Opportunities and Challenges for Energy Market Deregulation

What’s the state of energy market deregulation — or competition — in the United States today? The COMPETE Coalition has a new report on the subject, and given that the coalition represents pro-deregulation business interests, it’s full of happy talk on the benefits of competitive markets. Some 16 states and the District of Colombia now serve up to 15 percent of the country’s electricity in competitive markets, where retail electricity providers (REPs) compete for power customers in one way or another. But how much actual energy are they saving in the process?

REPs buy power from generators and distribution utilities and sell it to customers, and this process could lead the way in trying out new in-home energy management technologies and business offerings. But REPs aren’t doing this to save energy. Instead, they do it to win customers and, with them, more business. It’s a different motivation from the traditional monopoly utility model, where utilities pit rate cases and returns on investment against regulator demands for energy efficiency goals and lower customer bills.

But it also means there’s a potential drawback to the competitive market in terms of energy efficiency. Simply put, what REPs are selling is not what most customers seem to be interested in. As one Texas power retailer representative told me, “Demand response is a four-letter word to us.” Devices that automatically shut down air conditioning during hot summer afternoons is not a selling point, as the limited uptake of residential demand response programs has shown. Rather, Texas retailers concentrate on extra service, or feel-good items. Southwest Power and Light’s promise to plant a tree for every 1,000 kilowatt-hours a customer buys, for example, is more common, utility consultant and report author KEMA noted. Others give customers a chance to play the market in their energy bills: Reliant Energy’s “cap-and-save” option allows customers to link their power bills with the rise and fall of natural gas commodity markets.

According to KEMA, Texas is the state driving innovation in connecting customers with their utilities, providing both smart meter and broadband avenues into the home. Its Smart Meter Texas Portal, launched in the summer of 2010, is the first in the United States to serve customers of multiple utilities using multiple smart meter networks, although KEMA reports that smart meters haven’t yet driven much innovation in the residential retail innovation front.

On the broadband front, Texas is the home of projects that include Ecofactor’s cloud-based thermostat optimization software, or TXU’s  broadband-enabled iThermostat system. More recently, Reliant Energy, the Texas energy retailer owned by New Jersey-based NRG Energy, has started testing out home energy management systems from Control4 in a limited, employee-only pilot project.

At the same time, Reliant has about 175,000 customers who subscribe either to daily energy report emails or various time-of-use rates. But Reliant doesn’t really track whether or not those programs are leading to greater energy efficiency among those customers, a spokesman told me, though they do close tabs on how those products perform in retaining customers and adding new ones.

Keeping customers isn’t the only thing REPs look at when deploying technology in homes, of course. U.K.-based home energy and security device maker AlertMe, for example, has found that customer British Gas uses AlertMe’s heat controller unit to sell boiler insurance and replacement services to customers, and then diagnose those heating systems remotely, cutting down on costly service calls.

Still, competitive power markets offer the same conundrum in efficiency incentives found in the most regulated, monopoly-driven markets, that electricity providers are still being paid on the kilowatt-hour. Unless REPs can find offers that both save customers on their energy bills and help the retailers make money, innovation in the competitive landscape may remain more of a sales boost than an efficiency boost.

Question of the week

Can REPs can find offers that both save customers on their energy bills and help the retailers make money?
Relevant analyst in consumer electronics
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