepayer; and
3) Acting as the Provider of Last Resort (POLR).
Deregulated markets feature grid operators that administer wholesale markets to ensure reliability on the grid and prevent blackouts. Multiple retail suppliers (or load serving entities, known as LSEs) buy generation and sell electricity to end-users.
Several states have become deregulated markets over the last 20 years, largely in the Northeast, Mid-Atlantic, and Texas. Other states, such as California, are partially deregulated or have had deregulation suspended.
In my next post I’ll outline some of the most important factors you should understand around your presence in regulated and/or deregulated markets, and how to optimize your energy supply purchasing strategy based on your unique position.
In the meantime, click the link below to read a helpful framework for selecting a strategic energy advisor who can help you make sense of energy market ins and outs.