In a regulated market, people have no choice but to get their energy from a local utility company. When the energy market is deregulated, however, energy consumers have the right to choose who supplies their gas and electricity.
Many countries around the world have deregulated markets. In the UK, for example, the process of deregulation of the energy market began in 1989 when the Electricity Act of 1989 was signed.
Now, the US energy market is also transforming into a deregulated one. As of March 2022, the following US states enjoy deregulated markets:
- California
- Colorado
- Connecticut
- Florida
- Georgia
- Illinois
- Indiana
- Iowa
- Kentucky
- Maine
- Maryland
- Massachusetts
- Michigan
- Montana
- Nebraska
- New Hampshire
- New Jersey
- New Mexico
- New York
- Ohio
- Pennsulvania
- Rhode Island
- South Dakota
- Texas
- Virginia
- Washington DC
- West Virginia
- Wyoming.
Deregulation of the market aims to ensure that prices are low and competitive. Here you can find out more about how deregulation works and what the benefits of it are.
What is the deregulation of the energy market?
The deregulation of the energy market means that the process of supply and delivery of energy is not controlled by a local utility, but instead customers have complete freedom to choose between numerous suppliers.
In a deregulated market, there is no one provider who has a monopoly on delivering energy to customers. On the contrary, deregulation encourages competition and there are tens, or sometimes hundreds small and big suppliers operating on the market.
What are the advantages of deregulated energy markets?
As an energy consumer, you can enjoy many benefits that come from the deregulation of the energy industry. The main ones are:
- Freedom to choose your supplier
- Better quality of services
- Lower prices
- Improved energy efficiency
- Additional services
- More support.
In a deregulated market, suppliers have to constantly look for ways to improve to stand out and beat the competition.
Energy Pricing
Energy prices are not set. Instead they change frequently. To better understand why that is, have a look at the two cycles that the electricity market tends to follow:
| The seasonal cycle | People consume more energy during cold winter months to heat their homes and during hot summer months to cool their homes down. |
| The energy market cycle | Energy prices rise and fall over the course of 4 to 8 year cycles |
Prices of natural gas also follow two cycles:
| The seasonal cycle | During colder months consumers use more natural gas to heat their homes – that’s when the demand for natural gas is the highest |
| The storage cycle | Natural gas is shipped to customers through transmission pipelines. When the demand is high, there might not be enough gas stored to respond to the needs of consumers so the prices go up. |
What defines the price of energy
The price you are paying for energy is expressed in cents per kilowatt-hour (kWh). Nevertheless, there are several things that are included in the price. These things are:
- Energy – the cost the supplier pays for getting energy they then deliver to you
- Capacity – charges that ensure there will be enough generation to meet the maximum demand possible
- Ancillary Services – charges for maintaining the grid
- Losses – charges covering the electricity lost between generation and delivery to consumer
- Transmission – cost of moving power from the generator to the local distribution company.
So, when paying your energy bill, you are paying for more than just the energy you actually consume. Still, the more energy you use, the higher your bill will be.
Electricity pricing plans
When choosing an electricity plan, you will have to decide whether you want a fixed or a flexible price. A fixed price means that you will lock a set rate per kilowatt hour you consume. How much you will pay every month will depend on how much energy you use. Even if energy prices on the market go up, your price will not change.
If you want to protect yourself from fluctuating energy prices and have greater stability, you can consider a fixed energy price. Then, you will be paying the same rate for your energy throughout the duration of your contact. The disadvantage of that is, however, that you will not have the flexibility to end your contract whenever you want and change to a different supplier.
Natural gas supply
Just like with electricity, the price of your natural gas is composed of a few things, which are:
- Commodity – the cost of the natural gas
- Basis – the cost for transporting gas through pipeline system to your location
- Losses – the cost for gas that is lost during transporting gas through pipelines.
The price of your natural gas is expressed in therms (th). And, of course, the price you will be paying for your natural gas supply depends also on your usage. When getting a quote from a supplier, they will take into consideration your past usage to provide you with an estimation of what you can expect to pay.
When choosing a product, you can opt for one with swing, also called bandwidth. Then, you will be able to go above or below the amount you are getting supplied while still paying the fixed price you agreed on. If you choose a tariff without bandwidth, you might find yourself paying expensive rates for the natural gas you use once you reach contract quantity.
Just like with electricity, you can decide to choose a fixed price tariff when signing a natural gas supply contract. Thanks to that you will have more predictability regarding your monthly cost. You can also save money overtime if the prices on the market increase.
However, you can also decide to choose an Index price tariff where the price for your natural gas is tied to market rates so it keeps changing as supply and demand change. What you will be paying each month will be based on market rates and your usage. An index rate gives you a good degree of flexibility as you normally do not have to sign a contract for a specific period of time. If at any point, you want to change deals or suppliers, you can do so without having to pay exit fees. Still, there is a risk of price volatility.