What are the differences between utilities and retail suppliers?

Updated: Jun 25, 2019

This may have been a question that you pondered for a moment and then shrugged off, but it actually has quite significant impacts on how you use energy and how much you pay for it.

In this week’s TRUELight Talk blog series post, we will be covering a question that many house owners, business owners both large and small, and the like have asked themselves at some point: what exactly is the difference between utilities and retail energy suppliers?

This may have been a question that you pondered for a moment and then shrugged off, but it actually has quite significant impacts on how you use energy and how much you pay for it.

So, we have laid out the basics. Being an independent energy data & analytics firm, we are completely unbiased in this matter. As energy informants, we just want you to make the best decision for your home and/or business. Powering your home or business has cost and risk implications, as well as environmental implications, so it is important to be informed.

When you shop for your retail electric supply, unless you are in Texas, you have a choice between getting electric supply from your local utility or from a competitive retail supplier. What are some of the differences between utilities and retail suppliers?

Many of the differences between these entities trace back to the history of local utilities.

When the electric grid was first built, the local utilities had monopolies over their service area. They owned the generation plants, transmission and distribution systems, and charged customers based on their costs. Utilities have always been subject to government regulation, but because they were monopolies, their customers were a captive consumer base for the costs of their decisions to build generation and other infrastructure.

In the 1990s and 2000s, electricity deregulation came along with the goal to open parts of the electric bill to competition – specifically the supply portion, which you now have the option to purchase from a competitive retail supplier. With the introduction of deregulation came the establishment of electric wholesale markets, where wholesale electricity is sold by generators and then bought by suppliers. However, the local utility still maintains, improves, and charges customers for the transmission and distribution infrastructure across all markets in the US. Additionally, your local utility handles electric meter reads as well as any emergency situations regarding the electricity grid.

ERCOT (Electric Reliability Council of Texas – the state’s Independent System Operator, or ISO) is slightly different. In Texas, the utilities are now purely “poles and wires companies” that do not offer any electric supply. In other markets, utilities offer a default or standard service supply option which is passed along by the utilities at cost. In other words, in Texas you’re selecting a plan from one of the many retail suppliers, whereas in all other deregulated markets you’re selecting a plan from either the utility itself or one of the retail suppliers.

One of the other key differences for a retail electric customer is how energy procurement in the wholesale market is handled by the utilities verses the retail suppliers. The specifics vary, but each utility procures electric supply in a highly regulated way with a structured procurement plan subject to regulation. For instance, every 6 months a utility might procure 50% of their standard service obligation for a period 6 months in the future. Then that utility’s rates are fixed for a specific 6-month period.

However, a retail supplier has more flexibility in how they buy power in the wholesale market and are able to adjust prices based on daily price movements in the wholesale energy markets. This means that if forward energy market prices are down, retail suppliers have the flexibility to buy wholesale power when it’s cheaper. The utility, on the other hand, will procure power according to their procurement auction plan even if the market prices are high at that time when they are scheduled to buy. A retail supplier will also have flexibility to pass through certain cost components to a customer, such as their capacity or transmission costs, and can offer longer contract terms to lock in current pricing beyond the terms that the current utility rates are fixed.

Retail suppliers also have flexibility to offer value added plans that can offer customers rewards or 100% clean energy power plans that utilities may not offer (this is where environmentally-conscious decision making comes in).

Long story short, you can choose to get your electric supply from your local utility or from a retail supplier – but the prices and structure will vary.

Your local utility offers supply procured in a highly regulated manner on a set schedule, while a retail supplier should be able to offer you more valued added options with different term lengths and innovative products. And remember – regardless of whether you opt for the utility or a retail supplier, the utility will still provide the physical infrastructure by which you receive your power (that’s the transmission & distribution maintenance and related customer costs that we mentioned above).

Have more questions? TRUELight’s team of energy experts has a combined 60 years of wholesale to retail energy expertise. We’ve been in the shoes of a retail supplier, a broker, a trader, a clean energy developer, and an energy end user. We know our stuff, and our core expertise in retail energy pricing provides transparency into accurate market-tested power pricing down to the line item. Explore more about us here and feel free to reach out to us at sales@truelightenergy.com – we’d love to work with you.

© 2019 by TRUELight Energy LLC

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