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What is deregulated energy?
The power of choice takes some understanding to find the best rates and plans for your energy needs.
The deregulated energy market offers opportunities for you to purchase the energy that powers your home or business directly from suppliers. Deregulation promises more competition with lower prices as a result. But to take advantage of deregulation, you must live in a state and territory that offers it.
What does deregulated mean?
Deregulation means to remove government regulations or restrictions from a process or industry with the goal of improving efficiency, widening competition and boosting growth. Among deregulated industries in the US are airlines, railroads, telecommunications and energy — specifically electricity and gas.
In a regulated energy market, utilities operate like monopolies within territories, with the government setting the rates you pay.
But in a deregulated market, independent energy utilities purchase energy at wholesale and compete for customers at rates set by the market itself.
Rhode Island was the first state to take steps toward deregulation in 1999. Today, 26 states offer consumers the choice of suppliers for electricity, natural gas or both.
How does energy deregulation work?
Deregulated energy works by limiting or eliminating government regulations around who provides and delivers power to consumers, businesses and industries. It’s designed to open up the market for customers looking to choose their own energy suppliers.
A deregulated energy market works through a reverse auction — something like a reverse eBay. Energy service companies — called ESCOs — offer to sell the energy their plants produce at their lowest rate at wholesale, competing with other energy providers on the market. Independent agencies bid for the energy they think they’ll need to meet their customers’ demands.
Energy then arrives to you in the same way it’s delivered in a regulated market: through the established utility infrastructure. What you pay and who you pay for your energy and services depends on where you live and the supplier you select.
Parts of the deregulated system
Energy is delivered through a complex system of generators, ESCOs and suppliers that work together.
- Generation. Service companies sell large volumes of the energy they produce on a wholesale market. Utilities and providers buy it and sell it to the public as energy plans.
- Transmission. Energy is moved from power plants, across power lines or pipelines and ultimately to local substations, where it’s converted for public use.
- Suppliers. You shop the market to find an energy provider to buy your energy from.
- Distribution. Local utility companies deliver that energy to your home or business.
Which states offer deregulated energy?
The US is divided when it comes to deregulated energy. Yet more than half states in the US offer some choice to access electricity, natural gas or both.
| State | Deregulated electricity | Deregulated natural gas | What to know about deregulation |
|---|---|---|---|
| Alabama | No | No | No competitive energy supplier choice |
| Alaska | No | No | No competitive energy supplier choice |
| Arizona | No | No | |
| Arkansas | No | No | |
| California | Yes | Yes | |
| Colorado | No | Yes | No utilities currently allow for consumer choice |
| Connecticut | Yes | Yes | Gas choice limited to commercial and industrial customers |
| Delaware | Yes | No | |
| Florida | No | Yes | Gas choice limited to select regional customers |
| Georgia | No | Yes | |
| Hawaii | No | No | No competitive energy supplier choice |
| Idaho | No | No | No competitive energy supplier choice |
| Illinois | Yes | Yes | Electricity and gas choice limited to specific utility territories |
| Indiana | No | Yes | Gas choice limited to NIPSCO utility territory |
| Iowa | No | Yes | Gas choice limited |
| Kansas | No | No | Gas choice available to limited customers of Kansas Gas Service |
| Kentucky | No | Yes | Gas choice limited to Columbia Gas utility territory |
| Louisiana | No | No | No competitive energy supplier choice |
| Maine | Yes | Yes | Electricity and gas choice limited to commercial and industrial customers |
| Maryland | Yes | Yes | Electricity and gas choice not available statewide |
| Massachusetts | Yes | Yes | Electricity choice limited to Eversource, Fitchburg and National Grid territories |
| Michigan | Yes | Yes | |
| Minnesota | No | No | No competitive energy supplier choice |
| Mississippi | No | No | No competitive energy supplier choice |
| Missouri | No | No | No competitive energy supplier choice |
| Montana | No | Yes | Gas choice limited to Northwestern Energy and Energy West utility territories |
| Nebraska | No | Yes | Gas choice limited to SourceGas utility territory during 2-week selection period |
| Nevada | No | No | Gas choice limited to commercial and industrial customers and capped at 500 therms daily |
| New Hampshire | Yes | Yes | |
| New Jersey | Yes | Yes | |
| New Mexico | No | Yes | Gas access limited to Northwestern Energy and Energy West Montana utility territories |
| New York | Yes | Yes | |
| North Carolina | No | No | No competitive energy supplier choice |
| North Dakota | No | No | No competitive energy supplier choice |
| Ohio | Yes | Yes | |
| Oklahoma | No | No | No competitive energy supplier choice |
| Oregon | No | Yes | Electricity choice limited to commercial and industrial customers |
| Pennsylvania | Yes | Yes | |
| Rhode Island | Yes | Yes | Electricity choice available in Rhode Island Energy, Pascoag Utility, Block Island and Electric Competition utility territories |
| South Carolina | No | No | No competitive energy supplier choice |
| South Dakota | No | Yes | Gas choice limited to commercial and industrial customers |
| Tennessee | No | No | Gas choice limited to commercial and industrial customers |
| Texas | Yes | Yes | |
| Utah | No | No | No competitive energy supplier choice |
| Vermont | No | No | No competitive energy supplier choice |
| Virginia | Yes | Yes | Gas and electricity access limited |
| Washington | No | No | No competitive energy supplier choice |
| Washington, DC | Yes | Yes | Electricity choice available in Pepco utility territory |
| West Virginia | No | Yes | Gas choice available in Peoples Gas, Dominion Energy, Consumers Gas and Mountaineer Gas utility territories |
| Wisconsin | No | No | Gas choice discontinued in 2001 |
| Wyoming | No | Yes | Gas choice limited to SourceGas utility territory |
How to shop for an energy provider
If you live in a state where energy is deregulated and competitive, get started by researching your options.
- Narrow down the type of energy you need. Is your home powered by electricity or natural gas — or a mix of both? Think too about whether you’re interested in renewable energy options.
- Calculate your current energy use. Look at two or three of your most recent energy bills and average out your use by energy unit — per kilowatt-hour (kWh) for electricity or per therm for natural gas. This information will help you shop for similar or cheaper rates on the market.
- Shop by ZIP code on an energy marketplace. Marketplaces like EnergyBot can help you compare rates and energy plans specific to your residence with your ZIP code and information about your home.
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How to compare energy plans
Depending on the state you live in, you may have one or a handful of independent suppliers to choose from, each offering different rates and energy plans. Factors to weigh when researching your options come down to the type of plan that fits your energy needs and budget.
Fixed, variable and hybrid rates
Providers in your state or city may offer the option to choose among a fixed, variable or hybrid kwH or therm rate:
- Fixed rates. Fixed rates allow you to lock in a rate for an established contract term. These plans protect your budget from surprise rate spikes, though they can keep you from more easily switching providers with lower rates if the market dips.
- Variable rates. Variable rates allow you to purchase energy without a contract. These plans give you the flexibility to jump to a different provider at any point, though you can expect to pay increased rates when demand is high, such as during colder weather months.
- Hybrid rates. Fixed and floating options split your contract into a fixed rate for part of your term and a variable rate for another.
For variable rates, ask your potential provider if it limits how much rates can fluctuate, which can help you keep costs manageable.
Introductory rates and signup bonuses
Many suppliers and providers offer lower advertised rates or bonuses to entice new customers. These bonuses can be reflected as a lump-sum savings or percentage knocked off the standard rate.
Introductory rates can last the first quarter of your contract, for six months or even the full term. Read the fine print of any offer to understand the rate you’ll pay after the bonus and avoid overpaying for your energy in the long term.
Contract terms and details
Understand the contract system of any supplier you’re interested in. Look at available terms, how the supplier handles renewals and whether you can cancel before your contract ends.
- Contract terms. Contracts can range from three months to a year or more. Longer terms can be easier to manage, while shorter terms allow the flexibility to leverage market dips.
- Contract renewal. Some providers require you to renew a contract term, allowing you to review or change the details of your rate schedule, while others automatically renew your terms unless you tell them not to.
- Contract cancellation. Markets what they are, you may find lower rates so enticing, you’re willing to pay a termination fee to end your contract early. Understand the penalties you face so you can factor them into any future decisions to switch providers.
- Late fees and grace periods. Ask potential providers about late fees and how many days after the due date you can make a payment without paying a penalty.
Energy and transmission costs
Your natural gas and electricity bills include home energy costs that can vary by utility provider or supplier.
- Unit or consumption charges. Energy costs are expressed as kilowatt-hours (kWh) for electricity and therms for natural gas, with variances among residential, commercial and industrial customers.
- Delivery and transmission costs. This is the cost a utility company charges to cover moving energy from power plants, across power lines and pipelines and to your meter.
- Capacity or demand fee. Some electric companies charge a fee to cover the cost of ensuring enough electricity or gas when demand peaks.
- Ratchet charges. Also related to demand, these are periodic fees charged by utilities to recoup costs related to surges in use.
- Taxes. Most suppliers include tax costs in pricing schedules. Ask your supplier about taxes if you don’t see them clearly listed in your bill.
- Other costs and fees. Some states and local governments charge fees that fund public policy programs related to such causes as energy conservation or support for vulnerable communities.
Many suppliers offer alternative energy options, like wind, hydro or solar energy. Your energy bill may include fees associated with the renewables you choose.
How to switch suppliers
After you’ve found a provider that fits your energy needs, gather up a current monthly bill and get ready for the big switch.
- Call your new energy supplier. Confirm the details of your energy plan and ask any remaining questions. You may need to provide information from your current utility provider to transfer your account. Ask how long you can expect to wait until it’s completed.
- Call your old provider. Your new supplier will notify your old supplier, but it’s helpful to confirm the process directly with your current company.
- Review your first bill. Make sure the details of your new bill match your contract or agreement, and flag any issues as soon as possible for a fix.
Benefits of deregulation
Energy deregulation is advertised as a way for consumers to take control of their energy costs outside of regulated monopolies and potentially put more money where it belongs: in your pocket.
- Competitive rates. In theory, deregulation requires suppliers to compete for your business, motivating quality service and keeping prices lower than regulated rates over time.
- Flexibility of suppliers. Unlike the regulated market that chooses suppliers for you, the deregulated market allows you to customize suppliers and rates for control over how you power your home.
- Access to alternative energy. Deregulation has allowed alternative energy suppliers to compete on the market, offering 100% renewable options to consumers
What to look out for
Results of deregulation are mixed, and there’s research to suggest that doesn’t lead to the savings it promises over the regulated market. There’s also the potential for suppliers to lure customers into plans without transparency around the risks.
- High demand can be costly. It’s not as easy to plan for surges or manage overproduction with more companies on the market. This guesswork can leave suppliers short — and consumers footing the bill.
- Shaky supply security. If generators aren’t able to meet demand, it can collapse the system. These situations are rare but possible: In 2021, the Texas power grid failed due to unexpected extreme weather, resulting in an energy crisis that left more than 10 million people without heat (and electricity suppliers pointing fingers).
- Potential for scams. A confusing deregulated market has resulted in unscrupulous suppliers targeting the elderly, low-income households and other vulnerable communities with aggressive calls to switch utility companies and promises to save money.
History of energy deregulation in the US
Energy wasn’t regulated until the Great Depression, when the government stepped in with the Public Utilities Holding Company Act that established laws around the selling of energy.
Since then, state politicians have argued that regulation breeds monopolies, prompting key events on the country’s road to deregulation, competition and — theoretically — lower costs:
- The 1970s energy crisis affected the US and other major players in the Western world, pushing energy costs sky-high at a time of oil shortages. President Carter began phasing out controls on the price of oil, leading to a reorganization of the energy industry and deregulating the airline and trucking industry at the same time.
- The Public Utility Regulatory Policies Act was designed to reduce the country’s reliance on foreign oil in the wake of back-to-back energy crises. PURPA diversified what powered the country and promoted rate-regulated electricity utilities.
- By the 1980s, the energy market was in chaos, leaving many utilities on the edge of bankruptcy. Soon came the Energy Policy Act of 1992, which addressed energy supply and demand and created a version of the wholesale market on which deregulation is built.
- Industry restructuring in the 1990s led to nascent consumer choice, and by 1999, five states — California, Massachusetts, New York, Pennsylvania, Rhode Island and Texas — had partially deregulated access to power.
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