Broker eXcelerate Series: Why is Restructuring Today’s Power Markets Such a Complicated Task?
Welcome back for another entry into the Broker eXcelerate Series, meant to cover complex energy market topics for newcomers to the energy brokerage industry, as well as providing timely refreshers for even veterans of the industry who could use a brush up on this exciting but sometimes confusing industry.
Whether you know it or not, independent energy suppliers and the industry of energy brokers were not always a part of the power sector. This aspect of the industry has been a more recent development that’s seen independent energy suppliers become an integral part of many energy markets across the country. That evolution has been aided not only by digital technologies that can more readily connect brokers to other parties in the sector via real-time pricing and deployment, but also infrastructure advancement that has increased the distance over which power can be efficiently and effectively sent. Both of those agents of change, however, are only enabled once policy and regulation reform allows them to come into play.
But those regulatory changes can be complex, especially the broad restructuring of power markets, which is also known as deregulation. This topic remains hotly debated in energy wonk circles and in ballot initiatives across the country, ultimately reaching more and more states with each passing year. But what exactly is power market restructuring, and why is it such a complicated task?
What does restructuring power markets mean?
Understanding today’s U.S. power markets requires a quick history to understand the evolution of regulation in the power sector. Initially when power lines were first hung in cities and electric lights were brought indoors for the first time, utilities were not regulated. Multiple power companies competed for the same customers and it required multiple sets of infrastructure to be built to deliver electricity from each provider to all potential customers. This setup was obviously quite inefficient in space and resources, making it impractical. As such, states began to regulate and oversee the power providers, with each given customer base not being given an option from whom they’d buy their power. Rather a regulated market was developed where selected utilities would be given a monopoly over that customer base, but those utilities were then tightly regulated so that monopoly couldn’t be exploited: rates had to be approved by a state regulatory board, investments had to have a proven benefit to customers, etc. This regulated market developed and became the standard across the country for the ensuing century of electrification.
That arrangement carried from the beginning of the 20th century through most of the ensuring decades. In the 1990s, though, state policymakers started to individually highlight and debate market restructuring: goals included:
Using market mechanisms to better achieve efficient prices
Shifting business risk from consumers to investors
Let customer choice incentivize better service and lower prices
In the years since, many parts of the U.S. power markets have restructured. All told just over a dozen states (as well as the district of Columbia) have seen their power markets restructured to allow for some degree of energy markets being open to consumers choosing their provider.
Why would restructuring be desired?
The complexities of power market restructuring are a large hurdle, but in the viewpoint of many stakeholders they are worth undertaking given the potential benefits. Going once again to three decades ago when the restructuring debate and trend began, the Pacific Northwest National Laboratory noted that:
By the early 1990s it was becoming apparent that electric industry regulatory approaches were not working. IRP (integrated resource planning) was successful in were not working. IRP was successful in holding rate increases in check & stimulating holding rate increases in check & stimulating consumer choice, but the process was highly consumer choice, but the process was highly adversarial, time consuming, & expensive. adversarial, time consuming, & expensive. Rates were still high & significant differences Rates were still high & significant differences among adjacent electric utilities & between among adjacent electric utilities & between gas & electric utilities caused problems.
In the existing structure, central monopoly utilities operated to cover all verticals of the power sector, covering generation, transmission, distribution, and ultimate sale to consumers. Since then, though, more states have been opening up the markets to allow other players into the game. The driver for this change is to let a more free and open market provide natural benefits to consumers: rate structures that work for them, energy generation mixes that align with their ethics, unique programs for demand response that can benefit them and the grid, and more.
What are the hurdles that make it so complicated?
If the potential benefits to customers can be so great, what are the hurdles that are stopping wider implementation in swifter fashion?
To start, the way in which energy markets work in the United States is dictated by the states, not an overall federal body. While certain specific issues are handled on a national level by the Federal Energy Regulatory Commission (FERC), those are specific cross-state issues like approval pipelines that stretch across state borders. The vast majority of relevant grid decisions on who can buy and sell energy and under what guidelines they can operate is dictated via state policies. States have public utility commissions, regional transmission operators, and other bodies. So, on a macro level, this separation of who controls power markets in different states creates huge challenges for power market restructuring because there’s no single sweeping action that can be made at a national level to really open up opportunities for such restructuring. Instead, the entire country operates under a patchwork of unique policies, differing regulatory bodies, and state-specific considerations. Those different arrangements need detailed and resource-intensive attention before considering restructuring, and so advocates of doing so can’t really follow a single unique playbook or hope for any type of order from a federal entity to undo this arrangement.
Further, those myriad of different areas where restructuring policy would be needed must then contend with expected political pushback from legacy utility supporters and their deep pockets across the board. Having the public debates in each state is a large undertaking, and voters may understand the benefits to them of restructuring but they can also be readily swayed by scary, or even misleading, stories told by those funding the opposition efforts. From a public perception standpoint, these efforts are an uphill battle against that messaging, despite the reality that restructuring is inherently consumer-friendly first and foremost. Even worse, the legacy utilities can and do express skewed consumer protection concerns to get them to vote against or demand their elected leaders vote against such restructuring progress.
If and when the consumer and public battles are won and restructuring has the wave of momentum, there are still undoubtedly logistical hurdles that add complexity and inertia to the process. The way in which restructuring happens can take many different forms. Utilities typically cover generation of electricity (or production, when dealing with gas utilities), transmission across long distances to local substations, and then distribution from substation into individual customer home. The question of how to restructure means that the state regulators aren’t going to immediately create a free for all. Deregulation is more of a pragmatic process, identifying specific areas of that market to open up. Going back to that historical perspective, new sets of grid infrastructure built out aren’t beneficial to anyone. As such, restructuring means giving new generators access to the infrastructure the legacy utility operates. Formalizing that process, ensuring it’s kept fair for all power providers (including the legacy utility), and monitoring that process is inherently complicated.
Many restructuring challenges also come from new technology on the grid. Even compared with just 10 years ago, restructured markets newly have to deal with distributed energy resources, demand response program, energy storage assets, increase renewable penetration, smart grid technology, and more. These technologies require unique consideration to the new challenges they bring to a deregulated market that weren’t there for previously restructured states to face.
The decentralized nature of these restructured markets also creates problems. When all the utility functions are done under a single roof, the process to ensure supply is meeting demand is more straightforward, as there are only so many people involved. But when the generation is taking place in a more distributed fashion (both in terms of geography and ownership) that means there isn’t a single decision-making entity covering the grid who will anticipate potential outages, downtime, and other concerns. The grid operators and the open markets exist to send the appropriate market signals and keep the system humming—and by and large that is successful for the power providers and customers alike—but going from regulated to restructured power markets requires a lot of study, build up, trust building, and more to ensure that process can be done smoothly. For example, In a newly restructured power market, the billing process also thus needs upgrades. Customers don’t want to receive multiple bills from each stage of their restructured utility process, so integrating these processes, overseeing them to be fair and reasonable, etc. is another potential headache.
Even once deregulation and restructuring is baked into a region, brokers must still deal with challenge of getting customers to take the new step to transfer to different retail power providers. In states with deregulated power markets, less than 20% of customers tend to utilize the opportunity, whether because of fear, lack of awareness, being content with their current provider, or otherwise. While brokers have many strategies to combat that inertia, this hesitation on the end of many consumers still adds extra complication.
In the end, building a deregulated market from the ground up in a way that optimizes benefits for consumers and power providers would be one task that is more straightforward, but the reality is that restructuring the power markets is complex because we have a starting point of a regulated market. Transitioning to the new way of doing things is resource intensive, requires a necessary amount of public debate, has notable upfront costs associated with it, and creates some natural unpredictability. Doing so is worthwhile because this transition is one that benefits consumers and the efficiencies in the market, but it’s still an uphill climb.
What does that mean for brokers?
Currently, energy brokers are inherently limited to the audiences in which they can serve, as they are persona non grata in still regulated power markets. But the truth is that the benefits that brokers can bring to consumers only expands and multiplies as more markets are opened up. A wider market in which they can pull in generation means more personalized, reduced cost, and high value power programs become more widely available. Higher voltage and higher efficiency transmission is literally bringing down the borders of where power has to be generated, with less local sourcing being feasible if those sources are cleaner, cheaper, and are more readily available. That’s a win for everyone.