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Report: Competitive Markets Suppress Electricity Prices

April 1, 2015 By Josh Kessler

Bill Massey posted evidence on the COMPETE Coalition blog last week that suggests competitive markets have been effective in suppressing electricity prices. He presents data from the Energy Information Administration that compares prices between states with deregulated (or “restructured”) markets and those with regulated (or “vertically integrated”) markets from the start of deregulation in 1997 through the end of 2013. Massey’s data set shows that over this period retail rates in restructured states increased 3.6 percent less than inflation, while retail rates in vertically integrated states increased 8.2 percent more than inflation.

A working paper published in 2014 by the Energy Institute at Hass (part of the University of California at Berkeley), titled The Electricity Industry after 20 Years of Restructuring suggests that prices have been driven more by factors like generation technologies and the price of natural gas than by restructuring policies. The paper notes that marginal prices for gas generation typically drive prices in restructured markets. Prices nearly tripled during the first half of the 2000s, peaking in 2008, which led to far higher prices in restructured states. During this period, the value of coal assets increased. However, as gas prices have fallen since 2009 as a result of fracking technology, restructured markets have benefited.

Overall, deregulated markets appear to have moved more aggressively toward a gas-fired generation mix, whereas regulated markets continue to rely more heavily on coal-fired generation. As aging coal-fired plants continue to shut down to accommodate environmental regulations, states that have built more gas-fired generation appear to be well positioned to benefit from low gas prices and face fewer risks from environmental regulations. This bodes well for retail electricity buyers.

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