Regulated Versus Deregulated Electricity Markets
In today’s energy market, staying on top of the latest news is important. As cutting-edge advances in energy supply technology emerge, a new landscape is forming. It offers a fresh look at energy system frameworks and lays the groundwork for widespread success.
Regulated and deregulated electricity markets—and the risks and benefits associated with each—figure prominently in the energy market equation. Understanding the pros and cons of both regulated and deregulated electricity markets is essential for industry professionals and consumers alike. Equally important is a clear understanding of the underlying principles of each in terms of energy production, distribution, and supply.
What Is a Regulated Electricity Market?
A regulated electricity market, an integrated utility company controls everything from power generation, to distribution via the grid, to customer delivery, with oversight from a public regulator such as a state or regional government. Each utility company in a regulated market often has a near monopoly on power generation and supply within a given region.
How Does a Regulated Electricity Market Work?
A regulated electricity market operates vertically, with a single entity responsible for everything—from wholesale ownership, production, and transmission of energy to the retailer, and finally to the consumer. The controlling utility operates and manages all aspects of this process, usually overseen by some form of public regulator.
For much of the last century, regulation dominated the electricity market and it remains a primary approach for wholesale electricity transmission service. Reports estimate the number of electric utility companies operating in the United States is more than 3,300, with around two hundred providing power to consumers.
What Are the Benefits of a Regulated Electricity Market for Consumers?
Regulated electricity markets offer consumers relatively stable energy prices, public access, and long-term reliability. Because investor-owned electric utilities have to adhere to strict regulations set forth by public utility commissions, consumers generally experience fewer fluctuations in energy rates.
However, as energy infrastructure continues to age, and consumers become increasingly aware of the environmental damage caused by large scale power generation, new ideas such as transactive energy and peer-to-peer trading are gaining attention.
What Is a Deregulated Electricity Market?
In the latter part of the last century, public interests shifted. In the mid-1990s, the need for better energy efficiency, lower energy rates, greater use of renewable energy, and a desire for improved customer service drove policymakers to pass deregulation legislation. California led the nation (PDF, 709 KB) in efforts to deregulate the electricity sector with the passage of AB 1890 in 1996. Other states soon followed.
What did this mean exactly? Deregulated electricity markets give consumers the right to choose their electricity supplier at the retail level. It breaks the monopoly of a single source for the generation, transmission and delivery of power. Currently the US consists of a hybrid of energy market options.
How Does a Deregulated Electricity Market Work?
A deregulated or restructured electricity market allows competition to enter the energy market. Multiple companies can generate power, without also needing to build a grid for transmission and delivery. An increase in electricity producers leads to competition and greater efficiency, driving down energy rates for consumers, and improving quality of service. It can also give consumers creating surplus energy the chance to become prosumers, in which they actively participate in the energy market. They do this using a variety of technologies, such as solar panels, that are located near where the electricity will be used.
What Are the Benefits of a Deregulated Electricity Market for Consumers?
The growing trend toward a deregulated market environment offers more flexibility for those who self-generate power. It potentially increases competition, leading to improved efficiency and lower costs. It also makes distributed power generation much more feasible. As the planet faces greater climate challenges and weather events that strain existing energy supplies and the nation’s infrastructure, renewable-based microgrids (PDF, 1 MB) can improve the resilience of our energy supplies too.
The US infrastructure of electricity grid markets is complex. Electricity deregulation opens the energy market to innovative new ways of producing and distributing energy—and how the public consumes it.
Pros and Cons of Deregulated Versus Regulated Electricity Markets
Before looking at the pros and cons of a deregulated electricity market versus a regulated market, it is useful to consider the early years in the energy sector. Before government oversight became the dominant approach, deregulation was far more common.
Several key historical milestones deeply impacted and shaped the energy market’s evolution in the United States. During the Great Depression, many businesses, including electricity companies, collapsed. It created havoc in the energy sector and for consumers. Energy sector regulation faltered, and the electricity market was difficult to bring under control of the law. This changed in the mid-1930s with the passage of new legislation.
Congress passed the Public Utilities Holding Company Act of 1935 (PUHCA). This gave the Securities and Exchange Commission authority to regulate, license, and break up electric utility holding companies. With this legislation came new rules and an attempt to better protect consumers.
The energy crisis of the 1970s also impacted the energy sector. During this time, the US faced petroleum shortages and elevated energy costs. In an effort to respond to this period of crisis, the United States established its Department of Energy in 1977. It continues in operation today.
What Are the Pros and Cons of Deregulated Electricity Markets?
The decades since the 1970s brought big changes to the energy market landscape. It continues to evolve. Climate challenges and related extreme weather events threaten the energy supply chain and its aging infrastructure. Consumers want better energy solutions—and more options for cleaner, greener, and renewable energy.
Deregulated electricity markets open the door to new technologies, such as transactional energy and blockchain entrepreneurship, and give consumers options they wouldn’t otherwise have. They also incentivize policymakers to reframe their thinking as they address the needs of the environment and the priorities of the public. As public awareness of the changing environment grows, so too does the appetite for new and different ways of consuming energy.
Deregulated markets also help to advance the push toward renewable energy, clean energy, and energy conservation.
A downside to deregulated electricity markets is that retailers often require customers to sign a contract for a fixed electricity price. This may work for some consumers, but not others during periods when they use less energy.
What Are the Pros and Cons of Regulated Electricity Markets?
Regulated electricity markets provide its customers with stable energy rates and reliable service. Although these investor-owned utilities monopolize the electricity market, they follow regulatory constructs, which better protect customers. Energy prices experience less fluctuation, which also serves consumers.
Having said that, within regulated electricity markets, few incentives exist to drive innovative technologies that create more advanced, ecofriendly, or durable energy solutions. The regulated markets in the US have relied heavily on fossil fuels such as coal and natural gas even as the costs of renewable alternatives drop rapidly.
How Do Both Systems Affect the Push Toward Renewable Energy, Clean Energy, and Energy Conservation?
Consumers want their energy companies to provide reliable and cost-effective energy. Many also want to promote cleaner energy options. In regulated electricity markets, power solutions traditionally generate via three major categories—fossil fuels (coal, natural gas, and petroleum), nuclear energy, and renewable energy sources.
With the passage of the Energy Policy Act in 2005 and several other energy acts, the federal government improved its policies and advanced longer-term energy solutions. Still, most of the energy generated in the US derives from fossil fuels.
Deregulated electricity markets invite the application of innovative approaches to energy solutions. The ability to use solar and wind power, for example, increases through technological advances gained in a competitive marketplace.
Blockchain technology, often associated with cryptocurrency, shows promise in the energy sector. According to an article from ScienceDirect, key principles in blockchain technology provide real-world energy applications such as peer-to-peer trading in a deregulated energy market. The higher level of transparency for participating members offers improved business solutions in energy transactions.
Deregulated markets may in fact create better community outcomes, but implementation occurs on a state by state basis. Some states allow market competition for retail energy supply to electricity customers, but certainly not all.
States with Electricity Deregulation and Those Without
In the US, electric utilities operate under a variety of market structures. Some states continue to operate under a traditionally regulated electricity market while others opened the market to competition. Distributed energy sources or deregulation gives consumers a choice. Government oversight in these states with a regulated environment aims to ensure access and stability. Utilities in states with deregulated market electricity distribute, operate, and maintain the energy supply from the point of grid interconnection to the meter, and they bill ratepayers.
What States Have a Regulated Energy Market and How Is Their Electricity Market Doing?
In the US, traditional wholesale electricity markets exist primarily in the Southeast, Southwest, and Northwest. Consumers purchase energy from their local utility company in much the same way as they have historically. Electricity rates remain fairly stable and access remains constant.
What States Have a Deregulated Energy Market and How Is Their Electricity Market Doing?
States with free access to both electricity and natural gas suppliers include Illinois, Maryland, New Jersey, New York, Ohio, Pennsylvania, and Rhode Island. The primary benefit for customers is a choice of options. Customers can still choose a more traditional approach if they want to.
What Factors Dictate Whether or Not a State Uses a Regulated or Deregulated Energy Market?
Deregulation efforts vary state by state, and adoption barriers exist in highly regulated markets. The breakdown of utility monopolies impacts a state’s political, economic, and technological landscape. As state and local leaders gain a greater understanding of the path forward—and reshape energy goals accordingly—options to overcome obstacles will become increasingly apparent.
Innovative approaches, such as the blockchain ecosystem (PDF, 979 KB), which serves to create a standards-based interoperability of the combined technologies from the public Ethereum, are being developed. This kind of technology makes smart contracts possible in peer-to-peer energy trading.
Decarbonization, or a low-carbon economy, appeals to many consumers and factored into the changes implemented in the 1990s. An emerging trend in state municipalities that want to incorporate clean energy goals into their strategic framework is to enter into franchise agreements with utilities. An electric franchise agreement is a negotiated contract between a municipality and an electric service provider.
A recent article in ScienceDirect describes the possibility for local governments across thirty states to negotiate electric franchise agreements to pursue energy goals. This kind of policy tool forms more collaborative working relationships. It advances joint energy goals in a community.
Advancing Change for Greater Community Outcomes
As technology opportunities grow and the public’s awareness grows with it, demand for better energy solutions will become greater. Transactive energy, or peer-to-peer trading, and other novel energy solutions will refine, reshape, and transform the way we think about energy production, distribution, and consumption.
There are pros and cons to each market approach, and one side may tip the balance eventually. In the meantime, a hybrid of energy solutions exists for consumers.
Key Technology Trends in Energy Solutions
As outlined in this article, moving toward a better tomorrow in energy solutions requires a critical look at the energy solutions of today. Understanding industry trends and changes in the electricity market, and how they impact communities, requires staying connected to what’s happening. New advances in solar power, wind power, and other forms of renewable energy are just one aspect of the energy market ecosystem.
The greater drive toward renewable energy, clean energy, and energy conservation around the world features prominently in the future of energy solutions. How local, state, and federal governments will assess, manage, and implement policy change remains to be seen. Certainly, the possibilities for novel energy solutions appear endless in scope in the electricity market for the foreseeable future and beyond.
Interested in learning more about regulated and deregulated electricity markets? Get involved with IEEE Blockchain-Enabled Transactive Energy (BCTE). This program is series of regionally diverse virtual forums addressing Blockchain-enabled transactive energy in the domain of electrical power and energy application development. To learn more about IEEE Blockchain, join the IEEE Blockchain Technical Community to stay informed of latest activities.