If we want more affordable power prices, cleaner energy and more innovation, competitive electricity markets are today’s solution for a brighter tomorrow.
Most Americans understand what electricity is, but cannot describe how this essential service that powers our lives is generated and then delivered to our homes and businesses. And even more do not know there are wholesale electricity markets that have big implications for their monthly utility bill.
When you want to buy something, you typically have at least a few choices. Usually your decision comes down to price, need and quality. Electricity is also something that can be bought and sold in a market, but there are a lot of factors that go into how much choice there really is when it comes to how we get power in the U.S.
In simple terms, wholesale competitive power markets help keep electricity affordable and reliable—and they have many other benefits. Today, though, there are important questions about how those markets are structured and whether they can stay competitive—that is, create a fair playing field for many power companies and providers to offer the best energy solutions.
So let’s break it down by exploring the different types of power markets, how they are regulated, and why they matter to every single consumer – yes, you!
Traditional Regulated Markets and Utilities
Utilities pass the costs of their operations, including building power plants, onto monthly customer bills… customers end up paying for projects that cost more than anticipated or end up being abandoned.
Let’s start with some history. After Thomas Edison invented the lightbulb in 1879, he created the United States’ first electrical power plant, Pearl Street Station, in New York City. Because there was no existing infrastructure, Edison had to build, own and operate the entire system to deliver power to consumers. Edison controlled the power generation and the wires that delivered the electricity from Pearl Street to customers.
This system is known as a vertically integrated model, and for a long time it was how all utilities operated. In this model, a single company owns:
- the plants and facilities where power is generated,
- transmission lines that carry large amounts of high-voltage power across long distances to a transformer/substation,
- and distribution lines that ultimately deliver electricity directly to the end users—homes, businesses, factories, hospitals, and anyone that needs power.
Traditional utilities are publicly regulated, and they effectively operate as monopolies overseen by state regulators in their respective territories. If you are a customer, your only option is to buy power from them. To keep rates reasonable and replicate market forces, state regulators set retail electricity prices, which are based on the utility’s operating and investment costs, including a fair rate of return on those investments.
Because the utility companies have monopoly control over their territories, there is no competition. In these markets, utility companies generate and distribute all electricity within a geographic region because they own all parts of the supply chain. Thus, competition is eliminated, and so is consumer choice. And utilities are able to pass the costs of their operations, including building power plants, on to monthly customer bills—subject to review and approval by the state’s utility regulators. Still, even with regulatory oversight in place, customers end up paying for projects that cost more than anticipated or end up being abandoned (what’s known as a stranded asset).
Consumers rely on utility regulators to keep a close eye and make the right decisions to ensure utilities don’t pursue unnecessary, overly expensive projects and affordable, reliable power is balanced with other goals.
Today, most utilities still control the transmission and distribution of electricity—the wires and the meters outside a building used to deliver power to customers. And customers in many states still do not have access to competitive wholesale electricity markets.
Restructured Wholesale Markets and Competitive Power Suppliers
Utility charges were too expensive, and customers wanted a more cost-effective but reliable way to get electricity.
Let’s go back to what followed Edison’s Pearl Street plant and fast forward to a time when more regulated monopoly utilities came into existence. As Americans began more heavily relying on electricity, blackouts became more frequent, power prices spiked and confidence in utility monopolies dropped. Utility charges were too expensive, and customers wanted a more cost-effective but reliable way to get electricity. To address this issue, the idea emerged in the 1990s to restructure electricity systems, and instead use markets to determine which power plants would create electricity generation based on price and reliability needs. This allowed more power generation companies and providers to offer electricity across a broader state or region—they are known as independent power producers, merchant generators, or competitive power suppliers.
Originally created to share or “pool” generation across a large geographic footprint, Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) were intended to reduce costs and increase reliability across multiple utility areas. As states restructured, RTOs and ISOs began developing wholesale power markets to ensure reliable power is available when and where needed at the lowest cost. In the U.S., there are seven RTO/ISOs that all run their own wholesale power markets.
The Federal Energy Regulatory Commission (FERC) oversees the regulation and transportation of energy in all RTO/ISOs except ERCOT. It is up to FERC to determine whether the market rules in each RTO/ISO are just and reasonable—that is, they create a fair playing field.
Instead of prices being determined by states based on utility investments, real-time wholesale electricity market prices are determined by factors that are constantly changing, such as weather and fuel costs.
In these markets, RTOs purchase electricity at market-determined wholesale prices, and then sell that electricity to customers at market-determined retail prices.
By accounting for factors based on the markets and not the monopolies, wholesale deregulated markets are able to adjust quickly to changing supply circumstances and consumers’ needs.
Why This Matters for Consumers
Today, wholesale power prices in many regions are at their lowest level in the history of the restructured market—which has helped families and businesses across the economy save money.
Electricity Costs:
At the wholesale level, competition among power generators and market rules create pressure to keep prices low—just as makers of any product try to offer the best option at the lowest cost. Many factors then go into what eventually shows up on your utility bill, but competitive wholesale markets help ensure the cost of generation is as low as possible. And importantly, private companies bear the risk of their investments—you don’t have to pay for a project that goes over budget or has to go offline sooner than anticipated.
Today, wholesale power prices in many regions are at their lowest level in the history of the restructured market—which has helped families and businesses across the economy save money.
At the retail level, in some states, electricity customers have the option to make their own decisions (known as customer choice) when it comes to picking an electric supplier—rather than being required to purchase from one utility.
Energy Innovation:
Competition not only creates the need for electrical providers to be cheaper than the next, it also applies pressure for providers to be more innovative than the next. Markets improve access for new entrants and technologies and grid operators and investors must respond nimbly to changes in fuel prices or demand shifts. Competitive power suppliers have followed market signals to improve operations and efficiency, as well as to retire older, no longer economic power generation technology to invest in newer, more cost-effective, efficient and cleaner approaches.
Efficiency and Environmental Progress:
Competition encourages power providers to be more efficient to meet needs at the lowest cost. This helps reduce emissions from power generation operations. The drive to choose low-cost resources also encouraged many power generators to retire coal plants when natural gas—which emits far less carbon dioxide—became far more affordable than coal. That has helped drive power sector emissions reductions of nearly 28% since 2008—with cost savings for consumers. In the PJM Interconnection footprint, which is served by the largest competitive power market in the U.S., emissions have declined 34% since 2005. As renewable resources become increasingly cost competitive, these resources have also been displacing higher emitting resources; a trend that competitive markets can help to accelerate.
The Bottom Line
Competition among providers creates a focus on consumer needs, rather than utility revenues. This matters for consumers, the economy, and the industry as a whole, because competition is what drives us forward.
Our energy landscape is swiftly changing. But the lessons of the competitive market experiment are clear. If we want more affordable power prices, cleaner energy and more innovation, competitive electricity markets are today’s solution for a brighter tomorrow.
