Where Does Your Energy Come From?

by

I’m excited for the Energy Marketing Conference in Houston in a few weeks. Tom Brady seemed to enjoy his visit to Houston and I expect to have the same experience he did!

At the last few conferences, there has been a very consistent theme: people know very little about retail energy and the industry needs to educate customers about their choices and what deregulation means for them. It’s a huge industry that very few people know or understand. Let’s start with the basics: where does your energy come from in a deregulated market?

When I first started working with companies in this industry, I assumed that deregulated markets were just like regulated markets, but with a few new middlemen. Instead of buying from a “wholesaler” (the utility), customers were buying from the “retailer” (a Retail Energy Provider or REP). Sometimes, and especially for commercial and industrial customers, a Broker would help the customer find the right REP.

In other words, while a regulated market would have just two players:

…a deregulated market would have four main players:

Not quite that simple! I eventually realized something that most consumers probably misunderstand: how energy is delivered is fundamentally different from how it is sold and purchased.

The picture of how energy is delivered is pretty close to how I thought things worked in a regulated market:

It’s important to note two things about this picture:

1.      It’s useful to split the idea of a “Utility” into its components: Generation (power plants, solar arrays, wind farms, etc.) and Transmission & Distribution (powerlines, substations, transformers, etc.) – more on that when we get to the next picture.

2.      The entire process is overseen and monitored by a regulating body, known as the Independent System Operators (ISOs), for each deregulated market.

Now, here’s a picture of how energy is purchased:

A few notes on this one:

1.      The REP doesn’t necessarily buy electricity directly from a Utility. Rather, they are sourcing from the “Energy Market” – which is made up of various players, including both Generation and Energy Traders.

2.      Note that the ISO plays a role here too – in this case making sure that the Energy Market is properly functioning and that the players are complying with the market rules and regulations.

3.      Brokers are not always involved in setting up customers with REPs, but they are big players in the Commercial and Industrial (C&I) space – brokers are involved in 50% of electric sales in C&I in deregulated states (source = Sam Henry, President and CEO of Mira Vista).

So, where does your energy come from? Even in a deregulated market, it still comes to your house or your business from the Utility. If your power goes out, call the Utility. But, if you want to save money or have more choice for how that power is sourced, you’ll want to shop around for a REP. If you live in Texas, you can see side-by-side comparisons of REPs and their plans on PowerToChoose.com. If you are a commercial business or property manager, you might want to work with a Broker to find the best deals.

I hope this blog helps provide some context for a foundational concept of deregulated energy. I’m sure that I’ll learn additional perspectives at the conference and I will work to blog about them soon after that. If you are planning to attend the conference, please let me know! I hope to see you there.

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