Nobody likes a monopoly.
That was the fundamental premise of deregulating the Texas utility market nearly 15 years ago. Rather than having single utilities serving wide swaths of Texas, the free market would encourage competition across the state, with the goal of bringing down energy costs and improving customer service. In the proud tradition of oil production, hydraulic fracturing and massive wind and solar energy growth, electric utility deregulation was yet another example of Texas energy innovation. Gov. George W. Bush — who signed the bill into law — said "competition in the electric industry will benefit Texans by reducing monthly rates and offering consumers more choices.”
Bush was right about enabling more choice, but he was wrong about benefiting Texans overall. While Texas has some of the lowest electricity rates, Texans face the fifth-highest energy bills in the country. Worse, residents in deregulated regions pay about 15 percent more for electricity than their neighbors with regulated utilities, such as Austin and San Antonio. Despite the best intentions of policymakers and regulators, deregulation has failed to deliver lower energy bills.
Similarly, competition has exploded. There are now over 100 retail energy providers (REPs) across Texas fighting viciously for new customers. Houston alone offers nearly 200 different electricity plans via state-run website PowerToChoose.com.
Sadly, amid this competition, many REPs will do whatever it takes — and then some — to win over new customers. They employ some of the most annoying tactics in the sales playbook to get Texans to switch — everything from offering shiny toys like free smart thermostats to deceptively low intro rates to long-term locked-in contracts. I’m an energy executive, and I can barely make sense of the market. Consider that 85 percent of Texans in deregulated regions have switched REPs at least once, and the annual customer churn rate is a staggering 40 percent. If only they spent as much energy keeping customers as they do luring them in!
The frustration is visceral. According to a recent third-party survey sponsored by my company, Griddy, 42 percent of Houstonians say they want improvements in transparency, timeliness and accuracy of rate and energy usage information. Four in ten Houstonians reported that they would change REPs today if they weren’t locked into contracts. It’s clear that more choices do not necessarily translate into a better customer experience.
Moreover, today’s deregulated system has distorted one of the most vital parts of the utility system: balancing energy supply and demand through fluctuating wholesale prices. Today, when there’s a spike in demand — say, on a hot day with lots of air conditioning running — wholesale energy rates spike, making more expensive sources of power to come onto the grid. It’s like Uber surge pricing for electricity — and it’s very effective in the wholesale market.
So, demand shifts are influencing energy suppliers to rationally change their behavior in the wholesale market. But how about consumers?
So far, that’s been a major failure. REPs offer a variety of rate structures, including indexed, fixed and variable. Fixed-rate plans lock customers into a certain electricity rate over a period of time, completely cutting out the fluctuating wholesale prices that would help balance the grid by encouraging consumers to use less energy as prices rise. These types of energy plans block the inherent opportunity for both the grid and the consumer to take advantage of real-time price changes. Even with so-called variable and indexed rates, there’s little that consumers can do in real time to respond to rate changes. All they get is a surprise when they get their bill at the end of the month.
It’s clear that deregulation hasn’t fulfilled its potential. Yet, Texas’s independent streak and history of bold innovation in energy means you can never count it out. The state is also uniquely positioned to benefit from a combination of advanced consumer technology and widespread access to rich smart meter data in Texas.
Today’s consumers expect handy mobile apps for everything from reading the news to catching cabs to checking in for flights. Why should electricity be any different? Enhanced mobile technology powered by smart-meter data can alert customers in real time about energy price fluctuations and provide recommendations on when they should conduct energy-intensive tasks, like cranking up the A/C.
Some REPs do run “demand response” programs that provide incentives for Texans to use electricity sparingly when demand is high. But these are typically only in certain high-stress situations for just a few days a year. Why shouldn’t Texans get these clear and valuable notifications around the clock?
Fortunately, the revolution has already begun. Several REPs have deployed new technology that tells customers which appliances use the most energy, so they can either adjust usage or upgrade to more efficient models. Other REPs send real-time alerts when powering certain appliances has gotten unusually expensive or to let customers manage their homes with a tap of their touchscreens. Other REPs provide alerts and notifications tied to smart home devices that can be managed remotely. Such innovations are ultimately a good thing not only for consumers, but for regulators looking at new ways to help balance the state’s power grid.
Texas is on the precipice of an exciting market transformation that finally delivers on the promise of deregulation. New technologies built around the customer are already vastly improving experiences, saving money and stabilizing the electricity grid. Texas has a long history of shaking up the energy market, and it’s time to do it again.