How Does Energy Deregulation Work?

If you’ve ever studied your electric bill you may have noticed that it was split up into two main types of charges:

1. Delivery or transmission charges 

2. Supply or generation charges 

Delivery charges constitute all the fees your utility company charges to deliver electricity or natural gas to your home or business. When you pay delivery charges, you pay for the physical infrastructure used to transfer energy from its source or storage place to you – the electrical wires, transformers, pipelines, and so on.

Supply charges are what you pay for the actual electricity or natural gas that you use.

I’ve included here a sample electric bill from the Philadelphia Electric Company,  just to give you an idea of how these two charges show up. Every bill looks a little different but this gives you a general idea:

In the case of electricity supply, electricity is sold at market price in units called kilowatt-hours or “KWH”. A kilowatt-hour is simply a unit used by your utility to measure how much electricity you use. Also read, What is a Kilowatt-Hour and What Does it Have to Do With My Electricity Bill?

Let’s say that your business uses 5,000 kilowatt-hours every month, and each kilowatt-hour costs 10 cents. That means the supply or generation portion of your electric bill would be $500.

By default, your local utility company delivers your energy and supplies it. That means you pay whatever price or rate per kilowatt-hour that they charge. Most utilities post their rates once every 6 months, others post them monthly, and some utilities base your rates on how much energy you use and various other calculations. But most utilities have set rates that they post on their website.

If you live or own a business in a deregulated energy state, you have a choice. Meaning, you don’t have to buy your electricity and natural gas from your local utility, you can shop around and find lower energy rates through a retail energy supplier. Doing so will lower the supply or generation portion of your bill.

You’d still pay a delivery or transmission fee because your local utility company will still transfer the energy to you through their wires, transformers, and so on, but you’ll pay a lower rate for the supply – meaning the actual energy you use.

Let’s take my original example. If your business uses 5,000 KWH and you found a retail energy supplier that offered you a rate of 8 cents per KWH, you will see a 20% drop in the supply part of your electric bill, you’d be saving $125 each month.

Retail energy suppliers also offer fixed-rate plans. Choosing a fixed-rate plan will not only reduce the amount you pay for your energy, but it will protect you against the routine increases people usually see in their electricity bills year after year.