NRG Energy is spearheading a political effort to make the most sweeping reforms to competitive retail electricity markets in the Northeast in over two decades. But Texas' recent power crisis has created an unexpected obstacle for this effort, raising questions about the extent to which retail electricity competition benefits consumers.
Legislation introduced in Maryland, HB 1327 — and supported by NRG as a first step toward wider market reform — would amount to a "dramatic redo" of the late 1990s restructuring process that moved states like Maryland away from a vertically-integrated utility model, Maryland Public Service Commission Chairman Jason Stanek said while speaking in opposition to the bill in a state legislative committee hearing this March. The proposal "is immense and breathtaking in the scope of its changes," Stanek said.
The Maryland bill is part of a campaign from NRG, one of the largest retail power suppliers in the country that is not a regulated utility, dubbed "Choose Who You Use." It aims to overhaul who gets to be the default supplier when a retail customer starts electric service. For NRG and competitive suppliers, changes are necessary to correct what they see as an imbalance that puts them at an inherent disadvantage vis-a-vis regulated utilities in states where retail customers can choose their electric supplier — disadvantages that allegedly prevent robust competition from emerging.
The legislation is supposed to serve as an "icebreaker" that, if successful in Maryland, could then open the door to similar legislative efforts in nearby states like Pennsylvania and New Jersey, according to John Holtz, senior director of market development & regulatory affairs for NRG.
In these states, residents typically buy their power from the regulated distribution utility that happens to serve the area in which they live. If a customer wants to switch from this default option to an alternative supplier, the onus is on the customer to take that step. This setup dissuades customers from shopping for other electric plans that could save them money, according to James Cawley, a former commissioner of the Pennsylvania Public Utility Commission and attorney who consults for NRG and is one of the advocates for Choose Who You Use. Default service "rewards people who don't want to do anything even if it's in their economic best interests," he said, calling it the "biggest mistake" left over from restructuring.
But Texas is one of the only states in the country to look to as an example of where — with a few exceptions such as in the case of municipal utilities and co-ops — retail competition is the default option, meaning most customers have to pick from different suppliers of electricity. Consumer advocates and regulators in Maryland, New Jersey and Pennsylvania have opposed NRG's proposed changes, arguing that eliminating the regulated utility as the default option and requiring customers to enter the choice market would amount to forcing them into a Texas-style model with all the risk that entails.
"This is the Texas model. I don't think there's any disagreement," Stanek said of the legislation in the hearing. "I haven't been approached by any one of Maryland's six million residents to have a competitive supplier market similar to Texas."
In response, supporters of the legislation including retail suppliers like NRG, are denying retail competition played a role in the events in Texas and emphasizing what they see as the primary benefits of retail competition: better pricing for consumers, more choices and more innovation.
But some analysts dispute those claims and say there are other ways to realize those benefits without requiring customers to shop for power plans they may not fully understand.
Supporters of the Choose Who You Use campaign are quick to point out the stark differences between Texas and Northeast states. "Don't panic. This is not Texas," Democratic Del. Kathleen Dumais, who sponsored and introduced the Maryland bill, said in her opening remarks at the committee hearing. The cause of blackouts in Texas was "primarily an infrastructure problem, not a problem with retail competition," Holtz said.
Texas also had limited ability to import emergency power supply from outside its borders because most of the state has its own electric grid separate from the rest of the U.S. Pennsylvania, New Jersey and Maryland, on the other hand, are founding members of PJM Interconnection, the largest wholesale power market in the country.
But, Dumais said in an interview, the issue of Texas is one that must be acknowledged by anyone making their case for more retail competition. One notable phenomenon coming out of the blackout crisis in February was the issue of residential retail customers who had signed up for variable rate plans without fully understanding the risk involved and were shocked to receive electric bills driven to exorbitant levels by power price volatility.
"We have to take [Texas] into account so we do not have Maryland citizens facing the outrageous bills we heard about in the news," Dumais said, adding that she did not think such a crisis could happen in her state due to the breadth of the PJM supply.
Some economists have found no evidence that competition has reduced the cost of electricity for customers in states with retail choice, although retail suppliers have responded with their own studies claiming that customers in those states are saving money compared to states that still have vertically-integrated utilities.
Retail suppliers say that customers have the possibility to achieve savings through plans they typically do not get from regulated utilities, such as variable rate plans that allow customers to arbitrage the price of electricity by shifting their electricity use in line with wholesale market trends. Although the rules vary from state to state, variable rate plans also exist in the Northeastern retail markets.
But the track record for such plans gives plenty of reasons to be skeptical about the idea of allowing more retail choice, according to Tanya McCloskey, the acting consumer advocate at Pennsylvania's Office of Consumer Advocate.
A little under 30% of Pennsylvania residential customers shop for their electricity plans, according to the state's 2019 Retail Choice Activity Report. Of that group, about 25% to 27% are on variable rate plans, McCloskey said.
Despite the fact that variable plans are only a subset of a subset of the market, the numbers are big enough to be "concerning," according to McCloskey. "It might be time to revisit regulations." That is because, she suspects, if customers were more educated, even fewer would choose to be on variable rates. "Very few customers would choose to take that risk. You may look like you are getting savings, but then in August, [your bills spike]," she said.
"People have busy lives and don't want to be checking the PJM website every day" to check for the wholesale price of power, McCloskey said.
The supporters of the Maryland legislation say that a provision in the bill would actually increase protections for consumers from risky power supply plans. "The bill prohibits the type of 'Wild West' wholesale index pricing plans that are now saddling Texas residential customers with hundreds of thousands of dollars in unanticipated and crippling energy bills," Dumais said in her testimony before the committee.
But another part of the bill could subject retail customers to wholesale market risk, according to David Lapp, the head of the Office of People's Counsel for Maryland. Currently, customers are by default on "standard offer service" in Maryland, where the PSC regularly holds an auction in which wholesale power suppliers compete to supply power to distribution utilities. This process does not directly expose customers to short-term wholesale market risk, Lapp said, because customer rates are then set through fixed price contracts that spread risk over a two-year period.
The bill would make it so that customers would continue to have fixed price contracts for a three-year transition period, and competitive retail suppliers would be able to participate in this auction for the ability to serve retail customers. At the end of the transition, customers have the option to shop for a different supplier if they want. Lapp said he is concerned what happens at the end of the transition period. "Bottom line, we can't assume that there's going to be effective competition in Maryland in the 2-3 years that the NRG bill provides — many consumers will get stuck on really bad plans" like variable rate plans, he said.
While cost savings are one motivation for switching to an alternative supplier, a recently popular reason is to have access to more "green" options for energy.
Green purchasing plans
Competitive retail suppliers also offer plans marketed toward customers who want to attribute a greater amount of the energy they consume to renewable or otherwise "green" sources. For example, out of about 1.5 million Pennsylvania residential customers who shop for electricity, over 400,000 pick some kind of "green" plan, according to the state's Retail Choice Activity Report.
Green Mountain Energy, an NRG-owned retail supplier that operates in Texas, Illinois, Pennsylvania, Maryland, New Jersey, New York and Massachusetts, offers plans in which the supplier purchases renewable energy credits from local renewable energy facilities in amounts and times that match the customer's energy usage, or another plan for EV users that claims to allow the customer to buy solar power while also enjoy a reduced price at night, when the EV is most likely to be charging .
Different ways for customers to go green are just the start of the diverse product offerings that NRG claims it could offer if changes like those found in the Maryland legislation were made to retail markets in the Northeast. "The future is for people to take control of their energy," Holtz said. "We want to invest in cool products for customers."
But, he argues, a variety of rules that favor the regulated utility as the default option has held this future back. "It's hard to get a return on investment" if, for example, a new customer — or a current customer who moved to a new location — is automatically enrolled in a supply plan offered by their regulated distribution utility, and it is incumbent on the customer to select an alternative supplier.
Elsewhere in the country, NRG offers energy services aimed at customers who want to use the latest in energy management and distributed generation technologies, but is less willing to market these services in states where the return on investment is uncertain, Holtz said. As an example, he cites the "Smart Home" in Houston, a demonstration house put together by NRG subsidiary Reliant Energy, that showcases the latest in "smart" efficiency technologies for homeowners, like app-controlled smart thermostats, and energy storage options like different types of home batteries. "It takes a two story house, backyard and garage to showcase all the energy-related products we can offer customers in a fully competitive market," Holtz said.
Duplicating these services in other states requires substantial investments, such as developing new products, as well as implementing these services for customers. In Maryland, New Jersey and Pennsylvania, investing that capital is too risky in part because the existing rules induce customers to stick with their utility, according to Holtz.
Empirical research on whether retail choice has led to innovative new services for energy customers is mixed, however. A 2016 paper from Christensen Associates Energy Consulting reviewed how much "experimentation and innovation" has occurred in states with retail choice compared to traditional states, and found that retail choice "induces relatively high participation in dynamic pricing programs" and promotes green pricing, but that "it has a mixed record in promoting demand response" and "has not generally promoted smart metering."
The Retail Energy Supply Association, a trade group, points to what it sees as a strong record for innovation in competitive retail markets — particularly for commercial customers, who tend to participate in retail choice in the Northeast at much higher rates than residential customers. spokesman Daniel Allegretti said. He mentioned as an example that a RESA member in Texas has designed a rate for customers who use EVs that allows them to take advantage of low wholesale electricity prices when charging at night. "In many cases, retailers are ready to bring offerings like this to residential customers but are held back by limitations in utility metering and billing systems," Allegretti said.
Rather than embracing competitive retail suppliers, however, many consumer advocates and municipal leaders have instead turned to a third option to meet the growing demand among customers for cleaner energy: community choice aggregation, where local governments directly procure energy for their citizens. At least nine states currently allow community choice aggregators, and the urgency around emissions reductions is influencing calls for the model to be expanded elsewhere.
In Maryland, for example, the Office of People's Counsel has supported a pro-aggregation bill that, in testimony before a Maryland Senate committee, Lapp explicitly raised as a "third alternative" to retail suppliers and regulated utilities. The legislation, HB 768, would make Montgomery County, one of the most populous counties in the state and made up of suburbs of Washington, D.C., a testing ground for community aggregation.
The bill would establish a pilot program that would make the county government the default electricity provider, which, supporters hope, will allow the county to have more flexibility to pursue "innovative distributed technologies and services such as local and rooftop solar, energy efficiency, microgrids, energy storage, and demand aggregators," as Lapp said in testimony at a March state legislative hearing.
But while community choice aggregation is expanding around the country, retail choice in the Northeast is stuck in a holding pattern as the Choose Who You Use campaign tries to change the conversation.
Supporters of the campaign admit that shaking up the way people have bought electricity for decades is a tough endeavor. Dumais, the Maryland delegate, said that while HB 1327 did not pass in the legislative session that concluded this spring, she hopes it will serve to lay the groundwork for similar bills in future sessions. "You don't get to put in a bill that completely changes the way a market is handled and have it pass in the first year," she said.