The Bumpy Road to Energy Deregulation

Posted March 28, 2016

The Promise of Energy Deregulation

There was a time when electricity was just as exciting, if not more so, than the internet is today. For the first time humanity was able to harness the power of nature, store it as electricity, and use it a thousand kilometers away. The energy industry made enormous progress in the first few decades of its existence, but then innovation nearly stopped.

It’s only recently, with the advent of the deregulation of the energy industry, that we have begun to see an increase in innovation in the industry; it is needed now more than ever.

Birth of the Electrical Age and Industry Regulation

To understand how energy deregulation came about we need to start back at the first few decades of the electricity era from 1882 to 1914. At this time electricity was changing the world; with the now famous battle between Tesla and Edison – better known as the War of Currents – taking over the media.

Eventually Tesla won this war and Alternating Current became the standard method of distributing electricity. The race was on to install the distribution lines to bring this new power to the masses. Many private companies competed to deliver this electricity to end-customers, even building competing lines to the same cities. The competition was quite fierce and often drew complaints from consumers and politicians alike. These companies were accused of providing spotty service, charging high prices, and ignoring areas that were less profitable.

Eventually, governments stepped in to regulate and oversee the energy industry to protect consumers and ensure a more reliable service. Governments created organizations that were contracted to be the sole providers of energy in each region, and made laws to ensure that these companies provided this energy safely, reliably, and for a fair price. In exchange for a long list of restrictions on their ability to operate, these companies were granted a monopoly in their markets and guaranteed returns on their investments: the modern utilities were born.

This arrangement seemed to work for a while, and the electricity grid grew rapidly until nearly every home and business was connected to the electricity grid. Eventually, however, issues began to arise. Many utilities earned profits based on a return on their investments and as a result they were incentivized to spend money. This led to hugely wasteful investments in outdated technologies, but very limited investment in new ones. Consumers began to complain about the lack of innovation and poor customer service.

Many thought that there would be more innovation, and consumers would get better deals, if there were more competition in the industry.

The Re-emergence of Deregulated Energy

Despite consumer complaints, governments were hesitant to deregulate the entire industry, fearing that they would recreate the problems of the early 1900’s. Instead, a solution was found which allowed utilities to maintain their transmission and distribution monopolies but introduced competition in the generation and retailing of electricity and natural gas.

This arrangement ensured that there would be increased competition in the energy industry but customers would continue to receive service from their utilities, that lines would continue to be managed and owned by their existing owners, and service would not be impacted by new private companies.

Generation Deregulation: This let average homeowners and small companies to generate their own electricity, allowing everyone to install solar panels on their rooftops and, in many markets, sell their excess electricity back on to the grid. This trend continues to grow and could in the future lead to a majority of our energy coming from decentralized solar panels and wind turbines scattered across the country rather than a handful of coal and nuclear power plants.

Retail Deregulation: This allowed private companies to offer new and innovative product and service solutions to customers for their electricity and natural gas. This is also commonly referred to as behind the meter innovations. It allows private industry to improve the service that customers receive from the industry, and begin to take charge of their energy usage. This is usually done in the form of different pricing options, but increasingly companies are also finding other unique ways to provide value to customers.

The first country to embrace energy deregulation was the United Kingdom under Margaret Thatcher, which began to deregulate its electricity and natural gas industries in the late 1980's. Since then, 35 countries representing 44% of the world’s energy use have begun deregulating their energy sectors. The map below outlines all 35 countries that have begun deregulating their energy markets, the majority of which are in Europe.

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North America

In North America, there is a wide range of deregulation activity. In the late 1990's energy deregulation was being widely adopted by many states and heralded as the way to ensure savings for customers across the country. Unfortunately, mistakes were made in several markets, most notably California with the infamous Enron scandal. As a result of these issues, although some states fully adopted energy deregulation, other states have remained hesitant to deregulate.

This has resulted in North America having a wide spectrum of different levels of deregulation. Some states only allow large commercial customers to choose a different supplier, some allow all consumers to choose. Some only allow choice for natural gas, while others allow choice for both electricity and natural gas. Even more confusing, although natural gas deregulation is fairly similar across markets, most states have taken very different approaches to electricity deregulation. The map below gives a high-level look at which markets have begun to deregulate, a more detailed explanation of each market will be provided in future posts.

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Europe

Similarly, the European Union has been working hard to create a large, unified energy market across the entire continent. The EU has made enormous investments in an effort to integrate its electricity and natural gas grids, with the continent currently being split into a number of energy regions. These investments have been successful in driving down energy prices for commercial and industrial consumers in many countries. Unfortunately, these savings have yet to be passed down to residential and small business customers.

The end goal of this project is to create a truly integrated energy system across Europe that allows all residents to benefit from reduced prices, and a more sustainable and manageable energy grid. Currently, the EU and other European countries are all moving towards energy deregulation to varying degrees. In most countries, all residential and commercial customers can look to source their electricity and natural gas from a variety of providers, but many exceptions remain. The map below gives a high-level look at which markets have begun to deregulate, a more detailed explanation of each market will be provided in future posts.

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Pacific Region

Australia and New Zealand have completely deregulated their markets. In these countries, all residential and commercial customers can source their electricity and natural gas from a variety of providers. Australia is often recognized as one of the most open and best run energy markets in the world, thanks to a significant levels of competition between companies in the industry.

Japan has only recently begun to deregulate its energy market. Large businesses are able to source their electricity and natural gas from a variety of different companies, but most residential and small business consumers still have no alternatives. Recent rulings, however, are pushing the Japanese market to fully deregulate its market in the coming years.

Various other Asian countries, including South Korea and Singapore, are looking at the potential to deregulate their energy markets. Although they currently remain far from deregulation, the first tentative steps have been made.

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How Energy Deregulation Works

While the transmission and distribution of electricity and natural gas remains primarily under the mandate of utilities, the generation and retailing of energy has become deregulated in many markets around the world. In this section, we will take the time to explain the difference between these four roles, and explain what has changed now that many markets have become deregulated.

Whether we are looking at natural gas or electricity, both markets can be split into five main categories.

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Generation: This is where your energy is produced. Usually undertaken by companies with big power plants or wind farms, but generators can be anyone with a small solar panel on their rooftop. These are the people that are actually producing the electricity and natural gas for the rest of us.

Retail: This is where companies like EnPowered can help. We negotiate contracts with generators in the market which allows us to guarantee pricing to you. This also allows us to buy energy from Greener sources, or provide other interesting services and products.

Transmission: This is how the energy is brought to your region. Electricity is often generated far away from where most people live, in large power plants or windfarms. These guys are responsible for moving electricity and natural gas from where it is produced to where it is consumed.

Distribution: This is where your local utility comes in. They distribute the natural gas and electricity the final distance from the major transmission lines to your doorstep. They are also usually responsible for maintaining the infrastructure, managing your utility billing, and providing emergency response after a storm.

Consumption: This is where you come in. Homeowners and businesses use electricity to power their lives and natural gas to heat their homes.

As mentioned earlier, the Transmission and the Distribution of energy remains largely monopolized by utilities, but the Generation and the Retailing of energy have become deregulated. What this means is that when you choose a different supplier to Retail or Generate your electricity, your local utility will still provide maintenance, emergency services, and all the infrastructure you are used to. Essentially, the same utility remains in charge of maintaining the lines and the infrastructure by the roads, but you can change where you are getting your energy and what you are paying for it.

Generation deregulation:

The deregulation of energy generation has led to a huge numbers of new companies. These are the hundreds of small companies starting natural gas drilling operations, or the more commonly known companies installing solar panels on rooftops across the world. The deregulation of energy generation has allowed small companies to begin to change the face of this industry.

This is far more noticeable within the electricity industry, where solar now represents an ever growing share of electricity generation in many countries. We have gone from a few large coal and nuclear facilities powering our countries, to millions of solar panels installed on rooftops all over the world.

We are beginning to move from a heavily centralized power system to a decentralized power system. With millions of solar panels and wind turbines scattered across a country, a huge number of new and innovative solutions become available to reduce transmission losses by consuming electricity closer to where it was produced.

Unfortunately, it also creates significant difficulties. The most obvious issue is that of storage; the sun does not shine all day and the wind does not blow all day. So as more of our electricity is produced by these sources, it creates strain on a region's system as energy output fluctuates depending on weather conditions.

In the near future, even if we are to produce enough electricity overall using renewable sources, we will often still need to keep our old power plants online as a back-up supply. These are called peaker plants and are a huge factor in our energy costs. Without the ability to cheaply store excess electricity during the day for use when production drops, we will need to continue to rely on our older power plants.

Retail deregulation:

The deregulation of energy retailing has been less noticeable, but has had a major impact on the ability of industrial and commercial customers to control their energy costs. In most markets, the standard energy supply comes from the local utility, often called the default supply. This default supply varies from region to region, but most homeowners and small businesses remain on the default supply while most commercial and industrial customers have left the default supply in favour of retailer plans.

As a result, residential customers in the U.S. pay 21% more for electricity and 33% more for natural gas than commercial customers. Retailers are able to offer these discounted prices because they are able to offer unique ways to avoid price spikes in your local market. For a more in depth understanding of your electricity or natural gas options, we will be writing future posts here and here.

Unfortunately, homeowners and small businesses are currently unable to get these savings as they cannot access the same rates. EnPowered’s group-buying model aims to change this.

The Future of Energy:

With the realities of climate change becoming more apparent, the need for innovation in our energy industry is becoming increasingly urgent. The deregulation of industry monopolies is allowing hundreds of new, innovative companies to emerge and offer new generation and retail services to customers. These companies have only just now begun to make their impact felt, but the growth of renewable energy and energy saving services are a great sign of things to come.