The Benefits of Competitive Retail Energy Markets


  • What Are Retail Energy Markets & Why Are They Important?

 

Retail energy markets allow consumers to choose among competitive suppliers and determine for themselves what energy supplier best serves their home or business. Competitive markets provide energy consumers with many options in terms of energy management, efficiency, renewable “green” energy, and price. Just as most consumers can choose from a variety of Internet or telephone service providers, consumers in many states can now choose an electricity and natural gas supplier for their home or business. This choice is a significant change over traditional utility service, in which an energy consumer has no choice but to purchase from a monopoly utility service provider offering few or no options in terms of energy management tools, renewable energy and efficiency, and pricing.

  • A Drive Toward Innovation

In order to compete with other companies for customers, suppliers are driven to innovate. This innovation has fostered the development of “green” energy, time-of-use pricing, and energy efficiency programs. In addition, the creation of demand response programs allows customers to participate in competitive wholesale power markets by receiving payments to curb usage during periods of intense demand. These programs help all customers as it is less costly to curb demand than to build new generation resources to meet peak demand.

  • A Choice for the Consumer

Retail energy choice is fundamentally different from traditional monopoly-protected and price-regulated electricity utility companies, which have no competitors and are guaranteed a profit through government-derived rate structures. These utilities have no incentive to be attentive to consumer needs as they are guaranteed customers and profit. While monopoly utilities have little incentive to cut costs or offer innovative products and services, a competitive market does just the opposite.

  • Why RESA Supports Energy Choice

 

RESA recognizes the critical role that substantive, practical, fair and workable consumer protection and marketing practices play in promoting a robust and sustainable competitive retail market that provides value-added products and services to customers. RESA member companies are committed to meeting and promoting a set of guiding principles addressing consumer protection and marketing practices.

 

  • How Does Service Change with a Competitive Supplier?

 

When you choose a competitive supplier, you will still have that energy delivered by your traditional utility company and typically will continue to receive a consolidated bill from the utility. What will change is the price you pay on the supply portion of your utility bill and the type of electric or gas product you purchase.

 

As a consumer, you need only select a competitive energy supplier and authorize them to make the switch. The reliability of your service will remain the same. The local utility company will continue to be responsible for any power outages or other emergencies.

 

Like choosing a cell phone service provider, selecting a competitive energy supplier requires a contract between you and the supplier. Always be sure to read and understand all the terms and conditions of your contract. You can enter into a contract with a retail electric or natural gas supplier in several ways.

 

Some examples include:

1. Enrolling online and accepting contract terms and conditions electronically; or

2. Signing a written contract; or

3. Providing a recorded verbal consent (also known as third-party verification) to contract

                 terms and conditions.

 

While it can be as easy as contracting through one of the three methods above, keep in mind that written contracts, especially those that result from direct solicitation, sometimes also require third-party verification for your protection.



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Facts & Figures

 

In the white paper entitled, “The Great Divergence in Competitive and Monopoly Price Trends,” Philip O’Connor, Ph.D. and Muhammad Asad Khan looked at data from the U.S. Energy Information Administration (EIA) and compared the weighted average price trends of the 35 U.S. monopoly states with the 14 U.S. jurisdictions that allow retail competition. They discovered that, while the electricity industry as a whole is facing unprecedented market conditions, i.e. – a flattened  demand for electricity, an increased interest in and affordability for renewables, alongside the shale gas revolution -- customers in states that allow retail energy competition are paying proportionally less for electricity, while customers in monopoly states are paying more.

 

Their research shows (as updated on the RESA website at https://www.resausa.org/phil-oconnor-thought-leadership) that between 2008 and 2019:

  • The all-sector annual weighted average price in the 35 monopoly states was 19.5% higher in 2019 than in 2008.
  • The all-sector annual weighted average price for the competitive retail markets was 6.9% lower in 2019 than in 2008.

 

EIA data also finds that the cost implications of such a difference are staggering. The analysis shows:

 

  • If the annual percentage price changes in the 35 monopoly states had tracked with the percentage prices in competitive jurisdictions, customers in the monopoly states would have paid nearly one-third of a trillion dollars ($442 billion) less.
  • On the flip side, if the same price trend patterns that occurred in the monopoly group had prevailed in the competitive jurisdictions, the cost to customers in the 14 choice markets would have been higher by $301 billion.

 

The research also reveals one partial explanation for this cost disparity may be found in the way competitive markets and monopoly regulation treat power plant utilization. While plant utilization has declined in greater proportion in monopoly states, plants in those states are granted full cost recovery -- with consumers left to absorb those costs. In contrast, if plants are underutilized in competitive markets, they will experience unfavorable financial consequences, but it is investors who pay the price, not customers.

 


INFOGRAPHICS

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FAQ’s:

What is retail energy competition?

Retail energy competition is the ability for consumers to choose their own electricity or natural gas provider based upon individual needs and preferences. Retail energy competition stimulates innovation and empowers choice but can only occur in states where policy makers have acted to end protected monopoly utility price regulation.

How does retail energy competition work?

A standard electricity and/or natural gas bill consists of three main costs: (1) the transportation of energy, (2) the distribution of energy and (3) the cost of the energy itself.

In states that allow customer choice, the transportation and distribution costs are still owned and operated by traditional monopoly-protected utility companies. It is the energy commodity, whether electric or natural gas, that is competitively priced. In states with retail competition, customers still receive one bill for their electricity and natural gas, but they have a choice of selecting their energy supplier.

 

What is the difference between monopoly-protected/government price-regulated utilities and a competitive market?

The fundamental difference is that a competitive market allows customers to shop for their supplier, while a regulated market dictates what utility consumers must use. These monopoly-protected utility companies do not foster the same innovation and have little to no incentive to cut costs.

Who are competitive energy suppliers?

Competitive retail energy suppliers sell electricity and natural gas in regulated energy markets to residential, commercial, and industrial end-use customers.