Texas experienced a series of devastating power outages in February 2021 that some are blaming on its instability caused by its deregulated electricity market. However, proponents of deregulation say that it can help cut down on costs and improve services to customers. Given this recent discussion, we will explain what having a deregulated electricity market means, how Texas’s electric choice affects customers, and how it can impact your savings with solar.
What is a deregulated electric market?
Most states have regulated electricity markets, meaning utility companies are vertically integrated. In other words, a single utility company takes care of supply, transmission, and distribution. In a deregulated electric market, separate companies can take on each part of the process of getting the electricity from power plants to your home. This means that you can get your electricity supply from one company, but another company will deliver it to your home. As an electricity customer in a deregulated market, you have the opportunity to switch between different providers in order to maximize savings. Also, the competition and increased choice between energy providers can improve services to customers.
State governments regulate electricity markets in order to try to protect consumers from instability in pricing and in electricity availability. For regulated electricity markets, the state public utilities commission (PUC) oversees the price of electricity set by utility companies, and the utility companies guarantee that they can provide reliable electricity to their customers at all times. (Note: for member-owned utilities, the rates are set by the company board. Member-owned utilities are not heavily regulated, as they are assumed to already act in the best interest of their members.) In some cases, utilities must back up their generators with surplus power plants in order to meet unforeseen challenges, such as demand spikes.
What makes Texas different?
In other states with deregulated electricity markets, major utilities still provide the majority of retail energy supply. However, in Texas, deregulated retail energy providers are available to approximately 90 percent of electricity customers. In many cities, you can choose between individual suppliers or vertically integrated utilities (i.e. utilities that provide supply, transmission, and distribution) depending on the availability of offerings in your area.
Although Texas’s electricity market is technically “deregulated,” the state government is still involved with setting prices. The state PUC regulates transmission providers but doesn’t regulate energy suppliers and distributors. Additionally, the physical grid is maintained by the Electric Reliability Council of Texas (ERCOT) to help utilities cut down on costs. Although ERCOT is technically a non-profit organization, it does have oversight from the Texas State legislature and the PUC.
(Note: Electricity transmission is the act of moving electricity with higher voltage loads long distances, while electricity distribution refers to moving lower voltage electricity shorter distances, from power substations to homes or businesses. The companies or subsections of utilities that provide these services are often different. If you would like to read more about this, you can do so here!)
How does deregulation impact access to solar energy?
In many ways, deregulated electricity markets allow for increased access to renewable energy providers because they allow you to choose an energy supplier that offers green power plans. This drives increased competition between utility-scale renewable energy providers and traditional electricity sources that are not possible in regulated states.
Deregulation may have a positive impact on the adoption of utility-scale solar, but as far as rooftop and other self-generating solar projects are concerned, the impact of full deregulation varies. Texas lacks a statewide net metering policy, so whether you can access the benefits of net metering depends on your electricity provider’s individual policy. This means that, if you install a solar panel system for your home in Texas, you could be leaving money on the table for excess energy produced by your system if you don’t pair it with storage. You can learn more about incentives available in Texas here.
Although deregulation allows you to choose between competitive suppliers and, in theory, save money by doing so, in practice it requires constantly switching between suppliers and monitoring competitive pricing to ensure that you’re getting the best deal. This can result in savings for some, but for others, it results in higher costs. According to the Wall Street Journal, since 2004, customers on deregulated plans have paid a cumulative 28 billion dollars more than Texans on plans with vertically integrated utilities. Additionally, deregulated markets are subject to price spikes based on demand.
A worst-case scenario of a demand-based spike occurred in 2021 during the blackouts when customers in Texas saw as much as a 70 times increase in their monthly electric bill. This was due to the sharp increase in demand brought on by the unseasonably cold weather, and Texas’s electrical grid not being prepared for high demand during the winter months.
Additionally, NPR reported shortly after the blackout that Texas utility regulators removed caps, allowing prices to rise to $9 per kilowatt-hour (while the average price for electricity in Texas in the winter at that time was about $0.12 per kilowatt-hour, according to the U.S. Energy Information Administration).
Disasters like what occurred in the winter of 2021 are not frequent, but smaller price fluctuations occur regularly. If you want to learn more about our take on what caused the blackouts, check out this article.
Frequently asked questions about Texas’s deregulated electricity market
The main reason stated as a benefit to deregulating electricity is lower electricity rates over time. Unfortunately, there’s no guarantee to lower rates, especially with inclement weather events like the one that happened in Texas in the winter of 2021. Providing options is another plus side noted by states with deregulated markets.
Most states have regulated electricity markets where a single utility company handles the supply, transmission, and distribution of the electricity in the area. However, in a deregulated electric market separate companies can take on each part of the process of getting the electricity from power plants to your home. This means that you can get your electricity supply from one company, but another company will deliver it to your home.
As a deregulated electricity market, there are a few steps in how your electricity gets to you, including a service provider that generates and delivers energy to your home, a supplier or Retail Electricity Providers (REP) you choose which sells you your electricity, and the company you pay the bill to for your electricity. Two main entities are involved in overseeing rates and reliability for the state of Texas —the PUC for electricity rates and the ERCOT for reliability and security.
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