How retail energy providers cut rates without cutting corners. #ServicesKnowledge
When deregulation exposes the energy industry to an open market, competition drives down prices. You’ve doubtlessly heard this all before, but what does that really mean?
Though electricity might be generated through different resources like coal, natural gas or renewables like solar panels or wind turbines, in the end, all megawatts are essentially the same. It seems baffling that a retail energy company could offer lower prices than utilities for what is basically an identical product.
What’s the catch? There is none – it’s just good business sense. But to understand the core concepts at play behind price assignment in U.S. deregulated energy markets, you’ll have to go back in time to when deregulation didn’t exist. Let’s dive into the past to find out how retail energy emerged and how its businesses can set their rates at historic lows.
“Energy regulation can stifle innovation.”
How it all started At the start of the 20th century, as American infrastructure flourished, regulating energy interests seemed like the right thing to do. According to the Retail Energy Supply Association, utilities sought out regulations in part to prevent streets and cities from being cluttered with competing transmission lines from disparate companies. This is primarily the reason why deregulated energy customers switching providers don’t need a team of electricians and service interruptions.
However, decisions like sharing the costs of an all-inclusive grid and denying free market competition were solely about profit. And it worked – for a while. But energy is amorphous, a constantly shifting resource that develops by way of innovation. Energy regulation can stifle innovation, or at the very least, hinder it from growing at an organic pace. So as America’s entrenched energy interests pushed against newer, cleaner forms of power, prices flew through the roof. The dividing lineHow does this all tie back to where retail energy finds room to trim their rates and stay competitive? Because the answer is, simply, anywhere they can.
Utilities worry about a single conglomerated price comprised of separate costs pressed together. Retail energy providers, by nature of their very origin, see energy as a multifaceted issue. Since deregulated companies don’t typically own generators and transmission hardware, they’re forced to pay those who do to create and transmit energy to their customers. But as things like energy storage technology and distributed energy resources begin to make their mark on the industry, the nuts and bolts of the national grid will diversify – something utilities aren’t particularly equipped to handle. An Edison Electric Institute study suggested as these new channels of generation and distribution become inexpensive, it could “directly threaten the centralized utility model.” And that’s exactly what’s happening.
On the other hand, deregulated energy retailers see their products the way a housefly sees the world, the same image shown from a thousand different angles. If retail providers spend X dollars to send electricity over power lines, but uncover an innovative alternative that saves them in the long run without changing their customers’ service, competition in their market pushes them to heavily consider investing. Hard costs and government oversight prevent utilities from enjoying these freedoms.
The finishing touchIn exchange for its forward momentum, retail energy providers don’t just pass along cost savings to their customers. In addition, they offer a mitigating force against economic volatility. While both regulated and deregulated energy interests can be swayed by the risks of doing business, utilities lack the recourse to push back against factors that drive up prices.
Deregulating energy cuts costs for the retailers and customers alike, but what’s arguably more important is how services don’t degrade just because rates drop. Retail energy customers enjoy the security of both competitive pricing and an industry-leading product.
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