Deregulated Energy Markets in the US: Gateway to the Future
Deregulated electricity and natural gas markets in the US are under threat – more than at any time since the process started in California 22 years ago. The experience with deregulation has been mixed across the many states. However, the savings to customers have been substantial in many cases.
In a testimony by at the New York Public Service Commission hearings in September 2017, Direct Energy reported that savings of ESCO variable rates compared with the default utility rate from 2011 to 2016 were $18.1 billion[i].
Texas is a good example for understanding the pricing dynamics because there are regulated utilities and retail markets in adjacent areas. According to a study published by the Texas Coalition for Affordable Power, from 2007 through 2016, average residential prices in areas exempt from deregulation increased by nearly 6.1% compared to a decline of nearly 19.6% in the deregulated areas, saving customers billions of dollars[ii].
In Illinois, residential customers saved $37 billion in a 16-year period according to a report issued a coalition of business groups in March 2014[iii].
Despite this, regulators across the Northeast US are putting significant constraints on the retail markets to protect consumers from the risks of retail energy. What is an energy retailer to do?
Fortunately, the economics of renewable energy technologies have dramatically improved in the last ten years; and increasing the demand more renewable energy. According to Bloomberg New Energy Finance (BNEF) the cost of wind power has dropped by 49% and solar by 85% since 2010, making them cheaper than new coal or gas plants in two-thirds of the world. Meanwhile, battery storage costs have dropped 85% [iv]. BNEF expects the world to generate half of its electricity from renewable sources by 2050.
A recent report from Lazard shows this dramatic decline[v] from 2009 to 2017. Since then, the cost of renewables has continued to fall.
The future for energy retailers adapting to deregulated energy markets in the US: Forget selling kilowatt hours (the focus of regulators and traditional utilities). Instead, offer renewable energy, new technologies, and new energy.
Commercial & Industrial
Commercial and industrial customers have been largely spared by the regulatory overreach – regulators have been loath to interfere in contracts between commercial entities.
There are many new energy contract constructs that are gaining momentum across the country – in deregulated and regulated markets. ‘Green’ power has upended the markets among the C&I customers. Power purchase agreements (PPAs)– physical or virtual – are pretty much standard parts of the new contracts and are being driven by corporate responsibility and sustainability goals.
Led by the U.S. companies, corporate power purchase agreements (PPAs) have soared across the world as the following graphs shows[vi],[vii]:
While regulators are considering additional retail energy consumer price protections, many of the states have created exemptions. These now include:
- Demand Response via smart thermostats, scheduled outages
- Solar (Roof-top, and community or shared)
- Electric Vehicles
- Other value-added products
Suppliers are experimenting with exotic offerings such as Micro Transactions and cryptocurrency. Since commercial style PPAs are cumbersome, it may be more beneficial to trade your solar generation and your battery storage via a microgrid with your neighbors when you are on vacation for a week rather than sell it back to the grid. New apps on your Smartphone will enable these transactions. In the age of the sharing economy, retailers are finding innovative ways for consumers to participate in the renewable energy market without owning physical assets.
Energy efficiency improvements based on shared savings have been prevalent in the commercial world for a long time – savings on energy usage, or forecasting coincident system peaks to shave capacity obligation or 4CP Demand. These services are finding their way to residential consumers, leveraging newer technologies and networks.