What Are Energy Markets? The Nitty Gritty, Explained
Lately, the energy market crisis has been all over the news. Global energy prices are soaring due to a natural gas shortage. During such a turbulent time, it’s important to have a good understanding of energy markets so you can make the best decisions for your organization both operationally and financially. So, what are energy markets and how do they work? In this article, we answer those questions, discuss the difference between regulated and deregulated energy markets, and more.
What Are Energy Markets?
In a nutshell, energy markets are commodity markets that deal specifically with the trade and supply of energy. An energy market may refer to an electricity market, but can also refer to other sources of energy like natural gas and oil.
How They Work
There are two types of energy market: Regulated and deregulated. Here’s a little background for context: Traditionally, regulated electricity markets existed across the United States, restricting customer choice. It wasn’t until the 1970’s that the idea of deregulation came into play, with the passage of the Public Utilities Regulatory Policies Act. This act began an age of restructuring for the energy industry. Consequently, in 1992, the passing of the Energy Policy Act opened the market further. The Energy Policy Act’s goals were to increase the use of clean energy and energy efficiency. It broadened choices for utilities and created new rate-making standards. Since then, deregulated energy markets have spread across various states.
A regulated electricity market contains utilities that own and operate all electricity. From the generation to the meter, the utility has complete control. The utility company owns the infrastructure and transmission lines then sells it directly to the customers. In regulated states, utilities must abide by electricity rates set by state public utility commissions. This type of market is often considered as a monopoly due to its limitations on consumer choice. However, its benefits include stable prices and long-term certainty.
On the other hand, a deregulated electricity market allows for the entrance of competitors to buy and sell electricity by permitting market participants to invest in power plants and transmission lines. Generation owners then sell this wholesale electricity to retail suppliers. Retail electricity suppliers set prices for consumers, which are often referred to as the “supply” portion of the electricity bill. It often benefits consumers by allowing them to compare rates and services of different third-party supply companies (ESCOs) and provides different contract structures (e.g. fixed, indexed, hybrid). Also, in a deregulated market, there is an increased availability of renewable sources and green pricing programs.
Which Energy Market Is Best for Your Organization?
Your organization may be in a state that has exclusively either a regulated or deregulated energy and/or gas market (see map below for reference). If so, you won’t have much choice where you procure energy from. However, some states have both types of market. In that case, with many U.S. states and cities pledging to switch over to renewable energy in the next 30 years or so, it may seem that a deregulated energy market has more benefits for your organization. But while it is true that deregulated electricity markets offer a broader range of renewable energy options, there are still options for consumers in regulated states to reap the environmental and economic benefits of green power. For instance, Power Purchase Agreements allow for the investment in a project outside of your state, providing benefits through renewable energy certificates (RECs). Although unable to incorporate renewables directly into your electricity supply contract like in deregulated markets, the green options are growing for regulated markets.
As seen below, the United States stays fairly divided on deregulated vs. regulated electricity markets. Deregulation gained large support when it was introduced in the 1990’s, but has been met with some challenges along the way. For example, the California energy crisis in 2000 led to many states worrying that total deregulation may cause market manipulation. But the increase in consumer control over decision-making pushes the growth of deregulation.
Natural gas (and increasingly, renewable energy!) pricing plays a key role in electricity power pricing due to nuclear, coal, and oil generation being retired and mothballed. WatchWire’s energy experts keep an eye on the energy market fundamentals in order to provide insights into forward power pricing for our clients. Click here to sign up for our weekly energy market updates.
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