Setting Electricity Markets Up for the Future With Competition
It wasn’t too long ago when the government told everyone where to get their electricity and how much they were going to pay for it. Electric utilities were granted monopolies over their customers, and in return those utilities had to get government approval for every major business decision they undertook. But starting two decades ago, 13 states plus D.C. decided to break up the monopoly and allow competition among electricity generators and resellers. While each state pursued competition a little bit differently, and some better than others, the results have been consistent.
Introducing competition into electricity markets has lowered prices for customers and offered a greater variety of products while providing a nimble footing for future energy industry developments. Monopolized states should be taking notes.
Since 2008, when competitive states worked out the legal kinks of transitioning from monopolies, customers in competitive states have seen their inflation-adjusted electricity prices fall 16%, whereas monopolized customers have seen theirs rise about 3%. If prices in monopolized states had declined at the same rate as in competitive states, monopolized customers would have saved a third of a trillion dollars in electricity costs between 2008 and 2017. Protecting customers from rising costs was one of the original justifications of states granting—and then fully regulating—monopolies. Competition is now achieving this goal better than monopolies are.
Not only are competitive customers saving money, they typically have more products to choose from. For instance, dynamic pricing options—helping customers take advantage of changing electricity prices—and demand response programs—helping customers save money by reducing electricity usage a key times throughout the day—are more widely used in competitive states. Large commercial and industrial customers are also often able to take advantage of flexible contacts to adjust to energy market developments. Allowing electric service providers to compete for customers means that those customers can choose between more and better options to fit their lifestyle.
Competition has also broken down barriers to allowing customers to take advantage of innovative products such as rooftop solar panels. For example, competition in Texas has spurred rooftop solar usage by making it easier for solar-seeking customers to choose an electricity provider more conducive to their goals, all without the need for state mandates of solar energy development.
Interestingly, customers in competitive states benefited faster from the past decade’s most significant energy industry innovation—fracking—than monopolized customers. Electricity providers in competitive states took advantage of low natural gas prices and switched to natural gas faster than in monopolized states, and those price savings were passed onto customers. Why the difference? Electricity providers in competitive states can make decisions at the speed of business, whereas in monopolized states they must gain government approval for every business decision, which can take months to years. This flexibility will be key in the coming years, making it easier to adapt to future innovations such as battery storage or small-scale nuclear reactors.
Continuing on the business versus government differences, exposure to competition created an incentive for power plants in competitive states to be run more efficiently than they were under a monopoly. In the first few years after their monopolies were ended, power plants in competitive states increased their fuel and operational efficiency by up to ten percent. This trend has continued through current times. Power plants in competitive states have higher capacity factors—which measures how often a power plant is running at maximum power—than in monopolized states. Simply put, competition encourages greater efficiency than monopolies do.
Competition’s encouragement of newer, more efficient technologies may also spur cleaner energy, too. Competitive states typically have less carbon-intensive energy sources than monopolized states. And wind and solar power have grown at near identical rates in both competitive and monopolized states. And while monopolized states have more hydropower, competitive states utilize significantly more carbon-free nuclear energy and low-carbon natural gas, providing competitive states with an edge. Not needing time-consuming government approval for every business decision has allowed electric service providers in competitive states to capitalize on a rapidly-changing energy industry.
Doing things the way they’ve always been done is proving to be a costly proposition that keeps states flat-footed at a time when the energy industry is undergoing rapid change. Competitive electricity markets have lowered prices, encouraged more choices for customers, and adapted better to energy industry changes. What reasons are there left to continue justifying restricting consumer choice?
Jakob Puckett is an energy policy analyst and an Associate Contributor for Young Voices.