Benefits of Competitive Energy Markets
The benefits of energy choice are becoming increasingly clear. In today’s competitive energy markets, families and businesses can choose energy solutions that are tailored to their needs, rather than relying on one-size-fits-all plans from monopoly utilities.
As of July 2024, 22 states and the District of Columbia have broken the utility monopoly model, allowing some or all customers to shop for competitive suppliers and select an energy provider that best suits their unique needs. With consumers demanding more affordable, clean, reliable, and individually tailored energy options, the number of customers who value energy choice and shop for electricity or natural gas continues to grow.
According to the U.S. Energy Information Administration, in 2021, 26% of eligible U.S. customers participated in their state’s retail choice program, or 13.2 million U.S. residential electric customers. This demand for energy choice is driven by a desire for affordable energy solutions that are tailored to individual preferences and needs.
In many states, the decision to do away with the monopoly utility model in the late 90s was driven by customer demand for cheaper energy and a lack of confidence in how the utility industry was managing assets and costs.
Almost three decades later, priorities have since expanded, and customers now want energy solutions that are also clean and reliable, while policymakers are driving policies that require the procurement of clean energy. Customer engagement in demand response and time-of-use products is also supporting grid resilience as more intermittent resources come online.
Today’s customer, policymaker, and market are not that of the 90s, and for restructured states that encourage competition and innovation, the markets and market benefits have evolved with our expanding priorities.
In this article, we will explore the many advantages of competitive energy markets, from driving down prices to giving consumers more options, convenience, and control.
Product Variety & Innovation
Exceptional customer service is at the foundation of competitive markets because suppliers must earn the loyalty of every customer every day.
When multiple energy providers compete to provide electricity and natural gas, suppliers focus on offering a broad variety of plans, including features that allow consumers to set a budget, track usage, improve efficiency, and easily get alerts so they can be more informed, all as a way to obtain and maintain that customer relationship.
In other words, unlike monopoly utilities, competitive suppliers are attentive to customers’ demands and provide energy solutions tailored specifically to their individual needs and circumstances.
That allows consumers to compare plans and maximize the aspects that matter most to them, whether that is contract length, price, carbon-free energy, cash back, flexibility, or other factors that best fit the way they use electricity. A few of the various plan options advantageous to standard service include:
- Fixed-bill plans, also known as predictable billing plans, offered by electric retail suppliers allow the consumer to pay a flat amount every month, all year long, protecting consumers from seasonal bill spikes. Think of these as an “all you can eat” energy plan.
- Fixed-rate products offer a specific energy rate that will not change during the contract term (e.g., a term can be 12 months), providing a consistent cost per kilowatt-hour, so the bill fluctuates only according to actual electric usage, giving consumers more control over what they use and what they pay.
What matters most is that consumers choose the plan that is right for them.
Electric competition also spurs innovative, value-added services that deliver on the promises of choice, convenience, and control. So, when the customer has the power to choose suppliers, suppliers seek innovative ways to win and retain them. A few examples include:
- 100% carbon-free energy plans
- Smart home technologies
- EV charging
- Backup power options
- Behind-the-meter solar
- Community solar
Efficiency and Resiliency
In monopoly states, customers have limited or no energy options beyond a single default rate. This outdated model made sense a century ago when the electricity industry was new and the government wanted to ensure its viability. But with innovative technologies and services available today, and rapidly changing consumer demands, the monopoly utility network is no longer fit for meeting current and future energy needs. We are asking more of the grid than ever before, and while utilities do have a critical role to play in energy markets by delivering power reliably at the lowest cost possible, they are not capable of handling the increasingly complex grid of 2023 alone.
On average, U.S. electricity customers experienced over eight hours of power outages in 2020, the most since the EIA began collecting data in 2013. There are various factors causing this increase, led by major weather events, but also including aging infrastructure, vegetation patterns, and utility practices. Resiliency has taken center stage as a result of this pattern, and these changes call for far more investment in transmission and distribution (T&D) than we’ve ever needed before. In a truly competitive market, utilities would focus more on ensuring reliability in T&D, rather than the retail sale of electricity.
In addition to improving the resiliency of the grid, states are moving forward with their goals to replace traditional fossil generation with clean energy alternatives, all while electrifying transportation and other parts of the economy. As a result, today’s grid composition includes far more distributed and intermittent energy resources than before, and managing this load requires a much more flexible T&D system. We are left managing a delicate balance of supply and demand that can shut down during any critical events where supply and demand do not match. Investment in demand-side efficiency is essential in preventing consumers from shouldering the cost of increased transmission and distribution.
In competitive markets, utilities typically handle the delivery portion of the grid, increasing and decreasing supply in response to changes in demand. But the challenges facing today’s grid call for more than adjusting supply. With the uncertainty of supply given the introduction of so many intermittent resources, it’s becoming increasingly important to flexibly control demand through customer engagement and demand response. This is where energy efficiency comes into play — and retail suppliers play a key role.
Unlike utilities, retail suppliers can incentivize flexible demand and get time-of-use products and controllable devices into homes and businesses faster than utilities otherwise can. More importantly, retail suppliers can do this while innovating. Competition between energy providers leads to more innovation and investment in energy-efficient products and services such as smart thermostats, efficient appliances, and custom billing arrangements that can help homes change their behavior and reduce their energy consumption, especially during peak hours of high demand.
The ability for states to achieve clean energy goals while maintaining grid resiliency depends on the regulatory environment’s structure. For example, suppliers’ inability to access their customer’s usage data or engage with their customer directly limits their capacity to offer customer-specific products such as demand response, time-of-use, or smart home integrations.
Competitive markets shift the customer relationship to where it should be, between the customer and their service supplier, allowing utilities to prioritize investments in upgrades that enhance infrastructure and ensure the power grid’s resiliency.
Economic Development
Competitive energy markets spur economic development in several ways. They create a competitive market where consumers have more options to choose the energy provider that best fits their needs. This competition encourages providers to offer better pricing, services, and innovation, leading to overall economic growth.
Competitive energy markets allow companies to respond to customer demand for clean energy solutions without increasing costs for ratepayers. As customers demand more affordable, reliable, and sustainable energy options, businesses are incentivized to invest in clean energy generation assets such as wind, solar, and hydropower. This not only creates jobs in the construction and operation of these facilities but also generates tax revenue for local communities. By fostering innovation and competition, energy markets enable companies to achieve their sustainability goals and differentiate themselves in a crowded marketplace, all while ensuring that the costs of these investments are borne by the businesses themselves rather than passed on to customers through higher rates.
Energy choice also provides more opportunities for investment and entrepreneurship. When consumers have options, they are more likely to seek out new and innovative providers, leading to the development of new companies and technologies. This not only creates jobs but also encourages investment in research and development, leading to new advances in energy technology and further economic growth.
In addition to the benefits for consumers, energy choice also draws in businesses. When companies have the option to choose their energy provider, they can select one that offers more competitive pricing, more reliable service, or renewable energy options that align with their corporate sustainability goals. This can help to attract and retain businesses in a region, contributing to economic growth and job creation. Furthermore, energy choice can lead to the development of local energy infrastructure and services, creating new business opportunities and contributing to a diversified economy.
Energy Cost Savings
When consumers have the buying power, they often seek the best deals. Competitive energy markets give them the option to shop and save.
In Pennsylvania, for example, consumers have had the option of choosing their electric service provider for a quarter of a century, as part of the Electricity Generation Customer Choice and Competition Act of 1996. Before introducing competition, Pennsylvania had some of the highest electricity prices in the country. Since the introduction of competition, prices have lowered and stabilized. Average Pennsylvania electric rates were 15% above the national average before the state embraced competition. Now they are about 7% below.
Not long after Pennsylvania enacted its law, Massachusetts opened its market in 1997, adopting the Electric Restructuring Act, which ended the captive utility monopoly that had consumers paying some of the highest prices regionally and facing unfair rate hikes. Energy choice has encouraged a healthy competitive market that benefits consumers. Massachusetts customers have saved more than $1.5 billion since the Electric Restructuring Act took effect.
A joint study, “Electricity Customer Choice in Ohio,” prepared by Cleveland State University and Ohio State University for the Northeast Ohio Public Energy Council (NOPEC) and last updated in 2019, said energy competition had saved Ohio consumers $23.9 billion since 2011. (Ohio restructured its markets in 1999.) The study noted competition drove down the standard service offer, saving Ohioans $19.5 billion. It estimates that customers who shopped for energy, whether on their own or through a government aggregator like NOPEC, enjoyed an additional $4.4 billion of savings.
More recently, in Connecticut, the Office of Consumer Counsel (OCC) noted in a January 2023 report that customers who shop the competitive electric marketplace and chose a supplier other than their default utility saved in aggregate $23,706,010 between February of 2022 and January of 2023. The OCC is an independent agency that advocates for utility ratepayers on issues decided by the Public Utilities Regulatory Authority.
Energy prices can be highly volatile, based on a diverse set of complicated factors. The beauty of competition is that if a customer does not like what they currently pay, they are empowered to shop for a different supplier at a lower cost. They can even lock in that price for an extended period of time to safeguard against volatility, ensuring the savings continue into the future.
Consumer Protection
In states with monopoly utilities, customers are at the mercy of their utility when it comes to energy prices and services. If prices go up, customers have no choice but to pay, and if they want clean energy but their utility isn’t offering it, tough luck. This lack of choice and competition leaves customers vulnerable to exploitation and high costs.
On the other hand, competitive energy markets provide consumers with more protection and options. In a competitive market, if a company raises prices too high or fails to provide the services that customers want, those customers can simply take their business elsewhere. This competition encourages providers to offer better pricing, services, and innovation, leading to overall economic growth.
In competitive energy markets, consumers are not left to bear the costs of bad generation investments made by utilities. In monopoly states, when utilities make bad investments like the Vogtle or Summer nuclear plants, customers are held captive and forced to pay for it without any other options. However, in competitive markets, suppliers assume the financial risk and are held accountable for their investment decisions because they must compete with other providers. This competition ensures responsible investment decisions and that the costs of any mistakes are not unfairly passed on to consumers.
Power of Choice
Price is not the only value proposition in competitive markets. While it may be among the reasons consumers enter the retail choice market, it is not the sole reason they stay. Factors such as brand reputation, level of service, and degree of product innovation also matter.
Regardless of the reasons, consumers have made it resoundingly clear that they want the power to choose the energy they use, who delivers it, and the products they pay for.
In Connecticut:
A survey of electric ratepayers from Emerson College Polling Center found that 89% of respondents believed they should be able to choose their electric supplier, even if they didn’t shop for a supplier.
In Massachusetts:
A poll by SurveyUSA on behalf of CleanChoice Energy found that 79% of respondents said they want to be able to choose who supplies their electricity.
In West Virginia:
A similar poll in West Virginia, 78% of consumers said they should be able to pick the natural gas supplier who serves them.
In Pennsylvania:
A 2020 survey of 729 likely voters in Pennsylvania by Susquehanna Polling & Research found that 89% of consumers said they support the ability to shop for electricity plans in the same way they do for cell phone, internet, or TV plans.
In Virginia:
A 2017 study by Public Opinion Strategies and a 2021 SurveyUSA poll found that 88% and 77% of Virginians, respectively, want to choose their electricity supplier. This sentiment is a culmination of decades of dealing with a broken monopoly system that isn’t held accountable. Virginians currently lack access to providers that can offer competitive pricing or products and services that can reduce their energy costs.
Nationally:
The latest annual poll by the Conservative Energy Network shows that voters overwhelmingly support more competition in the electricity sector, with 87% of respondents supporting increased competition in the electricity markets and 59% strongly in favor of more competition. Two-thirds of voters who responded to the poll agreed that America can create a new electricity system that benefits the environment, accelerates the availability of new technology, and creates more opportunities by opening markets to competition and giving consumers more choices instead of just their monopoly utility.
Consumers have spoken, and they want the power to choose because the benefits are real.
