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As I reflect upon my 13 years in the energy business, I can’t help but think of all the changes that have taken place. The industry has evolved and dynamically changed, while other areas have remained static.
More than two decades ago, federal and state governments began dismantling electric utilities’ monopoly on generating electric power. In its infancy, deregulation suffered a severe setback as the result of California’s energy crisis. “California’s experiment with energy deregulation is not just a mess; it’s a certifiable failure, according to everyone from the state governor to the very utilities that initially backed the scheme,” wrote Charles Feldman, an investigative reporter for CNN, in 2001.
Similar to what happened in the airline and telecommunications industries, deregulation was supposed to reduce the prices consumers paid for electricity. After a decade of doubt, it has done precisely that.
The trouble is that while wholesale power prices have fallen dramatically, retail power prices have soared. This dynamic may drive a second and more aggressive era of deregulation. Before deregulation, power was expensive and the grid was cheap. Today, the converse is true. Power is cheap. The grid is not.
In 1995, the average delivered cost of electricity for investor-owned utilities was 7.1 cents per kilowatt hour. At the time, generation accounted for about two-thirds of the price of electricity. Today, the cost of generating electrons currently accounts for less than half of the price of electricity, according to the Edison Electric Institute.
The price consumers pay for electricity has increased as a result of the rising cost of poles and wires, which account for more than half of the typical residential customer’s monthly electric bill. For example, in Ohio, a large industrial customer recently reported that the retail price it paid for electricity had increased by 53% since 2009. During the same period, the wholesale price of electricity in Ohio had decreased by over 10%.
The implications of this economic shift are vast. In ‘The Future of the Electric Grid’, the Massachusetts Institute for Technology suggested these circumstances could stimulate a new era of deregulation.
“On the customer side, when the average delivered price of electricity is higher than the incremental cost of providing that energy, there is an incentive for ‘disintermediation‘—reducing purchases of power from the regulated utility.
“This situation with respect to wholesale generation costs led many large industrial and commercial customers in states with high regulated rates in the 1990s to press for restructuring and retail competition so they could shift their purchases to lower-cost wholesale providers or self-generate. The future decades could see a similar phenomenon among smaller commercial and residential customers.
If the deviation between the cost of generating electricity and the price paid by electric utility customers gets too big, it may “threaten the current political equilibrium.” If this happens, get ready for more change and even greater opportunities!