How Texas Energy Deregulation Leads the Way For Innovation

How Deregulation Drives Innovation

Throughout the country, more and more people are demanding more and more electrical power. However, state regulated markets generally lack agility to meet this challenge that comes with rapid growth. Because the state manages, regulates, and sets the price of electricity, building new power improvements is a slow, bureaucratic process. Power utilities must negotiate with state regulators to build both build new generation and develop new transmission routes and then wrestle with the means of how to pass the expense on to consumers – who are also state taxpayers. Naturally, regulated states are very cautious with how they spend public money. Consequently, improvements and innovations are developed so cautiously that they are often technologically out of date when they are deployed for use. Likewise, generating companies have little incentive to cut costs, invest in new technologies or best practices, or improve Reliant Energy efficiency because they have a monopoly. They are guaranteed a profit no matter what.

However, in deregulated states, competition has been the answer to the problem of growth and expanding power demand. Competition removes the public’s financial risk for the investment and profitability of electrical generating plants and transfers it to private investors. When customers have a choice between rival competitors in an industry, the one that succeeds is the one that gives their customers what they want for the lowest price. Consequently, investors can effectively motivate their generating companies to cut costs by investing in new technologies, adopting best practices, and improving energy efficiency.

Market competition has been the key feature in Texas electricity deregulation since it began the process in the late 1990s. Already the second largest population in America, Texas is still among the fastest growing states and is expected to have 50 million by 2040. The Electricity Reliability Commission of Texas (ERCOT) has estimated that peak demand for Texas electricity increased at an annual rate of 2.5% from 1990 to 2006 and will experience similarly high annual growth, requiring between 60,000 and 80,000 MW of new electricity generation capacity by 2030.

Several important improvements to Texas’ electrical grid have now been put in place by ERCOT because of deregulation. Beginning in 1995 with its wholesale market, ERCOT consolidated 10 different control centers into one central location, increased staff and resources, created new transmission pricing and interconnection policies, developed statewide planning expertise, and produced detailed annual reports identifying transmission constraints and needs throughout Texas. This reorganization streamlined policies and eliminated bottlenecks in the transmission and distribution network. One of the effects was transmission rates became so-called “postage-stamp” rates, meaning that generating companies pay the same rate throughout the region, no matter how far the electricity must travel. With ERCOT as the central clearinghouse, transmission companies can rely on one organization with one price.