PrintRegulated vs Deregulated Markets
To get a good understanding on how the energy markets work in the USA, it is first important to understand the differences between the types of markets. For example, we have fuel supplier markets, like oil and gas companies and coal producers, who are private sector companies that compete for customers to whom they sell their products. If you use propane or fuel oil to heat your house, or are looking for a gas station to refuel your car, you get to choose from a number of suppliers who are all competing for your business.
We also have electricity providers who generate power and manage the grid. Parts of this grid include power producers who use fuels to run turbines and generate electricity and who are also private sector companies. This power then gets put into the transmission and distribution system to get the electricity to users. It is an understatement to say that this system and the relationships between players is quite complex, and there have been major changes in how this works over time.
One of the fundamental concepts to begin to understand these complex relationships is that of regulated vs. deregulated markets. To an extent, the entire energy sector is regulated in one way or another. So before discussing regulated vs deregulated, we should first define the key segments of the energy sector. For now, we will focus on the power generating sector, and the aspect of getting electricity generated and distributed. For this lesson, we will not be looking at regulation of the fuel sources themselves such as oil, gas, coal, nuclear, and hydroelectric. Each of these fuel types has its own, unique, myriad regulations. Also, we are not going to get into the intricacies of the legal and business elements. The goal is to understand how these regulated and deregulated markets relate to energy security, accessibility, reliability, and sustainability.
Energy generation is what power plants do. Whether they are coal, oil, gas, nuclear, hydroelectric, or a combination of these sources- these plants generate electricity by consuming a fuel and putting that electricity into the transmission and distribution grid (the power lines and power poles that crisscross the country). With the advent of renewable energy, power is also generated at wind and solar farms, biomass-to-energy plants, waste-to-energy plants, and others. All of these power generating options wish to add their power into the national grid.
The Federal Energy Regulatory Commission (FERC) regulates the transmission of electricity across the national grid. This includes setting standards for reliability and security and putting some controls on pricing. Price control was intended to address the risk of unfair charges that would prove detrimental to the public at large. Referring to our four attributes, FERC is most concerned with accessibility, reliability, and security. Whereas FERC does not actively focus on energy sustainability, they do indirectly support it by allowing renewable energy to be put into the grid, as well as allowing provisions for demand response. As we discussed before, demand response is allowing the generation sector to work with consumers to optimize efficiency of energy use.
Interestingly, when one speaks about regulated and deregulated markets, they are usually not referring to many of the complexities described above. In reality, when their state is unregulated, they usually mean the concept of consumers being allowed to choose their own power producer. You can imagine that having thousands of independent grids with their own generation units, transmission lines, distribution points, and wires right to your home would create an unreliable, tenuous mess. Blackouts would be common and the ability to meet demand when and where needed would be almost more by luck than by planning.
Hence, the power sector had to be regulated to ensure consistency and reliability across the country. The ability for these systems to interconnect and work together was the only way to ensure reliable power. But we know that there are hundreds of power generation and transmission entities in the U.S. With the advent of renewable energy generation, there are thousands of additional sources of electricity trying to get connected to the grid. There was a need for government-driven oversight of the system.
Over time a situation evolved that proved to be unfair to consumers. Historically, the electric utility was a single entity that owned and controlled the system from the power plant to the end user. These utilities had their service areas, and they were the “only game in town.” As a user in that market you had no choice.
Even though there was a growing number of power producers, including a growing amount of renewable energy available, there was only one set of wires available in a given area. In order to allow consumers to shop more competitively for electricity but recognizing that it would need to come to their home or business through the transmission system available, several states opted to decouple energy production from transmission. This decoupling is what is commonly referred to as a “deregulated market”. In reality, only the power production is deregulated. The transmission and distribution are still regulated.
In a deregulated market, you can shop around for a good electricity price, or you may be willing to pay more than average to ensure your energy comes from a renewable source. By keeping the transmission and distribution regulated, regardless of from whom you buy your power, you are assured that it will be delivered to you without undue cost markups, at high levels of reliability. Those who move the energy to your home are required to cooperate with the generation players to ensure enough power is in the system and reliably delivered to you at a fair price.
In essence, the entire issue of deregulation was an attempt to break up power utility monopolies and allow for more choices and therefore better and more competitive prices, but still keep enough regulation to not compromise accessibility and reliability. We shall see below in the Kim et al assigned reading paper how the element of deregulation affects renewable energy choices. But it is important to note that integration or promotion of renewable energy was not a driver or reason for deregulation. Before we discuss what the relationship actually is between deregulation and renewable energy, we need to understand what we mean by renewable energy policy.