The Price is Wrong: Why Capitalism Won't Save the Planet

by Brett Christophers

The paradox, then, is this. There has been a long-standing consensus that the economic key to renewables winning out is being cheaper than fossil-fuel-based electricity; renewables successfully crossed this apparent Rubicon in the late 2010s, prompting delight that the chief obstacle had been dislodged. And yet, at the same time, the position is also widely held that governments reducing or removing economic support to renewables in the 2020s would have a deeply negative impact on new investment.

The main answer, and argument, is this. Viewing the economics of the energy transition and the development of renewable energy through the prism of price results in contradictory perspectives such as those identified above because, economically, the matter is not in fact principally about price. Price is a misleading yardstick for assessing the current and future prospects of investment in renewable energy infrastructure. This is the main message that the book’s title is intended to convey. To be clear, the point here is not that the particular prevailing price of renewable power is wrong – in terms, that is, of precipitating a faster transition. It is that to look predominantly at price when thinking about what makes for a successful (or failed) transition is to look in the wrong place: as an analytical lens on climate and capitalism, price is a siren. Thus the book’s argument with those (principally economists) who obsess about what the price of renewables – and indeed of carbon – ‘needs’ to be in order for clean power to usurp fossil-based power is not that their answer is incorrect. It is that their question is. Price is the very wrong category to prioritize analytically.

The better, more meaningful, yardstick is profit. This is what we should be focusing on. The main economic reason why the decarbonization of electricity is progressing so much slower than we need it to, I argue, is that most governments worldwide have effectively outsourced responsibility for developing, owning and operating solar and wind farms to profit-oriented private sector actors, and yet the profits that such actors expect to be able to earn from investment in these activities generally underwhelm. It is simply not a sufficiently attractive economic proposition.

Particularly in countries with liberalized electricity markets, the price at which generators can sell their output is notoriously volatile. This renders investment decision making extraordinarily dicey. How much will it be possible to sell renewable power for? Often, it can be hard to predict a week ahead, let alone a year or more. Expected profitability represents a potential barrier to renewables development, in other words, not just in the sense of sometimes being unacceptably low, but also in terms of frequently being substantially unknowable. Hence one of this book’s core insights: that the government financial support we continue to see worldwide for renewables is often as much about making profit visible as about making it viable.

the substance, or colour – green or brown – of commodity production is ultimately immaterial to capital.

The advent of ‘green capitalism’ (such as it is), rather, is the result principally of government support helping to make clean energy a business that is just about sufficiently profitable to attract investment, combined with a certain willingness in some capitalist quarters to accept lower returns, either in the expectation that green profits will eventually be substantially forthcoming, and thus that there is long-term economic value in establishing first-mover advantage and market leadership, or – whisper it – in the service of delivering the use value of greenness.

companies in other industry sectors, renewables operators generally do not have the luxury of funding major new capital expenditure out of operating cash flow.

That is to say, instead of decarbonizing various significant greenhouse-gas-emitting activities directly – by substituting clean fuels for dirty fossil fuels in powering vehicles, firing industrial processes and generating heat – these activities are predominantly to be decarbonized indirectly – by shifting them to electrical sources of energy while simultaneously decarbonizing the electricity thereby consumed.

From the side of science, for example, already in its 2014 report on mitigation options, the IPCC set out its stall, insisting that electrification was the master key insofar as ‘the decarbonization of the electricity sector may be achieved at a much higher pace than in the rest of the energy system’.16 By the time of its follow-up 2022 report, the scientific consensus had evidently further hardened. ‘Stringent emissions

Although significant hydropower potential clearly remains in many parts of the world, and especially sub-Saharan Africa, several countries, especially wealthy countries in the Global North, have already built out much of their suitable hydro capacity. Physical scope for expansion is constrained.

It would be foolhardy to turn to hydro to temper climate change if climate change is all the while tempering hydro.

hydroelectricity is not so friendly to the climate after all. Submerged vegetation in hydropower reservoirs, particularly in tropical regions, is, it transpires, a large contributor of emitted methane, a greenhouse gas that is much more potent than CO2.

Yet, overall, all this has been – and continues for the most part to be – considered a price worth paying, at least by those in society with the power to weigh overall benefits against costs and to make decisions accordingly.

No technology, advocates of wind and solar power insist, is perfect. There will always be costs, or at least perceived costs. But the costs of not investing in a future of solar and wind power are, they say, immeasurably higher.

Non-dispatchable technologies are inherently more capricious: energy is generated using the underlying resource (such as the wind) when and to the extent that the resource is available; it is not possible to extract on demand (that is, ‘dispatch’) a specified quantum of power.

But so too will economics. Solar and wind farms are being built into existing landscapes of electricity generation and delivery that in different parts of the world feature often markedly different institutional and commercial arrangements, incentives and possibilities. It is to those particular varying arrangements, incentives and possibilities – to, that is, the heterogeneous business of electrical power – that we now turn.

The premise, at least, is that buyers and sellers should be broadly free to trade on terms of their own choosing, either directly with one another or indirectly via organized market exchanges, and that investment in generating capacity should be guided by market-based price signals. This, once more, is the context in which Clearway operates in modern-day California.

The significance of this, economically as much as politically, simply cannot be overstated: insofar as the private sector is ruled by the profit imperative, profitability – its determinants, availability and scale – utterly dominates renewable energy’s conditions of both possibility and performance.

electricity for next-day delivery is traded on the spot market, typically in hourly or half-hourly chunks. Ahead of a cut-off point (usually midday), generators bid the amount of electricity they expect to be able to supply for each day-ahead time period – for instance, the hour beginning at 4:00 a.m. Expected supply and demand determine the market-clearing spot price.44 Prices in electricity spot markets are notoriously volatile, with, as we will see, hugely significant implications.

what will be one of this book’s core themes – namely the extent to which planned installations of new generating capacity are considered ‘bankable’, which is to say, are able to secure financing. But partly also because they point to another important aspect of the electricity industry to which marketization increasingly often applies, and which therefore needs examining briefly here. That aspect is resource adequacy.

LCOE expresses how much it costs a plant to generate electricity over its entire lifetime, averaged across the years and discounted to the present. Essentially, it is calculated by taking all the costs of all kinds incurred in developing, building and running the plant, and dividing this amount by the quantum of electricity generated over its lifetime.

Whereas 80 to 90 per cent of the LCOE of wind and solar plants represents upfront investment, the equivalent proportion is only around 40 to 50 per cent in the case of coal-fired plants and it is lower still – as little as 20 per cent – in the case of natural gas, for which fuel costs (approximately 70 per cent) predominate.

The key point, then, cannot be overemphasized: understood as aggregations of expenses, fossil-fuel-based plants and renewable plants are entirely different economic phenomena.

Specifically, debt is cheaper (to the entity raising funds) in the sense that the creditor charges less for it. But, if the charge applicable to debt is self-evident – in the form of the interest rate – it is less so in the case of equity. What is the ‘charge’ on (or better, embedded in) equity? It is, essentially, the financial return that the fundraising entity forgoes by virtue of the fact that it has sold an ownership interest. The larger that equity stake, the greater the cost. The higher the proportion that comprises debt, the more highly ‘geared’ or ‘leveraged’ funding is said to be.

The implication can, in fact, be stated even more starkly and broadly. As the gatekeepers to capital, financial institutions ultimately determine the conditions of possibility of all major programmes of investment carried out by private sector actors – and indeed also by many public sector actors – in capitalist societies, and that is as true of investment in renewable power as in any other class of infrastructure.

To understand the financing of renewable power development, there is one final crucial consideration. This is the question of how – or perhaps more accurately, where – particular projects are held in legal– organizational terms. If the developer is a major energy company (say, Sweden’s Vattenfall), a wind or solar farm is generally held like any other fixed asset: it appears on the company’s balance sheet. In the case of specialist developers, however, this is rarely how it works. More commonly, an individual project is made into a ‘company’ in its own right, using a special-purpose vehicle (SPV) structure. In other words, the asset does not appear directly on the developer’s balance sheet; it sits within the SPV, in which the developer, in turn, owns shares. Sometimes, in the case of especially large projects such as offshore wind developments, major energy companies also use off-balance-sheet structures, establishing SPVs that are often joint ventures in which more than one energy company holds shares.

Think of all those supply and demand curves in economics textbooks. They all convey the same essential message: that price contains meaningful and unambiguous signals to which companies and consumers, like automatons, respond, at least if in possession of transparent information.

As Hans-Josef Fell, an arch proponent of ecological modernisation and co-author of Germany’s pioneering Renewable Energy Sources Act of 2000, once put it, ‘The market can do a lot, it can break up rigidities, ensure more economic efficiency, and give citizens new opportunities to influence the energy industry. But we cannot foster renewable energy through the market alone.’

The basic argument of those who propounded the new orthodoxy, popularized for policymakers internationally in seminal texts such as 1989’s Blueprint for a Green Economy, was that the world’s growing environmental problems represented an endemic failure of capitalism’s price mechanism.19 Price is supposed to signal to consumers the full cost of producing a particular product, but, in the case of many of industrial societies’ most important products (say, cement), it did not. To be sure, some inputs – labour, capital, technology – were priced. But, alongside these priced inputs, were resources or ‘services’ provided by the environment effectively free of charge. Producing cement, for example, ‘uses’ the atmosphere as a waste sink for carbon dioxide, and the market price of cement did not incorporate this particular cost.

propitious political, cultural, geographical or other such factors can make such a full energy transition more or less likely and will fashion the substance of that transition in myriad ways, but only one factor – a lower price – is necessary for the transition to occur.

Both national and local governments furnished an array of support mechanisms ranging from access to cheap credit to subsidies for research and development expenditure. Such support was integral to driving investment in solar and wind technologies among both publicly and privately owned Chinese manufacturers.

Even today, China’s dominance of manufacturing of key pieces of equipment remains staggering: 96 per cent of wafers for solar panels, for instance, and 83 per cent of offshore wind blades are produced there.43

The view that the relative prices of different sources of energy will determine the relative dominance of the two in the evolving energy mix is, as we have seen, very much a view from within the economics mainstream. This mainstream tradition is sometimes labelled ‘orthodox’, other times ‘neoclassical’. It is also principally a form of ‘supply-side’ economics, so called because it rests on the premise that the supply of goods and services is the key determinant of levels of economic growth and prosperity.

In sum, there is in fact support in neither history nor theory for the claim that relative cheapness is today the economic key for renewables in winning out against fossil fuels in electricity generation. If wind and solar power are to thrive, and ultimately dominate, then history and theory suggest that profit, not the right price, is the sine qua non.

To varying degrees in different parts of the world, the electricity industry has become not just more competitive, but, more pointedly and precisely, more price-competitive. That is to say, its general direction of travel has been and is away from a model in which there exists substantial capacity for the industry to capture and profit from cost reductions.

Competition typically remains much more limited among suppliers to end users, which is to say, in respect of retail price – as opposed to wholesale price. This matters a great deal.

of the upside. But the crucial point is clearly this: the particular industry constituency that the world is relying on to actually, physically, make the switch to renewables – that is, generating companies, those that produce our electricity and sometimes also, in the process, produce greenhouse gas emissions – is seemingly not the industry constituency that would stand most to gain economically from that switch.

The standard explanation is that which the Economist recently offered its readers: ‘Just like in any other market for a homogeneous good, the price of power is set by the most expensive supplier.’3 In other words: generators are supplying the same thing, so should be paid the same as one another.

‘Low returns and volatility don’t go. No bank in the world will take power price risk at low returns.’

The obstacle, rather, is the effect of price volatility on the perceived investibility of projects under development. Essentially, there are not enough projects characterized by a level of revenue risk that potential financiers deem to be acceptable – or, at least, projects in which financiers are prepared to invest at a cost of capital that developers, in their turn, are willing to pay. The word used in financial investment circles to denote the quality of a project in terms of its perceived investibility is ‘bankability’.

This hedge – a mechanism whereby risks are offset or balanced – moderates the anxieties of plant developers and, more importantly, of their financiers vis-à-vis electricity price volatility.

‘That’s’, Buffett said, ‘the only reason to build [wind farms]. They don’t make sense without the tax credit.’

In short, government support mechanisms always exist in a complicated, multifaceted relationship with private sector profitability in the renewables industry. Often nothing less than essential to enabling profits insofar as they serve to mitigate revenue and development risk, such mechanisms themselves represent a risk of sorts to continued profitability, since what the government giveth it can also take away. Spain, among others, has seen that – and NextEra Energy, as we saw, likewise knows it.

Writing in 2017, Raymond Gifford and colleagues described developments in the US renewables sector across the previous decade or so in terms of a ‘vicious cycle’: a gold rush mentality sparked vast (if regionally uneven) investment, precipitating local ‘oversupplied conditions’ that ‘undermined the financial stability of merchant generators, and eroded their capacity to attract and deploy capital over the long term’.32 Baldly stated, the ‘free market’ in the generation of renewable energy evidently includes the freedom to overinvest and lose money.

costs is deemed a strategic priority, and any indication

Just as more competition in the generation of wind and solar power depresses average generator profits, so also more competition in financing such generation activities depresses average financier profits. ‘You have all these investors that are like,

The existence of this ‘price premium’ really should give us pause. Banks and other financiers’ willingness to support renewables projects is predicated in part, it appears, on their willingness to accept sub-par returns as the necessary price of going green. The key question, however, is how far such investor willingness to accept lower returns will stretch. Who knows? But if we have learnt anything from financial history, it is that banks, of all capitalist firms, are not charities. If we can be sure of anything, it is that their willingness to pay the premium in question will be limited, and at some point will be exhausted.

Readers will probably not be surprised to learn that there is a name for this paradoxical effect, whereby renewables potentially undermine the conditions of their own future viability and growth precisely by virtue of their own success in displacing more expensive, conventional generating technologies and thereby reducing the price of electricity. It is called, for obvious reasons, the cannibalization effect.

In other words, what we find with corporate PPAs in US and European renewables markets is a propitious alignment of interests around long-term fixed prices. It is in the interest of both the off-taker and the generator (or, more accurately and consequentially, the generator’s lender) that the contracted electricity price should be fixed. This fixing – and the investment it crystallizes – is in fact the very kernel of the corporate PPA phenomenon.

To many, relying on markets and the pricing mechanism to drive the transition away from fossil fuels – which, in terms of broad approach, is what the world widely and increasingly is doing – is itself problematic enough. Markets are not only impersonal and faceless; they are also unaccountable. Should not someone, or rather some democratically elected institutional collective of someones, be taking responsibility? One of the big problems, surely, with market-coordinated processes is that people cannot ask markets why they are doing things in a certain way. Nor can people ask markets why they messed up when things go awry. Market mechanisms preclude accountability.