In recent months, energy prices have risen at rates unseen since the 1980s. According to the U.S. Bureau of Labor Statistics, household energy costs are increasing, with customers paying 13.7% more for electricity and 13.1% for energy overall as of November 2022. These drastic changes are impacting pocketbooks around the country, leading to questions about deregulation’s role in rising prices.
What Is Deregulation in the Energy Industry?
Deregulation is when there are multiple energy suppliers within one area, giving customers more options when looking for gas, electricity or another energy source. Understanding the current debate over deregulation requires a quick history lesson. The U.S. energy market was highly regulated for much of the 20th century, resulting in a few government-approved utility companies having control over the supply.
These companies set the prices and residents had only one option for getting their electricity and gas. In the 1990s, however, several states began experimenting with deregulation. This attempt to resist monopolies comes alongside privatization, which is when energy production moves from public-funded ventures — like sanctioned utilities — to private businesses.
Currently, several U.S. states and territories have deregulated their energy market, including Texas, California, New Jersey, Maryland, Pennsylvania, Ohio and Michigan. Some have deregulated either their gas or electric networks, while others deregulate both.
Privatization and Rising Energy Prices
Since deregulation began in the 1990s, experts have debated whether it has had a net positive or negative effect on the U.S. energy market. While competition between a greater number of providers is intended to lower costs for customers, recent data indicates energy rates in deregulated states have risen faster than those in regulated states. Residents of deregulated areas pay an average of $40 more for electricity each month than their counterparts.
There are several reasons deregulation often leads to higher costs. While limited government interference and competition among suppliers encourage deregulated energy providers to operate more efficiently, higher operating costs offset these potential savings. Additionally, power companies take more profits than government-regulated utility companies, meaning any savings due to efficiency do not pass on to the customer.
These differences add up. Plus, energy consumers in deregulated markets often feel the impact when other issues affect energy costs.
Additional Causes of Higher Energy Costs
While deregulation plays a significant role in energy prices around the U.S., other factors have impacted the global market in recent years — including regulated and deregulated markets.
The COVID-19 pandemic served as a significant disruption to energy production worldwide. While there was an initial decline in costs at the start of 2020, the subsequent recovery period increased energy demand and prices. The pandemic’s impact on the workforce and production also complicated the supply chain for natural gas and oil.
As the world began bouncing back from the pandemic’s economic effects, energy prices once again rose after Russia — a major gas supplier to Europe — invaded Ukraine in February 2022. In addition to security and humanitarian concerns, the Russian war disrupted oil and gas energy supplies and increased price volatility.
Climate change is a third factor in rising costs recently. In states such as California and Texas, extreme and unpredictable weather has impacted energy prices. Recent heat waves, droughts, wildfires and freezing weather leave residents with excessive energy bills — that is, if they have power at all. Outages are now so frequent the White House has called on utility companies to take action.
The Impact of Deregulation on Renewable Energy
With so much instability in the gas, oil and electricity markets, many suppliers and consumers are increasingly interested in the potential of renewable energy sources. For example, solar and wind power have gained traction in recent years, making up a record 13% of energy in the U.S. in 2021.
Deregulation offers an opportunity to make these renewable energy sources available to even more households. Since multiple suppliers can exist within a single area under deregulation, smaller businesses are encouraged to form. While major corporations may not believe in the power of solar energy yet, these private companies have the flexibility to convert customers to cleaner energy, one household at a time.
The Future of Energy Deregulation
As the energy market continues to fluctuate, experts remain divided on whether deregulation is successfully breaking monopolies or pushing higher prices on customers. However, diversifying the energy market has potential as utility companies constantly search for the best supply solutions.
Jane Marsh works as the founder and editor-in-chief of Environment.co where she covers environmental news and sustainable living tips.