At the end of 2015, only 15 states and the District of Columbia had active residential electric choice programs. Participation caps in California and Michigan squelched consumer choice in those states. New York effectively shut down its residential electricity market in February 2016 by imposing drastic limitations on marketers. Customers in Ohio, Illinois, and Massachusetts are often lumped into municipal aggregation groups. Residents in those states have someone else choose an electricity provider for them. Electricity deregulation does not appear to be catching on in the United States.
The central question is why some states allow customers to choose their electricity suppliers while others stick with the old utility model. If customer choice is a good thing, then why is not the national norm? The answer deals with concepts like utility stranded costs and consumer protection. Deregulating an entire industry is a monumental undertaking.
Instead of discussing the reasons for not deregulating, it is more important to focus on why we should support electricity choice markets. Obstacles and challenges are easy excuses for not doing something. Focusing on the benefits is a better way of viewing an opportunity.
For clarification, electric deregulation is simply separating electricity into its delivery and supply components. Electricity delivery involves the transmission and distribution system. We count on this system for safe and reliable delivery of electricity to our homes. The critical nature of this system does not fit a free market model. It is ideally suited for a regulated franchise (not monopoly) approach.
Electricity supply, however, is a good fit for a competitive market. Consumers in deregulated electricity markets can manage their rates by locking them in for various terms. They can also select renewable energy or bundle their electricity with other energy services.
Telecom Market Evolution
Market evolution follows a classical pattern. Marketers first compete on price. This evolves to competition on price and service. Finally, competition focuses more on innovation and service than price. This pattern was very evident in the telecom market. Price and service were initially foremost in the consumer mindset.
Innovation, however, quickly took over and now drives consumer purchasing decisions. Imagine where telecom would be without deregulation. The primary innovation in the 40 years prior to deregulating long-distance was the move from rotary dialing to touchtone dialing. In the time since deregulation, the entire concept of long-distance service has become obscure. Telecom itself has evolved into mobile data connectivity.
Deregulation = Innovation
Energy is ready for large-scale evolution. Residential electricity does not need to be stuck at the rotary-dial stage of telecom. For example, smart meters link to home automation systems to optimize comfort while minimizing consumption. Smart meters also allow power grid operators to make the best use of their resources. This ultimately lowers costs to consumers.
Smart thermostats can reduce energy usage by learning consumer habits and monitoring home occupancy. In some areas, consumers with smart thermostats receive compensation for making short-duration temperature adjustments during power grid emergencies. These devices relegate manual and programmable thermostats to being dusty museum displays.
Time-of-use electricity plans are another example of energy innovation. These rate plans provide consumers with price signals on when to use or avoid using electricity. In addition lowering electricity bills, these rate plans reduce the need for constructing new generation plants and transmission lines.
Distributed generation is another reason to support customer choice. Rooftop solar system prices have decreased significantly over the past few years. Integrating these systems with the power grid and optimizing their benefits are perfect opportunities for deregulated electricity markets.
Innovation is not going to come from a traditional electric utility model. Consumer choice creates customer engagement. Customer engagement leads to energy conservation and energy optimization. Consumers and electricity providers will create new products and services by working collaboratively in an open and free market. Innovation will not come from regulated utility markets. Nor will it come from programs in deregulated states designed to limit customers from making individual choices.