Energy markets are complex. From one jurisdiction to another, businesses’ experiences with sourcing and securing electricity or natural gas can vary greatly.
For example, some states have deregulated energy markets, which means the local government has relaxed regulations on the generation and distribution of electricity and natural gas, allowing private businesses to compete for your contract.
In this blog, we’re discussing deregulation in detail — particularly deregulated electricity markets. We’ll go over what it means, why it can be a good thing for businesses, a few common challenges some often run into, how to overcome them, and more.
A Brief History and Timeline of Energy Deregulation in the U.S.
Prior to the passing of the Public Utility Holding Company Act of 1935 (PUHCA), giant holding companies dominated the electricity sector. PUHCA aimed to curb the market power of these holding companies and improve consumer protection by:
- Requiring registration and oversight by the Securities and Exchange Commission (SEC).
- Limiting energy company operations to a single state or a single integrated system.
- Forcing divestiture of unrelated businesses, separating them from the regulated utilities.
The PUHCA effectively made it easier for independent power producers to enter the market.
In America’s later pre-deregulation era in the 1970s, the oil shock of 1973-74 sent energy prices soaring, spurring the government to introduce more regulations to ease the country’s dependence on foreign oil.
Come the ’90s, Congress passed the Energy Policy Act of 1992 (EPACT92) on October 24 of the same year which, like the PUHCA, allowed new players to enter the wholesale electricity market.
In the late ‘90s, several states, like California and Texas, passed legislation enabling retail competition. These bills were followed closely by federal policies like Order 2000 in 1999, which further facilitated deregulation by establishing Regional Transmission Organizations (RTOs) to manage the power grid.
Contemporary Deregulated Electricity Markets Explained
A modern deregulated energy market — also known as an open, competitive, or free energy market — is a system in which the government removes or relaxes regulations on the generation, sale, and pricing of electricity or natural gas.
Core components of a deregulated energy market include:
Wholesale Markets
This is where electricity itself is traded. Generators submit bids to sell electricity at a certain price, and retailers or utilities looking to buy electricity submit bids for how much they are willing to pay. An independent entity oversees the market and determines the clearing price, which is the price at which electricity is bought and sold.
Retail Electric Suppliers (RES)
These are the companies that compete for your business. They buy electricity from the wholesale market and then sell it to you, the customer. They can offer different plans and electricity rates, such as fixed-rate, variable-rate, or plans that offer discounts for using electricity during off-peak hours.
Transmission and Distribution Utilities
Even though generation and retail sales are deregulated, the infrastructure for delivering electricity often remains regulated. These utilities are responsible for maintaining the power lines that carry electricity from the generators to your business. They typically charge a separate fee for energy delivery on top of the price you pay for the electricity itself.
Contemporary Deregulated Natural Gas Markets
For natural gas, the market structure is similar, wherein it’s traded as a commodity in wholesale markets. Here, though, prices are influenced by factors such as supply and demand, weather conditions, storage levels, and geopolitical headwinds.
Where the natural gas market begins to differ is in how it’s transported. Transportation capacity is traded separately from the commodity itself, and pipeline operators sell capacity rights to transport natural gas through their systems.
Deregulated States and Canadian Provinces/Territories
- Connecticut.
- Delaware.
- Massachusetts.
- Illinois.
- Maine.
- Maryland.
- New Hampshire.
- New Jersey.
- New York.
- Ohio.
- Pennsylvania.
- Rhode Island.
- Texas.
California, Georgia, Michigan, Oregon, and Virginia have deregulated markets, but only for some commercial & industrial energy consumers.
Interestingly, electricity and natural gas markets are run independently of one another. So, states with a deregulated market for electricity might not have deregulated natural gas. To cover our bases, the following states offer deregulated natural gas only:
- Colorado.
- Florida.
- Indiana.
- Kansas.
- Kentucky.
- Montana.
- Nebraska.
- Nevada.
- New Mexico.
- South Dakota.
- Tennessee.
- West Virginia.
- Wisconsin.
- Wyoming.
Deregulated Electricity in Canada
In Canada, Alberta and Ontario are the only provinces that have deregulated wholesale electricity.
Benefits of a Deregulated Electricity or Natural Gas Market
Simply put, there are myriad benefits and drawbacks to each type of energy market. The problem is that depending on which state you operate your business out of, it’s either regulated or not, and you won’t have a choice unless you migrate your business to another state.
But the good thing is that, at least in a deregulated market, you have far more freedom and flexibility to work with an electricity supplier who can meet your needs for a fair price.
Here are a handful of benefits businesses can expect from a deregulated market:
Increased Competition
Deregulation fosters competition among electricity suppliers by driving innovation as suppliers compete to one-up each other for business. Beyond that, competitive pricing and superior customer service are byproducts of deregulation that directly benefit energy consumers.
Consumer Choice
Deregulated markets empower consumers with the freedom to choose their electricity supplier based on various factors like price, contract terms, access to renewable energy options, and more. This makes it much easier for businesses to choose a supplier that closely aligns with their needs, goals, and preferences — promoting transparency and accountability in the marketplace.
Efficiency and Flexibility
Deregulation promotes efficiency and flexibility in electricity markets by allowing resources to be allocated based on market demand and supply conditions. Suppliers can respond more quickly to changing market dynamics, optimize resource utilization, and improve national grid reliability, resilience, and stability. This flexibility can enhance energy security and reduce the risk of supply disruptions.
Economic Growth and Development
A deregulated electricity market can stimulate economic growth and development by fostering entrepreneurship, investment, and job creation in the energy sector. Increased competition and innovation can drive productivity gains, attract capital investment, and spur technological advancements that benefit the economy as a whole.
So, What Are the Challenges of Deregulated Electricity and Natural Gas?
Despite its many benefits, deregulated electricity markets come with a few caveats, too. Luckily, most if not all are easily navigated with the right industry knowledge and foresight. Common challenges businesses face when wading through electric deregulation on their own include:
- Price volatility: With deregulation, electricity prices can fluctuate more widely based on factors such as demand, energy supply, fuel costs, and market conditions. This volatility can make budgeting and financial planning more challenging for businesses.
- Risk management: Deregulation exposes businesses to more risk, including the risk of price spikes, supply disruptions, and contract disputes. Managing these risks requires sophisticated risk management strategies and tools.
- Market transparency: In deregulated markets, businesses may struggle to access transparent and reliable information about electricity prices, market trends, and supplier offerings. Lack of transparency can hinder decision-making and limit the ability to identify cost-saving opportunities.
Many of the challenges faced by businesses when it comes to deregulated electricity remain true for deregulated natural gas, too; however, there are a few unique obstacles to note:
- Seasonal demand: Natural gas demand is often seasonal, with higher demand in winter for heating purposes. This seasonality can lead to significant price fluctuations.
- Tariff structures: Natural gas tariffs can be complex, with different rates for transportation, distribution, and storage. Understanding and managing these tariffs requires specialized knowledge.
- Sustainability goals: Companies aiming to achieve sustainability goals might find it challenging to reconcile these with the use of natural gas, pushing them to explore renewable alternatives.
Getting the Most Out of Deregulated Electricity Markets: Deregulation FAQ
Navigating deregulation can be challenging, especially with no external support. Thankfully, energy consultants exist to provide businesses just like yours with sage advice, support, and management to help you secure a better electricity rate and contract terms that work for your business — not against it.
Here are a few FAQs to further clear up a few key aspects of electricity deregulation and more:
What Is the Difference Between Regulated And Deregulated Power?
In regulated power markets, government authorities oversee and regulate all aspects of electricity generation, transmission, distribution, and pricing. A single utility company typically operates as a monopoly within a designated geographic area, with regulated rates set by government agencies to ensure affordability, reliability, and universal access to electricity.
In deregulated power markets, competition is introduced by allowing multiple suppliers to enter the market and offer electricity to consumers. Deregulation separates electricity generation from transmission and distribution, allowing consumers to choose their electricity provider from a range of options. Prices are determined by market forces, and consumers have the freedom to shop for electricity based on factors such as price, contract terms, and service quality.
How Do You Find the Best Electricity Provider In A Deregulated Market?
While it’s difficult to label any one supplier as “the best” in a deregulated market, finding one that can offer a contract tailored to your unique needs is the goal. While you can do it on your own, it takes time, knowledge, and lots of resources.
Instead, working with an energy procurement partner, like EnerConnex, gives you access to an unlimited knowledge base and consultants that work with you to secure favorable contracts.
A Procurement Partner To Help You Navigate Complex Markets
EnerConnex has the energy expertise and technology required to demand the best from energy suppliers.
We’ll work with you to help you understand your energy needs better, forecast future consumption, and choose a contract that powers your business for less.
Discover how an energy consultant can help you navigate the complexities of deregulated electricity — learn more about our energy procurement services.