The U.S. electricity industry was restructured in the 1990s to increase competition at the wholesale level by breaking up the generation and distribution functions of some vertically integrated utilities. In addition, some states restructured retail sales by unbundling the electricity delivery and electricity generation.
An increasing number of electricity customers now have access to the competitive retail markets, giving them choices in suppliers of electric power. Roughly 14 states and the District of Columbia allow consumers to purchase electricity from third-party providers instead of requiring power to be generated and delivered by one monopolistic utility.
In these states, customers are afforded the freedom to shop for the energy sources that best match their priorities, whether that’s the provider with the lowest price, the greatest amount of renewable energy, the most attractive program incentives or any other factor they care about.
While true energy choice for end users is not permitted in the majority of states across the country, the debate about whether or not those markets should allow greater competition is heating up.
A ballot initiative to amend the state constitution in Nevada was put to a vote in November 2018 – it failed after the utility spent a record amount of money to fight the popular initiative – while Florida’s State Supreme Court is set to answer soon whether a similar ballot initiative will be allowed in its elections in the fall of 2020.
The predictable political battles over consumer freedom creates a debate about how states can best speed the transition to a lower-carbon emission economy and whether the old regulated utility model has outlived its usefulness. The fights have turned ugly with opposing sides hurling opposing “facts” at consumers.
The mudslinging isn’t surprising given the stakes. The falling cost of dispatchable generation from wind and solar, the development of smart meters and other digital solutions, and the evolution of financing options have empowered electricity consumers like never before – threatening the way electricity has traditionally been generated and sold in the process.
To clear up any confusion about opposing claims, let’s fact check some of the most common arguments used by opponents of energy choice.
Claim: Allowing consumers energy choice would lead to higher utility bills.
In opposition to the Florida energy choice push, a spokesman for Florida Power & Light noted that “Floridians have access to electricity that is both cleaner and more affordable than the national average. This system would be dismantled under the proposed constitutional amendment.”
Fact: Competitive markets result in lower prices for consumers.
A study by Ohio State University found that the lack of energy competition in Ohio is to blame for electricity cost increases. Competitive markets also shift the investment risk away from captive ratepayers and on to competitive power companies.
Taking this point nationally, the Retail Electric Rates in Deregulated and Regulated States report has found that rates across the country are rising across the board for electricity, increasing by 55.9 percent from 1997 to 2018. In states without energy choice, the increase over that same time has been 65.5 percent, while states with energy choice have seen a more meager 47 percent increase. These trends of what has happened after competition is introduced is the critical factor in measuring how much consumers benefit.
Well-designed competitive markets offer a number of other benefits beyond just lower prices, including more efficiency, innovation and supplier options. A lack of competition allows regulated utilities to avoid competitive pressures which makes them slow to adopt new but more efficient technologies and business models that better serve consumers.
Attempts to scare consumers about how opening the market to competition will affect their utility bills is not supported by the facts. Looking at the impact of competitive markets in Texas, the Texas Coalition for Affordable Power found that “average residential electricity prices in deregulated areas have declined more than 23 percent during the 10-year period between 2008 through 2017. During the same time period, average residential prices in regulated markets have slightly increased during the same period.
The absolute cost of energy carries with it many different influences, including fuel costs, weather conditions and local regulations making it difficult to do a direct apples-to-apples comparison. However, looking at the price trend in Texas, the claims of those opposed to competition don’t hold water. In addition to lower electricity rates, the Energy Information Administration (EIA) notes that customers in competitive markets also see less price volatility in their monthly utility bills. This is because electricity prices are less influenced by fluctuations in the wholesale power market.
EIA data shows that from 2005 to 2016 competitive energy providers went from supplying 11 percent of total U.S. retail electricity to 21 percent, while total customers in retail choice programs has hit nearly 17 million in the past five years. These numbers indicate a high level of success and customer satisfaction.
California does hold important lessons but not the ones opponents of competition want you to learn. The California Public Utilities Commission (CPUC) released a report in 2017 examining what went wrong with reorganizing of the regulated market the last time and how to avoid such pitfalls this time around and ensure consumers have a greater say in the energy they use. California’s answer is to allow for local municipalities around the state to develop their own government-run power providers called community choice aggregators, or CCAs, which can be more responsive to community members on issues such as price and generation sources.
As the entity responsible for the issues that led to the 2000s energy crisis, the commission has every reason to exercise caution as it encourages greater competition in the state’s electricity market. But rather than stick with the old monopoly institutions, the commission found:
““California’s status as the 5th largest global economy is directly linked to its ability to embrace advanced and innovative energy technologies, maintain safe and reliable grid operations and keep prices relatively stable, while allowing new market entrants to flourish and protecting ratepayer interests.””
The lesson learned appears to be that removing barriers to competition encourages innovation and drives adoption of cleaner energy sources.
Claim: Restructured markets would force customers to rely on unproven energy providers.
A common note of fear that those opposing energy choice tap into is that the existing utilities are the best for the job of generating and delivering energy simply because they’ve been doing it for so long, and thus opening the market will introduce inexperienced service providers.
The president and CEO of Associated Industries in Florida has warned that energy choice in Florida would “force us to rely on new, unknown corporations that have no experience or track record dealing with our state’s unique challenges, such as hurricanes.”
Fact: Competition is good for all players in the market. Under competitive markets, poor performers are driven out by consumers who can vote with their feet. A strong cop on the beat to make sure service providers play by the rules and consumers are protected is an important component of a well designed market.
Claim: Energy choice would decrease investment in renewable energy.
Fact: Competition is driving more efficient and targeted private sector investment into cleaner forms of energy, including wind and solar and storage. The competitive model is also shifting the investment risk off the backs of consumers and back onto the companies and service providers competing for their business - where it belongs.
While the main argument for energy freedom comes in the form of allowing customers to opt for the energy generation from the supplier with the lowest prices, many suppliers set themselves apart by offering renewable energy.
Customers today increasingly want to know that their homes and offices are being powered by wind, solar, and other clean energy sources, and many are willing to pay a premium for that service - though with the falling price of renewables, most providers can compete on price, too. For these customers, energy choice gives them the ability to sign up for the provider best aligned with their values.
The competitive market is responding to consumer demand and delivering cleaner energy in the process. And because consumers can easily switch providers for any reason, service providers have a natural incentive to provide superior customer service and to strive to innovate to maintain their competitive edge. It’s a win-win that does not require government intervention.
Compare that to traditional integrated utilities that don’t make money from selling electricity, but from building generation facilities and infrastructure. An integrated utility has no incentive to reduce the price of electricity or improve its efficiency because the government guarantees it a specific rate of return on its investment. Under such a system, the customer is captive and has little to no say in how electricity is generated.
In Florida, opponents of competition point to recent utility-driven initiatives to invest in solar energy and permit net metering as signs of progress and an indication that the utilities are responsive to consumer demands. The chairman of Citizens for Energy Choices contends, however, that this was a result of the energy choice movement and not something the utility would otherwise have done on its own.
“The state’s solar growth, he contends, “didn’t occur until we started pushing competition. Suddenly the utilities react.””
Giving up on energy choice now would be allowing the monopoly utilities to do just enough to placate clean energy advocates and not actually continue the momentum that energy choice would allow to grow. It would also force consumers to bear the full risk associated with building new generating capacity instead of allowing private companies to take on those risks.