Energy Procurement | December 21, 2022
The Basics of Energy Procurement
In this blog, we’ll give you a foundation for understanding energy procurement in the United States and how it can differ from state to state and between different energy sources.
At a high level, there are two types of energy markets serving electricity and natural gas distribution, regulated and deregulated. The basic difference between the two is that a deregulated market allows for competition within energy supply, while in regulated states, utility companies can hold a monopoly on market.
In regulated states, one power company can have purview over how energy is generated, the transmission lines carrying power from the source, as well as the distribution lines that then bring that energy to consumers.
A regulated electricity market has a utility company or companies that own and operate all electricity. From power generation to the meter on your house or business, the utility has full responsibility and control. The utility owns the infrastructure as well as transmission lines, selling power directly to consumers. In a regulated state, utilities use electricity rates set by the state’s public utility commission. This kind of market could be viewed as a monopoly due to limitations placed on the choices for consumers. Conversely, its benefits include more stable pricing and certainty over the long-term.
A deregulated electricity market, sometimes called a choice market, features competition between those buying and selling electricity, allowing them to invest in power plants and transmission lines. Those who own the generation of electricity sell it wholesale to retail suppliers. These retail suppliers set their own prices for consumers. This can be referred to as the “supply” section of your electricity bill. This can benefit consumers by empowering them to compare rates and services of different suppliers. Different contract structures such as fixed, indexed, or hybrid, give the consumer some control over their energy procurement and its inherent risk.
Electricity and Natural Gas
Aside from the physical differences between these two power sources, the mechanics of their procurement are extremely similar. The key difference is that markets that are regulated or deregulated can vary between the two. For example, in Texas, while the electricity market is deregulated, natural gas is regulated. It is advisable to work with an energy broker to understand your options in any given market.
In any of these instances, you could be the off-taker for the energy produced, using it on site to power machinery, lighting, HVAC, and so on. This is both an opportunity to offset the cost of traditional power and mitigate risk in a volatile energy market and one to offset carbon emissions at your facilities.
Or you could be selling the power back to the market so someone else can use it. This can be a significant financial offset to traditional energy procurement, even with little guarantee of green electrons flowing to your facilities.
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Assessing risk in your energy spend can be complicated but by understanding what makes up your energy pricing—whether electricity or natural gas —and the factors that influence it, is the first step