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Is the U.S. Moving Inevitably to Competitive
By Bob Shively, Enerdynamics’ President
In the late 1990s, the electric industry seemed destined to follow telecom, the airlines, and natural gas in the move from highly regulated to highly competitive industries. The Federal Energy Regulation Commission (FERC) and many key states such as California, New York and Texas supported competitive electric markets. And most industry participants were moving forward with plans to implement at least competitive wholesale markets, if not also retail markets.
Then came the California energy crisis in 2001 followed by the collapse of Enron. Suddenly it seemed no one wanted to be associated with electric competition. Many assumed that competitive electric markets were a failure and that electric competition was dead. Ten years later, more than half of Americans are not even aware that several states provide customers with the option to buy their power from someone other than the monopoly distribution.*
But the reality is, over the last 10 years, the U.S. has continually moved in the direction of competitive markets, and it appears this movement will continue in coming years.
Competition in electricity manifests itself in two ways: wholesale markets and retail markets. In wholesale markets, utilities, merchant generators and marketers trade power through bilateral markets and through day-ahead and/or real-time markets run by an Independent System Operator (ISO). In the last 10 years, we have seen strong growth in regions committing to ISO-run wholesale markets. Both Midwest ISO (MISO) and Southwest Power Pool (SPP) implemented new competitive markets. And ISOs such as MISO and PJM have grown from initial footprints with the addition of new participants choosing to move from non-competitive to competitive wholesale markets. In April 2011, Entergy announced its intention to join MISO. Over the decade from 2001 to 2011, the amount of generation capacity participating in ISO markets rose from 29% of U.S. capacity to 53%. This will grow again to 56% by 2013 when Entergy joins MISO.
The Movement to Wholesale Competition
Why are market participants voluntarily choosing to shift to competitive ISO markets? As ISO markets mature, the many benefits become increasingly apparent. These include reliability and cost benefits of scheduling and operating systems over large regional footprints as well as enhanced competition among generators. More specifically, the key benefits include:
- the ability to dispatch for lowest cost generation across a wide area instead of requiring
utility traders to ferret out low-cost generation outside the utility service area
- the ability to share capacity and reserves across multiple utilities
- the ability to take advantage of diversity in variability across wide areas as renewables
become a larger part of the generation mix
- the competitive pressure that results in merchant generators working to reduce operating
costs and efficiently manage assets
So why hasn’t all of the U.S. gone to ISOs? The answer is primarily political. Moving to an ISO means states give up control of regulating the generation base since FERC regulates wholesale generation. And customers in low-cost regions are easily convinced that while joining an ISO may help the region as a whole, it will increase their costs as cheap generation bids to serve loads outside of their immediate utility.
Given this resistance, do we expect to see more movement to ISOs? Interestingly, growing use of renewables may push further growth. Since renewable generation output varies within the hour, renewables require markets that provide for rescheduling within an hour – typically every 10 or 15 minutes. While ISOs do this through market based real-time markets, non-ISO regions have limited or no mechanisms to allow power trading within an hour. The various utilities across the Western Energy Coordinating Council (outside of the California ISO, which already has it) are working to implement a real-time scheduling mechanism that will move them closer to looking like an ISO. In addition to renewables, enhanced demand response and dynamic pricing initiatives, which are coming sooner than later, will require more ISO-like functions. At some point, the balance tips to making it worthwhile to be part of an ISO, which means we can expect the creation of new ISOs and the expansion of existing ISOs.
Opening Up Competitive Retail Markets
It’s one thing to have a competitive wholesale market that lets generators compete to sell to the grid, but what about competitive retail markets in which customers choose their electricity supplier (while still getting distribution service from their incumbent utility)? Between 2001 and 2010, the number of customers buying their electricity from non-utility providers increased from 3% of the U.S. market to 15%. This number will likely grow in 2011. Reports show that markets opening up in Pennsylvania have had high numbers of customers selecting competitive marketers, and California has re-opened a limited amount of direct access. As of 2011, 20 states offer some form of electric retail choice with 15 of them actually being active.
Electric Supply Choices in the U.S.
So will retail competition follow wholesale competition into continued growth? The standard assumption among the U.S. energy industry is that outside of large industrials, retail customers just don’t care enough about electric service to be bothered with retail competition. But a recent survey by Accenture** and the aforementioned survey by EcoAlign seem to indicate something different. EcoAlign found that 88% of American consumers believe power choice is a good idea. And Accenture found that 75% of U.S. consumers would consider purchasing electricity, energy-efficient products and/or related services from retailers, phone or cable providers, or online sites.
There are a number of factors that suggest we could soon see a new push for retail choice, although the political barriers in many states are immense. Two key drivers are the rapid evolution of customer participation in demand side management and dynamic (meaning market-based) pricing opportunities, and the future growth in distributed generation through low-cost solar panels. Both of these will be further enabled by the technology evolution known as the smart grid. We may soon find ourselves having bifurcated markets in the U.S. where consumers in states with customer choice have robust electric service opportunities while those in other states have a few limited utility programs to choose from. If retailers can harness new technology and new wholesale market revenue opportunities that in turn offer exciting choices for customers, we may see a new wave of states pushing to implement retail competition.
* Survey by EcoAlign, “EcoPinion No. 11: Resurgence for Retail Electricity Choice and Competition?” Available at
** Revealing the Values of the New Energy Customer, Accenture end-consumer observatory on electricity
management 2011. Available at http://www.accenture.com/us-en/Pages/insight-revealing-values-new-energy-consumer-summary.aspx