Tag Archives: energy regulation

Deregulation Decrypted: a “Greener” energy approach

The word “deregulation” has been thrown around a lot in the past few years in the context of energy and utilities.  There has been much talk about what deregulation of the energy grid would mean for utilities, for renewables and for stockholders.

Yet little has been said about what deregulation means to average citizens and energy consumers.

Here is a run-down of the current discussion surrounding deregulation and how it pertains to you, an average energy user, and especially to your bottom line.

  1. What is Deregulation?

Deregulation is the process of removing regulations in an economic sphere; in this case, the economy of energy.  It is a daunting term for a simple concept: greater competition and access to multiple types of energy.  It represents an end to the old regime of utilities-dominated energy markets.  Deregulation has already spread through most of Europe, including all 15 EU original member states, and is now entering the US as well.

It is often discussed alongside renewable energy. This is because deregulation allows energy producers outside of major utilities to enter the energy market.  No matter which renewables are thriving in an area, they need access to the energy grid to be marketed and delivered to consumers.

Even without introduction of renewables, it could offer greater freedom of choice and lower prices for energy.

2.  What will deregulation change?

Most markets usually discourage monopolization, but the energy market is another story.

“Whenever you have a terribly capital-intensive industry, historically, the solution has been to grant a monopoly to an operator and then regulate their prices,” said Wayne Harris, the Director at the Elizabeth City, Pasquotank County Economic Development Commission.

In North Carolina, this is the way our current energy market functions and has functioned since the 1930’s.

This system of natural monopolies allows for one major energy producer per local area.  In the infancy of the US energy industry, utilities helped to combine the patchwork of producers and simplify the grid.  While simpler, now regulation leaves energy consumers with little-to-no choice in their electricity provider.

Deregulation combats this monopoly power of utilities, opening up the energy market.  This allows for greater total energy production and greater choice for consumers.

It also paves the way for renewable energy to enter the market.

Renewables have often been accused of destabilizing the energy grid.  In reality, they can contribute to greater market health and stability by adding more options for sources of energy production.

Craig Poff, a Director of Business Development for Iberdrola Renewables, described this as a game of musical chairs:

“Just like in an investment portfolio, you want diversity.  It helps you not lose your seat when the music stops.”

3.  How does it work?

Deregulation usually works through a reverse auction, in which energy producers offer to sell their energy at a the lowest price, or bid.

Independent agencies then buy enough energy to suit the daily demand, starting with the lowest offered bid.  The highest bid accepted for the day is then the price that every producer is paid.  The process begins again the next day.

This energy is then distributed, usually by established utilities or system operators, along the  existing infrastructure to consumers.

In a fully deregulated system, the function of utilities switches from primary producer to energy purchaser and distributor.  The basic logistics of energy transmission don’t change much—just the source.

While your usual utility is still responsible for delivering your electricity, they are no longer responsible for setting the price.  Depending on the type of arrangement, consumers could be billed through a utility or directly by a supplier.

Since the essential infrastructure remains the same, there is little chance of energy shortages or the mass blackouts often rumored to accompany deregulation.

4.  Price Volatility? How to choose the plan that’s best for your wallet

The price of producing energy is not constant and could become more complicated with multiple players.  There are a variety of rate plans available to address such price volatility and ensure consumers stay in the black.

The two main types of plans are variable rate and fixed rate plans.

Variable rate plans change with market prices.  This means that consumers pay the current going rate for electricity.  This plan is most beneficial when energy rates are stable and low or expected to decrease.

A fixed rate plan allows customers to pay a set price for their energy over a set time period.  These types of plans offer protection from highly changeable markets.  Consumers are unaffected by any sudden price increases or drops.

What’s more, the long-term costs of renewables may be more predictable than conventional fossil fuels.  While deregulation has a chance for price volatility, it offers the chance to choose renewables–which have lower fuel volatility.  Though they have a higher upfront cost, once running, renewable sources like solar and wind can produce produce electricity at little to no cost.

Poff cited this as the reason why Iberdrola has been able to guarantee consumers a fixed price.

“Nobody knows what gas is going to be in 20 years,” said Poff.  “Where I know with 100% certainty the cost of wind in 20 years- its still zero.”

5.  Why Deregulation? Conflicting Economic Ideologies

Deregulation is rooted in basic economic theory: more competition in a market drives prices down for consumers.  Poff said rates would go down with the removal of energy monopolies.

“You find this across the US where energy markets have been deregulated and consumers are given choice; the suppliers are forced to compete,” Poff said. “And electrons are not unique, they don’t have special features. And so its all about cost.”

Aside from lowered cost, many people believe that competition from multiple producers will also foster innovation and improved efficiency.  Outdated utilities, stripped of their monopoly, would be forced to get with the times to stay technologically current and competitive.

In short: a win-win for energy consumers and the environment.

The opposing side contests that deregulation in theory and practice are two different beasts, citing increased and variable rates rather than reduced cost for consumers.

Seventeen states in the US to date have currently deregulated energy sectors and have met with mixed success.  While deregulation offers customers more choices as predicted, prices have not been so predictable.

6.  The Opposition: Why many fear price hikes may accompany deregulation

In abolishing the old utilities system, deregulation also removes the price cap placed on energy producers set by utilities commissions. According to economic theory, competition should drive prices down, yet just the opposite has happened in some cases.

During times of high energy demand, producers in states like California and Montana have been caught gouging consumers.  The Enron Scandal of California created a particularly bad name for deregulation.  Dr. Greg Gangi, the head of the Institute for the Environment at UNC Chapel Hill said that this was an isolated case, due to rapid pace and poor planning.

However, many still associate deregulation with the rolling blackouts and price hikes that plagued California in the early 2000s.  Such events have left consumers wondering if deregulation is really the best thing for their wallets.

Richard Schuler, a professor of economics and engineering at Cornell University offered an altered version of the economic theory in an article on deregulation in California.  While competition does drive down prices, he argued that greater numbers do not necessarily increase competition.  According to Schuler, a market’s competitiveness is measured by how strongly producers are incentivized to lower prices.

The energy market is unique in that demand is almost constant, despite costs.  Our world is electric.  This ensures that producers’ energy will be bought no matter what the price.

However, prices aren’t necessarily expected to lower under current utilities.

“They have very little incentive to do deals that would ultimately reduce cost,” Poff said of utilities under regulated systems.  “Every time they spend a dollar, they are guaranteed by law a set rate of return on that dollar.  So they have no interest in cutting cost.”

7.  The Affirmative: Evidence of deregulation at its best

On the other hand, deregulation has met with much success in other countries.  This is especially true in Germany, where deregulation has ruled for far longer than in the US.  In a recent talk on the German energy system, Andreas Von Schoenberg catalogued Germany’s successes.

“We have gone from 3 to 30% renewables from the 1990’s to the present without any major changes to the energy grid,” said Von Schoenberg.

In Germany, deregulation has not only given consumers freedom of choice, but new economic opportunities as well. The largest support for renewable energy in Germany comes from a base of farmers.  Through enabling legislation, such as feed-in-tariffs, they were able to produce energy along with crops and diversify their income.

Many economically-minded environmentalists like  Harris advocate for coupling deregulation with a feed-in tariff, carbon tax or some other check on utilities.

“I personally would like to see a carbon tax.  I think the science is pretty irrefutable,” Harris said.

This strategy would allow for deregulation in a way that turns the market over to citizens and allows them maximum benefit.  Legislation such as carbon taxes favor renewable energies and would help to facilitate their introduction to the energy market, giving consumers more choice.  Though renewables may be doing just fine without any help.

“I think a carbon tax would certainly be a lot safer for the planet and accelerate things faster, but I’m somewhat encouraged by the speed of the deployment without it,” said Harris.

This is true for most of the current renewables in NC, which are large-scale.  However, to see the kinds of small scale residential energy production of Germany, we would likely need similar legislation.

8.  The bottom line

As evident from Germany and other world leaders, energy is trending towards renewable sources.  While deregulation represents a departure from the tried and true methods of the past, it also represents an opportunity for improvement.  Additionally, it is becoming increasingly costly to resist green energy.

“Twenty years ago, wind power was about 3 times as expensive as conventionally generated electricity, and today without a subsidy, its cheaper than most fossil fuel generated electricity. And it keeps getting better,” said Harris.

Though the path of deregulation may not be the smoothest, it is clear that renewable energy will continue to grow in importance.  It may also grow to be the most affordable, greening the energy sector and consumer’s wallets.