” Californians devised a system of electricity sales that ignored every dimension of the free market.”
P. J. O’Rourke, Comedian
The Pros & Cons of Electricity Deregulation
Electricity deregulation means a lower level of regulation in the energy market. Since it allows private corporations to enter the energy market instead of only allowing government monopoly utility companies to generate energy, a higher level of competition is created and consumer prices for electricity might fall due to this since customers can now choose from many different energy providers.
While many states in the US switched to deregulated systems, some still rely on regulated monopoly energy markets. Even though electricity deregulation can have many advantages, it also implies serious problems.
In this article, the pros and cons of electricity deregulation are examined.
Advantages of Electricity Deregulation
- More energy companies to choose from
- Competition may lead to lower energy prices
- Service quality may become better
- Private companies can enter the market
- Monopolies can be avoided
- Bigger variety of individual plans
- Technological progress may be fostered
- Increasing speed in the energy transition process
- Awareness and critical thinking of customers tend to increase
- Faster overall processes
- Switch of energy company is easy
- Customers can support green energies
- Free market forces can work properly
More energy companies to choose from
One advantage of electricity deregulation is that you as a customer can choose from a variety of energy companies instead of having to rely on one single utility like in regulated energy markets.
This gives you more flexibility and you can choose the provider that offers you the best package that fits with your personal preferences and your individual energy demand.
Competition may lead to lower energy prices
The deregulation of the electricity market also implies a higher level of competition since private companies are able to enter the market and the monopoly of government utility companies is broken.
Higher competition in the energy sector often leads to lower energy prices. Thus, through this higher level of competition due to electricity deregulation, you as a customer may significantly profit due to lower energy prices, which will give you the opportunity to spend those savings on other things you like instead.
Service quality may become better
A higher level of competition often also implies a significantly better service quality. For instance, if you as a customer can choose from different energy companies, chances are that you will choose the one with the better service if everything else is equal.
Thus, the bar for those energy companies regarding customer service is increased and the overall service quality will likely improve as well as a consequence of electricity deregulation.
Private companies can enter the market
Also for energy companies, the deregulation of the electricity market can be quite beneficial. Private companies may enter this market in order to increase their overall profit, especially in markets where they can choose above-average prices for energy due to demographical reasons.
Thus, electricity deregulation also provides new opportunities for companies to expand their target market and operation area to get a higher overall market share.
Monopolies can be avoided
Monopolies are usually quite harmful to consumers since prices can be increased to an unhealthy level and also the incentive for improvements that would benefit consumers may not be present since monopolies do not have to fear any competition at all.
Thus, by giving private companies the chance to enter this market, the level of competition is increased and the adverse effects of monopolies can be avoided.
Bigger variety of individual plans
With a high level of competition in the energy market, companies will also be forced to provide consumers with the best customer experience possible. This also includes providing the general public with individual packages that fit the needs and the energy demand of individuals.
Therefore, customers may be able to choose from a variety of different options regarding their energy supply and may no longer be forced to pay for things they actually do not need.
Technological progress may be fostered
History has shown that the privatization of industries often led to significantly higher levels of technological progress. This is quite logical since companies who act in a market with fierce competition will feel a bigger need to innovate to stay competitive in the long run.
Thus, more money will be spent on research and development, which will not only be beneficial for the energy company but also for the general public since knowledge will be spread over time and technology will improve due to this.
Increasing speed in the energy transition process
Another benefit of electricity deregulation is that it also supports the energy transition from fossil to renewable energy sources. Many people do not longer want to use electricity that is produced out of fossil fuels.
Therefore, those people may want to switch to energy companies that rely on green energies instead. In turn, this will also increase the pressure on electricity companies that currently rely on fossil fuels to also switch to alternative energies.
Thus, also the energy transition process to renewable green energy sources may be encouraged through power deregulation.
Awareness and critical thinking of customers tend to increase
In a state where there is only one big energy supplier and the energy market is fully regulated, customers will not have a choice at all regarding their energy supply. They have to rely on their official local energy supplier, even if the service quality might be rather poor.
However, through energy deregulation, customers now have the chance to choose their preferred electricity company, which may contribute to more critical thinking and a higher level of awareness of customers.
Faster overall processes
With a higher level of competition in the energy market, companies will also be forced to improve their overall processes.
This means that in order to guarantee a good customer experience, processes have to be optimized in a manner that customers get quick responses and application processes are as quick as possible.
Thus, through the increased competition due to the deregulation of the electricity market, chances are that all kinds of processes in the energy sector will be carried out much faster and customers do not have to wait too long anymore until their inquiries are processed.
Switch of energy company is easy
Since there will be many energy companies to choose from due to electricity deregulation, chances are that it will be quite easy for you to switch your energy supplier in case you are not satisfied with the provided services.
In many cases, you can switch to a new energy supplier online within just a few minutes.
Customers can support green energies
In states where there is no energy deregulation, customers have no choice other than to use the energy that is provided from the local utility, independent of whether it is produced with green energies or not.
However, the introduction of energy deregulation would give you the chance to support green energies. Since you are now able to choose from many different energy companies, you can use companies that are known to support the transition towards green energies.
Free market forces can work properly
There are many examples from the past that show that free market forces often increase the overall welfare levels of countries.
Since energy deregulation increases the competition in the energy sector, free market forces are able to work and chances are that the outcomes will be quite beneficial for the general public in the long run.
Disadvantages of Electricity Deregulation
- Prices may not drop as expected
- Significant administrative costs
- Lack of energy supply security
- Price rigging to increase energy companies’ profits
- Planning issues
- Effectiveness depends on the respective region
- Competition is not always good for customers
- Private electricity companies may use loopholes in regulations
- Crucial services should be fully controlled by governments
- Energy deregulation may pose a problem for poor families
- Energy companies may have to be rescued with taxpayers’ money
- People in rural areas may suffer from energy shortages
- Environmental problems
Prices may not drop as expected
As we have seen from the previous discussion, there are many upsides of electricity deregulation. However, energy deregulation also implies some problems.
One downside of electricity deregulation is that it might not actually decrease prices, at least not on the scale people would expect.
Although there is a higher level of competition, there will still be only a few big energy companies controlling the local market and therefore, the level of competition might not be high enough to decrease energy prices in a significant manner.
Significant administrative costs
Through the privatization of the electricity market, there will also be a greater need to set up controlling and monitoring instances in order to assure the energy supply of the general public from private suppliers.
However, those processes can be quite time-intensive and may also imply significant administrative costs since whole departments may have to be created to supervise those private power companies.
Lack of energy supply security
In general, most people would agree that if the electricity supply is controlled by the government, power outages and other problems will be less likely compared to a state where those important tasks are outsourced to private companies.
Thus, energy deregulation may also imply the problem that the energy supply of the general public may no longer be secured, especially in countries where technological progress is not advanced enough yet and there is a lack of skilled workers in the private energy sector.
Price rigging to increase energy companies’ profits
It is well known that in many industries where there are only a few big companies controlling the market, cartels and syndications are formed in order to keep prices high and therefore to increase the profits of companies. This is also true for the electricity market.
If a few big private corporations control the energy market, chances are that they will engage in price rigging in order to charge higher prices from customers than would be necessary to cover their costs.
It is relatively easy to plan energy production if there is only one single official utility engaging in the market. However, through electricity deregulation, there will be a higher number of companies joining the market and authorities have to make sure to plan how much energy each company will supply in order to avoid either electricity shortages or overproduction.
Effectiveness depends on the respective region
There are also huge differences regarding the suitability of electricity deregulation across countries. While in big industrialized countries with a strong economy, energy deregulation may make quite a lot of sense since private companies have plenty of knowledge in this sector, it may be quite hard to implement in poor developing countries since the energy supply of the general public may no longer be secured if the government gives away its controlling power in the energy market due to a lack of knowledge of private companies or also due to corruption.
Competition is not always good for customers
Competition can be great for customers since it often leads to decreasing prices. However, competition sometimes also leads to excessive price pressure, which could lead to a state with pretty bad service quality and other additional issues.
Thus, even though an increasing level of competition may benefit customers in the energy sector, it might also imply some problems if the level of competition becomes too high.
Private electricity companies may use loopholes in regulations
Depending on the country or the state, there may also be significant loopholes in the regulations related to the deregulation of the energy sector. Companies are usually quite good at finding those loopholes and to use them to increase their profits or to strengthen their market position.
Thus, regulators have to make sure to introduce suitable frameworks in order to avoid loopholes for companies operating in the energy sector.
Crucial services should be fully controlled by governments
Another problem related to electricity deregulation is that it might also be even dangerous to give away power regarding our energy supply to private corporations. Everyone of us heavily relies on working energy supply and we cannot afford longer energy outages.
Thus, it might not be a good idea to give away the power over this important resource since in case there is any trouble, it may take quite long to fix those issues and the economy in the respective region may greatly suffer due to that.
Energy deregulation may pose a problem for poor families
There may also be a significant problem with energy deregulation for poor families. In many states where the energy supply is entirely regulated by official government authorities, poor families often get financial support so that they are able to afford sufficient electricity to manage their daily lives.
However, through the partial privatization of this electricity sector, poor families may no longer be able to get this kind of financial support and may no longer be able to ensure their energy supply due to that.
Energy companies may have to be rescued with taxpayers’ money
If large private energy corporations get into financial trouble, there might be the need to bail out those companies since they are crucial for a working public infrastructure.
Thus, large amounts of taxpayers’ money may have to be used in order to rescue those companies. This may not seem to be right since private companies in the energy sector will keep all their profits but will be able to get financial aid from the government in case it is necessary.
This may even encourage those firms to take excessive risk in order to get the full upside of profits while they know they will be backed by the government in case of failure, which leads to flawed incentives regarding business decisions towards excessive risk-taking.
People in rural areas may suffer from energy shortages
Energy deregulation may also be problematic for people who live in remote rural areas. Since it is quite costly for energy companies to supply those regions, energy companies may simply refrain from supplying those areas.
In turn, people in those areas may suffer from energy shortages and may have to use solar cells or alternative sources instead. Thus, governments have to set regulations in order to also ensure the supply with energy for people in those remote areas of our planet.
There might also be plenty of environmental problems related to energy deregulation. For instance, if private companies control the energy market, chances are that they will strive to maximize their profits and may not care much about their pollution levels since they are not adequately charged for it.
Thus, every company in this sector will have the incentive to produce profit-maximizing energy amounts, without taking into account the various negative effects on our environment through all sorts of pollution.
Top 10 Electricity Deregulation Pros & Cons – Summary List
|Electricity Deregulation Pros||Electricity Deregulation Cons|
|You can choose from a higher number of companies||Planning problems|
|Potential lower energy prices||Additional administrative costs|
|Better service||Formation of price syndications|
|Technological progress may be enhanced||Flawed beliefs|
|Support of transition to green energies||Decrease in energy supply security|
|Better customer experience||Effectiveness depends on the respective region|
|More efficient processes||People in rural areas may face problems|
|Customized services||May not be favorable for poor people|
|Market forces can work properly||Environmental problems|
|Adverse effects of monopolies can be avoided||Taxpayers may have to pay the piper|
Should Electricity be Deregulated?
Whether electricity deregulation is a good idea or not depends on the individual case and also on the specific region. As we have seen before, there are many advantages to energy deregulation. However, electricity deregulation can also lead to serious issues if it is not implemented in a thoughtful manner.
Thus, governments around the world have to evaluate all the pros and cons on an individual basis in order to make profound decisions regarding whether the energy market should be regulated or not in their country.
About the author
My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.
As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.
After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.
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