How does switching energy providers work? A guide to the Texas market

Key points

• Not all energy markets are deregulated, so check your options before canceling an existing service.

• Review available energy plans and read your current plan’s fine print before canceling, as some have exorbitant early termination fees.

• Compare your current usage patterns and electricity rates to the new plan before switching.

If you live in a state with a deregulated or restructured market, you’ve probably looked into switching your utility company. Growing concern for cost-conscious living and an increase of solar energy options can leave homeowners scratching their heads as to the best way to approach energy supply to their home.

In this guide, we’ll dive into the electricity market, contract terms and how you can take advantage of finding a new provider for your electric utility or natural gas if you live in Texas, where there are provider options such as Reliant Energy and TXU Energy.

Compare Texas electricity rates, plans and prices to find the best electricity plan for yourself, and potentially leverage renewable energy sources — all thanks to the power to choose in Texas.

What is energy deregulation?

Energy deregulation or restructured energy markets are terms used to describe the energy market for utilities (think gas and electricity) in states where people can pick their energy company.

It’s important to note that not all states allow you to pick your electric retailer, so it’s best to check if you can by using a site such as Choose Energy, Electric Choice or Energy Bot.

In practical terms, when you turn on your lights or use your stove, three things happen to get the energy flowing into your home: generation, transmission and distribution. In a deregulated state, you can select which company or provider can manage certain aspects of that process.

In deregulated states, utility companies still own and operate the infrastructure to get the energy to your home, but the energy retailers create different product options and price out the commodity with contracts and rates. For example, Texas has several retailers including Reliant Energy, Amigo Energy and TXU Energy.

The words “restructured” and “deregulated” are often used interchangeably, but according to Ross Baldick, Ph.D., Emeritus Professor at The University of Texas at Austin, the word deregulation is a bit of a misnomer. “The words are often used as synonyms, [but]…there remain many, typically more, rules and regulations in the restructured industry,” he said.

There are two basic aspects of restructuring: wholesale and retail. “Retail restructuring means that you get to choose your retailer, but only relatively few states outside of Texas have retail restructuring,” Baldick clarified.

Wholesale restructuring means that energy generators compete, mediated by independent operators, to sell their energy to retailers within the U.S.

What is an energy distributor?

An energy distributor, also referred to as a distribution company, is the company that manages the last mile of energy distribution from the transmission system to your home. There’s usually only one distributor for each large service area or state.

In Texas, most of the Dallas area is served by Oncor, while Houston is home to CenterPoint. Other distributors include AEP North (for Abilene), AEP Central (Corpus Christi and the Rio Grande Valley), TNMP (Lewisville and Gulf Coast communities) and LP&L (Lubbock).

Another way to think about this is through outages. When you have an outage, you would call your distributor because they manage the delivery to you. But, when you have an exceptionally high bill, you’d call your supplier (also known as an energy retailer) because they are the ones who set the rate and terms of your contract.

“To get the energy from generator to consumer, there is a transmission system, which moves bulk power over longer distances, and a distribution, which reticulates electricity from the transmission system to end users,” Baldick said. “The cost of building this system is typically not part of the wholesale energy cost. It is charged separately to retail customers and makes up a significant fraction of total bills.”

How do you shop for an energy retailer?

If you come across an energy retailer offering a lower electricity bill for your consumption level, it might be time to switch. Baldick offers some practical advice for when you embark on your energy shopping journey, including ensuring that it’s a credible company and being aware of the risks.

Texans can check their rates by searching for rates online. For instance, the average price per kilowatt-hour (kWh) for energy in Dallas is 18.2 cents, and the average price per kWh for energy in Houston is 13.6 cents.

“Some retailers might expose a consumer to some component of wholesale prices, which are quite variable,” Baldick said. “A retailer might offer a lower price for consumption at certain times of the day or a lower price all the time in return for agreeing to allow the retailer to modify consumption of AC and heater during particular times when wholesale prices are high.”

To simplify this, energy is traded in real time. This means that when a retailer offers a fixed or slowly varying retail rate, it is hedging its retail customers against wholesale price variation risk.

How do you switch energy suppliers?

The thought of switching to a lesser-known energy company can seem daunting, but with a little research and motivation, you can lower your monthly energy bills while potentially taking advantage of local incentives offered by your new energy retailer. The most important things to do are review your current plan, research your potential energy options and compare them to your current energy supplier.

Step 1: Review your current plan

Before you decide to switch electricity suppliers, review your current plan and ensure you aren’t locked into a contract with exorbitant early cancellation fees, which can go up to $300, though they range from flat fees of $125 to $20 per month.

If your electric bill has been rising, or you have other pain points with your electric service, note them before you look into their competition. This is also a good time to take stock of your energy usage habits, which are typically shown on your electric bill in kWh.  

Step 2: Research your options

Most experts agree you should start your electric supply search with the Texas Public Utility Commission (PUC). The PUC website has information on the suppliers available in the state and general information such as their websites and contact information. 

If you’re looking for a more environmentally friendly energy source, now’s the time to also think about your energy choice. And last but not least, make sure you live in the service area for the other options you consider.

Step 3: Compare rates

The final step in your process of switching energy providers is doing an in-depth comparison of your options in Texas. According to the U.S. Energy Information Administration, the average electricity price in Texas as of January 2024 was 14.3 cents per kWh, so anything under this price could be considered a good deal.

Unfortunately, energy rates in Texas continue to rise, so it’s up to you to find a good rate — you’ll want to lock it in for an extended period of time. After narrowing down your options, note if the providers offer a variable-rate plan or fixed-rate plan and how they handle outages.

If you’ve made it this far, congrats. You’re equipped to make the leap to a new provider. To learn more about our energy markets, check out the National Renewable Energy Laboratory’s report on the evolving U.S. distribution system.

What’s next?

If you’ve successfully completed the switch to a different energy retailer, perhaps now’s the time to consider adding solar panels or solar shingles. These can further help reduce your energy costs and increase your home’s resale value.