The Difference Between an Energy Retailer and Utility


This post addresses a common question in the energy industry, namely, the difference between an energy retailer and a utility. The question became relevant to commercial and industrial businesses operating in Ontario when the Harris government proposed deregulating what used to be a vertically integrated Ontario energy sector. Understanding the difference between an energy retailer and local utility takes as a starting point the question, "why did Ontario deregulate its energy market"?

Background: Emergence of Ontario's Supply-Demand Problem

In 1925, Ontario built its first (and the world's largest) hydroelectric generator; the supply of electricity far exceeded the demand. In the 1950s, the post-WWII economic boom lead to a sharp increase in electricity demand. While nuclear power plants and coal-fired electricity generators offered good alternative sources of electricity to bridge Ontario's growing supply-demand gap, environmental issues, in the form of smog and acidic rain, began to emerge as an increasingly important topic when discussing energy sources. Plans by the Ontario government to build additional nuclear power plants and coal-fired electricity generators to overcome its supply-demand gap were abandoned. The strains on Ontario's electricity market became an alarming reality in 2013 when North Eastern America experienced a prolonged blackout. 

Deregulation of Ontario's Energy Market

In the mid 1990s, the Harris government proposed to deregulate Ontario's energy market as a solution to Ontario's supply-demand gap. Ontario's electricity market would no longer be under the sole monopoly of Hydro Ontario. Energy retailers would enter Ontario's energy market and, through competition, create highly competitive pricing options for their customers. Since price can only be adjusted so much, product innovation that better respond to the needs of power consumers would soon follow, as would a specialized customer service grounded in industry knowledge and expertise. 

Energy Market Deregulation: Benefits to Power Consumers

From the Ontario government's decisions to progressively deregulate and open up its electricity to the competitive forces of an efficient open market, power consumers now had the option of choosing between their local utility, or an energy retailer with pricing options and energy product solutions that have filtered through the efficiencies of market forces. What is the difference between a local utility and an energy retailer?

Choice: Traditional Utilities (Pre-existed Deregulation)

From the moment Ontario deregulated its energy market, power consumers could now choose to remain with their local utility or an energy retailer.  Despite a diversification in choice for the consumer, utilities continue own and operate the means (e.g. transmission wires) by which electricity is transmitted and distributed to businesses.  Transmission and distribution charges continue to be fixed by Ontario regulators. 

Choice: Energy Retailer (A Byproduct of Deregulation)

Energy retailers did not pre-exist the deregulation that took place in Ontario's energy market. As such, it is fair to say that they are a product of Ontario's progressive deregulation. It is also fair to say that energy retailers were shaped by the efficiencies of a highly competitive energy market. The forces of competition lead energy retailers to offer highly competitive energy rates. Since energy rates can only be adjusted so much, the competitive forces of an open energy market also lead to tailored energy solutions and product innovations that better meet the individual needs of power users.  Finally, the high intensity of a competitive energy market naturally lead to an improved and specialized customer service experienced founded in industry knowledge and expertise. 

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