Most people have probably thought of power as a commodity, with little to no customization capabilities. That is not surprising given how the power industry has operated to date.
Before energy competition, public utilities provided energy to consumers under the regulation of the federal government and public utility commissions – operating as a strict monopoly structure. In 1978, the U.S. Congress passed the Public Utility Regulatory Policies Act, which allowed non-utility companies to generate and sell electricity on the wholesale power market to utilities, and the Natural Gas Policy Act, which began to lift controls on natural gas.
Later, the federal government took further steps to restructure wholesale markets and many states began to allow non-utility companies (today’s competitive energy suppliers) to offer energy directly to consumers. State and federal policymakers had two major goals in restructuring energy markets after decades of regulated rates: first, to give consumers control over their own energy decisions, and second, to encourage competition and innovation in the energy sector. As a result, energy choice was born.
What is energy choice?
Energy choice is the ability for customers to explore the energy market and select a company and product that aligns with their specific energy needs.
Source: P.R. Quinlan Associates
Note: Residential, commercial, and industrial customers (RCI); Community choice aggregation (CCA): an energy supply system in which local entities in the U.S. aggregate the buying power of individual customers within a defined jurisdiction; Commercial and Industrial customers (C&I)
As of 2023, 17 states offer residential retail energy choice in electricity, natural gas, or both. In states where the regulated utility is the only supplier of energy, that energy sector is largely dictated by the utility monopoly and the public utility commission, with limited incentives to maximize consumer benefits, minimize consumer costs, or make significant technological advancements.
During many of this year’s legislative sessions, advocates for the closed market structure often shared information aimed at discrediting the success of competitive markets. By examining the most prevalent myths of energy choice, we can understand its true benefits and why it is crucial for a dynamic, sustainable, and consumer-centric energy landscape.
Myth: Monopoly markets are more capable of delivering reliable energy supply.
One prominent misconception is that a monopoly energy market is better equipped to provide greater reliability. However, retail energy choice fosters healthy competition among energy providers, encouraging them to invest in diverse sources of energy and innovative technologies. This diversification reduces reliance on a single energy source, making the energy supply more resilient to disruptions.
During a recent extreme weather event in Texas, competitive power generators performed better than monopolies in ERCOT.1 During the last winter season, another severe winter storm affected wide swathes of the country and challenged both types of business models — vertically integrated utility monopolies and customer-choice regions. The latter preserved reliability, while the former failed, causing blackouts over the Christmas holiday in North Carolina and Tennessee.2
Myth: Monopoly markets provide more stability to customers.
Regulated utilities are just as exposed to unregulated fuel markets as competitive providers. The only difference is that competitive providers have skin in the game and incentives that are aligned with the consumers they serve. Meanwhile, utilities – which have cost-pass-through mechanisms – rarely face any financial consequences if they do a bad (or good) job in procuring power and fuel in the market to serve their captive base of ratepayers. In all customer-choice markets, customers can lock in a rate for 12 or more months.
That insulates them from the volatility of the upstream wholesale market. By contrast, for “regulated” utilities, customers ultimately remain on the hook for this volatility because they are subject to after-the-fact surcharges if utilities’ costs run unexpectedly higher than the revenue they collected from their customers.
A real-life example of this played out in the aftermath of Winter Storm Uri, where customers of regulated utilities experienced a pass-through of the sudden price spikes that occurred in the wholesale power and gas markets. Meanwhile, customers of competitive providers were, with few exceptions, shielded because they had signed fixed-rate contracts with competitive suppliers that weren’t subject to after-the-fact adjustment. This appropriately placed the risk where it belonged: on suppliers, not customers.
Source: Retail Energy Supply Association
Note: All Winter Storm Uri impacted states refers to the following: Arkansas, Colorado, Iowa, Illinois, Kansas, Louisiana, Minnesota, Missouri, Mississippi, North Dakota, Nebraska, New Mexico, Oklahoma, and South Dakota.
Myth: Energy choice leads to higher costs for consumers.
Another misunderstanding surrounding retail energy choice is that it results in higher costs for consumers. The presence of retail markets allows consumers to explore a variety of energy options and compare prices, enabling them to find lower-priced energy plans that suit their needs. Studies have shown that the presence of competition drives prices down in competitive markets. A 2017 study conducted by Rice University’s Baker Institute tracked how regulated and competitive electricity prices changed in Texas over time. Results found that the cost of the retail function decreased in competitive areas while they remained steady or grew in regulated monopoly territories.3
The simple fact is: on average, in states where customer choice has been introduced, rates have gone down over time. In monopoly states, the trend is the opposite and rates have gone up.
Source: Retail Energy Supply Association
Recent natural gas price volatility has led to there being significant savings on the table for customers in states that allow shopping away from a default utility product. For example, in Maine, recent findings estimate if all Central Maine Power and Versant customers opted to take service under XOOM Energy (a competitive energy provider), the potential market-wide savings for 2023 customers would be approximately $190 million.4
Myth: Retail energy choice is too complex and confusing for consumers.
A common concern regarding retail energy choice is the perceived complexity and confusion on the part of consumers. It is important to note that numerous tools, resources, and regulations exist to support consumers in navigating the energy market. Energy providers and regulatory bodies are committed to providing support and educational materials that help consumers understand their options and make informed decisions.
Through these efforts, the energy market becomes more transparent and accessible, encouraging consumers to actively participate and benefit from retail energy choice. To find out if your market offers energy choice and to discover helpful resources, click here.
Myth: Energy choice is only beneficial for large commercial customers, not residential consumers.
While it is certainly true that large commercial customers are sophisticated shoppers able to secure the products and pricing that meet their needs, retail competition has also substantially increased the options available to smaller consumers.
Residential customers can choose renewable energy plans, budget-certainty products, like fixed pricing or flat billing contracts, or products that deliver value through other means. Whether it’s charitable giving, cash rewards, energy management tools, support for EV charging, or discounts on smart home devices, customers interested in shopping for energy can find an extensive list of services that complement their needs and are not exclusive to commercial customers.
Myth: Retail energy choice is deregulation.
Although markets that allow energy choice are sometimes referred to as deregulated, that’s not an accurate way of describing them. States regulate the competitive suppliers that operate in their jurisdictions. Each state has extensive policies and standards in place that govern energy supplier licensing and dictate how competitive energy providers can sell energy.
Energy suppliers must comply with rules that control their contracts, marketing disclosures, the products they can offer, how their sales agents can communicate with customers, and more. In fact, there are virtually no areas of the competitive market system that are not governed by prescriptive state rules.
Because the term deregulated can imply that retail providers operate within a model that is free of rules or enforceable penalties, better descriptors for these systems are restructured, open, customer-choice, or competitive markets.
The future of energy choice
Retail energy choice has numerous advantages for consumers and the energy sector as a whole. It promotes competition, encourages reliability, allows for lower-cost options, and provides support to navigate the complex energy market. By embracing retail energy choice, we can drive innovation and foster an energy landscape that empowers individuals to make informed decisions about their energy consumption.
However, despite the benefits energy choice brings, its existence is constantly under threat. In the next installment of our Energy Choice blog series titled Protecting Energy Choice we take a closer look how you can play a role in keeping energy choice around moving forward. Let us challenge the misconceptions and embrace the opportunities that retail energy choice creates.
