As we pass the twenty-year anniversary of energy deregulation in the United States, there is a lot to consider. Today, there are over 20 states with some sort of free market access, allowing consumers to purchase electricity and natural gas supply from a third-party provider. But, has energy deregulation been a successful experiment? This article summarizes the history of energy deregulation and evaluates the benefits, downsides, and future of the energy markets in the U.S.
An Overview Of Energy Deregulation
The history of energy deregulation is one written with market advancements and controversies. As a response to the monopolistic structure of the utility industry, deregulation began as a political movement toward open-access markets. It initially gained traction with the Energy Policy Act of 1992, which established the wholesale electricity markets and allowed independent power producers to participate in electricity generation. This laid the foundation for the retail energy markets, which were established in the late 1990s and early 2000s. The separation of the wholesale and retail markets enabled businesses and consumers in select states to choose their energy suppliers rather than being tied to the local utility company.
Several states, including California, Texas, Pennsylvania, and Illinois, fully embraced deregulated markets, creating efficient mechanisms for retail electric provider integration. However, over time market manipulation led to setbacks such as the California energy crisis of 2000-2001, which caused California to modify its laws. Despite these challenges, deregulation has driven innovation, increased renewable energy adoption, and given customers greater control over their energy costs. Today, deregulated energy markets continue to evolve, with growing interest in retail choice programs, demand response initiatives, and customized energy solutions that help businesses optimize their energy strategies.
Key Advantages Of Deregulation
Deregulated energy markets have helped the U.S. energy economy to boom. Some of the key pros of energy deregulation include:
Greater Investment In Energy Exploration
Open markets have encouraged more investment in energy exploration. Specifically, due to natural gas deregulation, producers have a greater incentive to explore natural gas through fracking and drilling practices. Deregulated markets facilitate forward contracts between energy producers and end users, allowing them to secure investment for their operations.
Enhancements In Technology
Energy deregulation set the stage for advancements in energy technologies. In regulated markets, consumers have little control over their tariffs and thus have less incentive to curtail usage. In deregulated markets, these same consumers can participate in hybrid energy supply plans that incentivize them to shift usage to off-peak periods. Furthermore, because energy capacity and transmission costs are billed independently from a regulated rate, consumers are incentivized to implement real-time energy analytics to reduce peak demand, participate in demand response programs, and seek alternative fuel sources during high-priced periods.
Structured Products For Consumers
Consumers in deregulated markets have the option to structure their energy supply based on their business consumption patterns. They are able to participate in index energy markets when prices are low and buy energy futures for other periods to create budget certainty. This flexibility allows consumers and their energy brokers to get creative in finding ways to reduce costs.
Rise In Renewable Integration
As the country transitions from fossil fuels to renewable energy, deregulated energy markets have helped to integrate these new generating assets into the electric grid. Battery storage owners can register to become RTO/ISO members and participate in the real-time energy and ancillary services markets. Furthermore, solar farm assets can be paid for their participation in the wholesale electricity markets.
Combined Efforts Towards Decarbonization
Deregulation is playing a key role in helping businesses and organizations with their decarbonization efforts. For example, an on-site solar system with battery backup can not only help a business to reduce its carbon footprint but also can become an income-generating asset for the business. When the battery is not being used to support the facility’s load, it can participate in the wholesale markets selling energy back to the grid. This is only possible in a deregulated energy system.
Challenges Of Deregulation
Despite its many advantages, energy deregulation has been riddled with controversy and challenges. Some of the setbacks of deregulation include:
Increased Consumer Costs In Some Markets
In some markets, consumers are experiencing higher supplier costs when compared to local utility rates. The increase is typically tied to post-term contract rates, which are usually much higher than standard fixed-rate energy contracts. Consumers in these markets should be aware of the terms and conditions of the supplier’s contract, including but not limited to energy pass through charges, auto-renewal clauses, and high energy index pricing after the contract term expires.
Price Manipulation
Due to the decoupled nature of the wholesale and retail markets in deregulated states, price manipulation from energy traders and wholesalers becomes a factor. In the early 2000s, price manipulation greatly impacted the energy markets with the Enron scandal. Energy traders were propping up energy prices by holding back supply in an effort to earn enormous profits. This created a chain effect, ultimately driving up energy costs for consumers.
Market Oversight
Each deregulated energy state is regulated by its Public Utility Commission or Public Service Commission. In some states, the need for more market oversight is justified. For example, there are many unlicensed energy brokers working in these markets that are not adhering to the strict consumer protection rules. These brokers are hard to identify and more legislation is being passed to regulate their actions.
Key Legislation
Due to these market challenges, there have been several changes in legislation in certain deregulated energy states.
California
California’s energy deregulation efforts were significantly altered following the 2000-2001 energy crisis, which exposed vulnerabilities in the state’s energy market structure. In response, lawmakers changed deregulation energy policies, limiting customer participation in retail energy choice. While large commercial and industrial customers still have some access to direct access programs, residential and small business customers remain tied to their local utilities. The state also implemented stricter licensing regulations on energy suppliers, preventing future market abuses. Today, California’s energy policies focus more on clean energy goals, grid modernization, and battery storage, rather than expanding deregulation efforts.
Connecticut
Connecticut’s deregulated energy market is currently under scrutiny, with state legislators discussing major changes to how energy suppliers operate. Concerns over rising supplier electricity rates and consumer protections have led to proposals that could significantly impact retail energy choice. Some lawmakers are considering reforms that could limit energy suppliers’ ability to market to residential customers, citing issues with contract term transparency and high post-contract variable rates. The ongoing discussions also involve potential structural changes to how Connecticut’s electric rates are set, aiming to provide customers with more stable pricing options based on real-time energy rates. While no formal legislation has been passed, the 2025 legislative session could bring major shifts to the state’s deregulated market.
Maryland
Maryland’s deregulated energy market has undergone significant changes due to new regulations aimed at increasing consumer protection and ensuring transparency among energy suppliers. Recently, the Maryland Public Service Commission (PSC) has implemented stricter licensing requirements for retail energy suppliers and brokers, making it more difficult for certain providers to operate in the state. These changes include enhanced fee disclosure rules, requiring suppliers to clearly outline contract terms, rate structures, and potential price fluctuations. Additionally, new rules governing utility consolidated billing have shifted how suppliers bill residential customers, making the market less attractive for some third-party energy providers. Maryland’s SB1 requires suppliers to bill residential customers on a dual bill. As a result, many smaller or less established suppliers have exited the market, leading to fewer energy supply offers available to Maryland businesses and residents. While these reforms provide stronger consumer protections, they also limit customer choice.
New York
New York has introduced new regulations for energy brokers and consultants, requiring them to register with the state and demonstrate financial accountability to operate legally. Under these rules, brokers must disclose pricing structures, contract terms, and potential fees to customers. Brokers must also post a $50,000 letter of credit with the PSC in New York. Additionally, the state has implemented stricter rules on residential energy sales, limiting how third-party suppliers can market their services and requiring customer-friendly contract terms. These reforms stem from concerns over misleading energy offers and fluctuating retail prices, which have led to complaints from residential customers. By tightening regulations, New York aims to increase accountability while maintaining a competitive retail energy market.
Future Market Transitions
The future of energy deregulation in the U.S. remains uncertain, but as the demand for renewable energy and grid modernization continues to grow, states are re-evaluating market structures to better integrate renewable energy resources. Deregulated markets have proven to be more adaptable in accommodating distributed energy resources (DERs), such as rooftop solar, battery storage, and community solar projects, allowing these assets to participate in both wholesale and retail markets. Additionally, states considering deregulation are looking at capacity market reforms, ensuring that intermittent renewable generation can compete fairly with traditional power sources.
As the energy landscape transitions toward a decarbonized future, deregulation could play a crucial role in enabling innovative pricing models, such as real-time energy rates, peer-to-peer energy trading, and demand response programs. Policymakers in some states are exploring hybrid deregulation models, where certain aspects of the market, such as renewable energy generation and energy storage, are opened to competition, while essential services like transmission and distribution remain regulated.
Need Help Exploring Deregulated Energy Markets?
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