The Evolution of Energy Markets: How Deregulation is Changing the Landscape

For decades, electricity consumers had no choice. Your utility was your utility—a regulated monopoly that generated power, transmitted it across high-voltage lines, distributed it to your home or business, and sent you a bill. You paid what they charged, and that was that. But starting in the 1990s, a revolutionary idea began reshaping the American energy landscape: what if electricity worked more like other commodities? What if consumers could choose their energy supplier the way they choose their phone company?

This transformation—known as energy deregulation or retail choice—has fundamentally altered how electricity is bought and sold in Illinois and across more than a dozen other states. Understanding this evolution isn't just an academic exercise; it's essential knowledge for any business or homeowner looking to secure competitive commercial electricity rates or residential pricing in today's dynamic marketplace.

From Monopoly to Marketplace: The Origins of Energy Deregulation

To understand where we are, we must understand where we came from. The story of American electricity began with monopoly as the default—and for good reason. Building power plants and stringing wires required massive capital investments that only made sense if a utility could serve all customers in a given territory without competition.

The Era of Regulated Monopolies (1900-1990)

From the early 1900s through the 1990s, the American electricity industry operated under a regulated monopoly model. State public utility commissions (PUCs) granted exclusive service territories to utilities in exchange for obligations to serve all customers and submit to rate regulation. This "regulatory compact" provided stability for utilities and (theoretically) fair prices for consumers.

The system worked—sort of. Utilities built out the grid, electrified rural America, and achieved economies of scale. But critics noted several problems:

• Cost-plus pricing: Utilities had little incentive to control costs since they could pass expenses to ratepayers
• Overbuilding: Nuclear plant construction in the 1970s-80s led to massive cost overruns that ratepayers ultimately absorbed
• Technological stagnation: Without competitive pressure, innovation languished
• Regional price disparities: Electricity costs varied dramatically between utility territories with no recourse for customers

The Deregulation Wave (1990s-2000s)

The success of deregulation in other industries—airlines, telecommunications, natural gas—inspired policymakers to consider electricity. If competition could lower phone bills and airfares, why not electric rates?

The Energy Policy Act of 1992 opened the door by requiring utilities to allow independent power producers access to transmission lines. This federal action enabled states to restructure their retail electricity markets.

California led the charge, implementing retail choice in 1998. Texas followed in 2002 with what would become the most robustly competitive retail market in the nation. Illinois joined the movement with the Electric Service Customer Choice and Rate Relief Law of 1997, which began opening the state's retail market to competition.

According to the U.S. Energy Information Administration, 13 states plus the District of Columbia now offer some form of retail electricity choice. These deregulated markets serve approximately 70 million American households and businesses.

Illinois Energy Deregulation: A Case Study

Illinois took a measured approach to deregulation. The state allowed large commercial and industrial customers to begin choosing suppliers in 1999, with residential choice phasing in by 2002. The two major utilities—ComEd in northern Illinois and Ameren in central and southern Illinois—continued to own and operate the distribution infrastructure while new retail electric suppliers entered the market to compete for customers.

The result has been a hybrid system. ComEd and Ameren remain the "utilities of record," responsible for maintaining power lines, restoring service after outages, and providing "default" supply to customers who don't choose an alternative supplier. But dozens of licensed retail electric suppliers now compete for the supply portion of customers' bills.

For Illinois businesses seeking competitive commercial electricity rates, this means options. You're no longer captive to a single provider's pricing. You can shop, compare, negotiate, and switch suppliers—often without any service disruption or installation required.

Navigating Deregulated Markets: Understanding the New Electricity Ecosystem

Deregulation created an entirely new electricity ecosystem with distinct players, products, and pricing mechanisms. Understanding this ecosystem is essential for developing an effective energy procurement strategy.

The Players in a Deregulated Market

Incumbent Utilities (ComEd, Ameren Illinois): Still own the "wires" and remain responsible for delivery, maintenance, and outage restoration. They also provide default supply service to customers who don't choose an alternative supplier.

Retail Electric Suppliers (RES): Licensed companies that purchase wholesale electricity and sell it to retail customers. They compete on price, contract terms, green energy options, and customer service. Illinois has over 40 licensed retail suppliers.

Wholesale Market Operators (PJM): The regional transmission organization that operates the wholesale electricity market covering Illinois and 12 other states. PJM runs auctions where generators sell power and suppliers buy it.

Power Generators: Companies that own and operate power plants. They sell electricity into the wholesale market, where it's purchased by utilities and retail suppliers.

Energy Brokers and Consultants: Intermediaries who help businesses compare supplier offerings and negotiate contracts. They may earn commissions from suppliers or fees from customers.

Understanding Your Electricity Bill in a Deregulated Market

In deregulated Illinois, your electricity bill has two main components:

Supply Charges: The cost of the actual electricity commodity. This is the competitive portion—you can shop for a supplier and negotiate these rates. Typically measured in cents per kilowatt-hour (¢/kWh).

Delivery Charges: The cost of transmitting and distributing electricity from power plants to your facility. This portion is still regulated and paid to your utility (ComEd or Ameren) regardless of your supplier choice. Delivery charges include distribution charges, transmission charges, and various riders and surcharges.

For most commercial customers, supply charges represent 50-70% of the total bill, making this a significant opportunity for savings through competitive procurement.

How Wholesale Markets Set the Price Floor

Retail suppliers purchase electricity in wholesale markets, primarily through the PJM Interconnection. Understanding these wholesale markets helps explain why retail prices fluctuate and how suppliers develop their offerings.

PJM operates several markets:

• Day-Ahead Market: Hourly prices set one day in advance based on expected supply and demand
• Real-Time Market: Prices that reflect actual conditions, adjusting every 5 minutes
• Capacity Market: Ensures adequate generating capacity exists to meet future demand
• Ancillary Services Markets: Covers frequency regulation, reserves, and other grid reliability services

When you sign a fixed-rate contract with a retail supplier, they're taking on the risk that wholesale prices might rise above your locked rate. When you choose an index or variable rate, you're tied more directly to wholesale market fluctuations.

3 Game-Changing Energy Procurement Strategies

The transition to competitive markets has created new opportunities—and new complexities—for energy procurement. These three strategies can help Illinois businesses capture maximum value from the deregulated marketplace.

Strategy 1: Strategic Contract Timing and Layered Purchasing

In the old regulated world, you had one rate, updated annually through regulatory proceedings. In the competitive market, timing matters enormously. Wholesale electricity prices fluctuate based on natural gas prices, weather forecasts, power plant outages, and economic conditions. Locking in a contract during a market trough can save thousands compared to signing during a peak.

Layered Purchasing Approach:

Rather than committing 100% of your electricity needs in a single transaction, sophisticated buyers layer their purchases over time. This involves:

• Dividing your load into tranches (e.g., four 25% portions)
• Purchasing each tranche at different times as market conditions warrant
• Using a combination of contract lengths (12, 24, 36 months)
• Setting price targets that trigger purchases when reached

This approach provides dollar-cost averaging that reduces the risk of locking in at an unfavorable price. Large commercial customers commonly use this strategy to manage their Illinois commercial electricity rates.

Market Monitoring:

Successful strategic timing requires monitoring wholesale market indicators:

• Natural gas forward prices (natural gas sets the marginal cost of electricity in most hours)
• PJM capacity auction results
• Weather forecasts for coming seasons
• Power plant retirement and construction announcements

Many businesses work with energy consultants who provide market intelligence and trigger recommendations.

Strategy 2: Blended Product Structures

Modern retail suppliers offer a menu of product structures that can be customized to match your risk tolerance and market view. The days of "fixed or variable, take your pick" are over.

Fixed-Rate Contracts: Lock in a single price per kWh for the contract term. Maximum budget certainty but no ability to benefit if market prices fall. Best for: risk-averse buyers, those with strict budget requirements.

Index/Variable Rates: Price fluctuates monthly (or even hourly) based on wholesale market indices. Maximum exposure to market swings—both up and down. Best for: buyers who can manage volatility and want to benefit from low-price periods.

Block and Index: A portion of your load is fixed-price; the remainder floats with the market. Example: 70% fixed, 30% index. Provides some budget certainty while retaining market exposure. Best for: moderate risk tolerance, desire for partial hedge.

Indexed with Caps/Collars: Index pricing with a ceiling (cap) and/or floor (collar) that limits your exposure. You benefit from market drops but have a maximum price if markets spike. Best for: buyers wanting index benefits with downside protection.

Heat Rate Products: Price tied to natural gas prices (the primary driver of electricity costs). Allows hedging of the gas-to-power conversion factor. Best for: sophisticated buyers who want to hedge specific cost drivers.

Strategy 3: Aggregation and Group Purchasing

Electricity suppliers offer better pricing to larger customers—it's more efficient to serve one 10-megawatt account than fifty 200-kilowatt accounts. This creates an opportunity for smaller businesses to band together.

Municipal Aggregation:

Illinois law allows municipalities to aggregate their residents' and small businesses' electricity load and negotiate with suppliers on behalf of the entire community. Over 700 Illinois municipalities have adopted aggregation programs, serving millions of customers.

Through aggregation, small businesses gain access to pricing typically reserved for large commercial accounts. The Illinois Commerce Commission maintains a list of approved municipal aggregation programs.

Private Buying Groups:

Trade associations, chambers of commerce, and industry groups often sponsor group purchasing programs for members. These groups aggregate member loads and negotiate favorable contracts that individual members couldn't secure alone.

Multi-Site Aggregation:

Businesses with multiple locations can aggregate their load across sites for better pricing. A retailer with 20 Illinois stores can combine their load into a single procurement, achieving pricing advantages while potentially mixing fixed and index products across locations.

For more on aggregation strategies, see our guide to Energy Aggregation for Businesses.

Future Energy Trends: What's Next for Deregulated Markets

Energy markets continue to evolve rapidly. Understanding emerging trends helps businesses prepare their energy procurement strategy for the years ahead.

The Rise of Renewable Energy Procurement

Corporate sustainability commitments are reshaping electricity markets. Hundreds of major companies have pledged to source 100% renewable electricity, creating massive demand for clean energy products. This trend is filtering down to mid-sized and smaller businesses as customers, investors, and employees increasingly expect environmental responsibility.

Retail suppliers have responded with a range of green products:

• Renewable Energy Certificates (RECs): The simplest approach—you purchase certificates representing renewable generation, which offset your grid electricity consumption.
• Green Supply Products: Fixed or variable rate products where the supplier commits to matching your consumption with renewable generation.
• Virtual Power Purchase Agreements (VPPAs): Long-term contracts (10-20 years) that finance new renewable projects and provide price certainty.
• Community Solar Subscriptions: Credits from off-site solar installations applied to your electricity bill.

The cost premium for renewable electricity has shrunk dramatically. In many cases, renewable products are now competitive with—or even cheaper than—conventional offerings, especially when accounting for long-term price stability.

Grid Modernization and Distributed Energy

The traditional model of large, centralized power plants serving passive consumers is giving way to a more dynamic, distributed grid. Key developments include:

Distributed Generation: On-site solar, fuel cells, and small-scale wind allow businesses to generate their own power, reducing grid dependence and providing backup during outages.

Battery Storage: Declining battery costs are making on-site energy storage economically viable. Batteries can reduce demand charges, provide backup power, and enable participation in grid services markets.

Demand Response: Utilities and grid operators pay customers to reduce consumption during peak periods. This transforms electricity demand from a fixed requirement to a flexible asset that can generate revenue.

Electric Vehicles: The electrification of transportation is adding significant new load to the grid while also creating opportunities for vehicle-to-grid (V2G) services where EV batteries support grid reliability.

Evolving Market Structures

Deregulated markets themselves continue to evolve:

Capacity Market Reform: PJM and other grid operators are reforming capacity markets to better integrate renewables and storage while maintaining reliability. These changes affect the capacity costs embedded in retail electricity prices.

Carbon Pricing: Illinois joined the Regional Greenhouse Gas Initiative (RGGI) and has implemented other carbon reduction policies. Future carbon pricing mechanisms could significantly impact wholesale electricity costs and the relative economics of different generation sources.

Real-Time Pricing Expansion: Advances in smart meters and automated demand response are making real-time, dynamic pricing viable for more customers. This could eventually replace traditional fixed-rate structures for many commercial customers.

Peer-to-Peer Energy Trading: Blockchain and other technologies are enabling direct transactions between energy producers and consumers, potentially disrupting traditional utility and supplier relationships.

Preparing Your Business for the Future

Forward-thinking businesses are positioning themselves for the evolving energy landscape by:

• Building energy management capabilities and data analytics infrastructure
• Investing in flexible loads that can respond to price signals
• Evaluating on-site generation and storage opportunities
• Developing long-term sustainability strategies that align with corporate values and stakeholder expectations
• Working with energy advisors who understand both current markets and emerging trends

According to IRENA's 2023 report, renewable energy costs have declined by over 80% in the past decade, fundamentally shifting the economics of electricity generation. Businesses that understand and adapt to these changes will be best positioned to control their energy costs in the decades ahead.

Taking Action in Today's Market

The evolution from regulated monopoly to competitive marketplace has created unprecedented opportunities for Illinois businesses to control their electricity costs. But capitalizing on these opportunities requires knowledge, attention, and strategic action.

Immediate Steps:

• Understand your current contract: When does it expire? What are the terms? Is there an auto-renewal clause?
• Analyze your load profile: Request interval data from your utility to understand your consumption patterns
• Research the market: Compare offers from multiple suppliers, or work with a broker who can gather competitive quotes
• Consider your risk tolerance: Fixed rates offer certainty; index products offer potential savings but also volatility

Ongoing Practices:

• Monitor contract expiration dates and begin renewal processes 6-12 months in advance
• Track wholesale market indicators to identify favorable purchasing windows
• Review bills monthly to catch errors and identify unusual consumption patterns
• Stay informed about policy and regulatory changes that could affect future costs