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January 12 - January 18, 2025
Price is a misleading yardstick for assessing the current and future prospects of investment in renewable energy infrastructure.
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.
One of this book’s key lessons is that, around the world, we have historically built, organized and transformed electricity systems in such a way that the substitution of cheaper and cleaner generation for dirty and relatively expensive generation is not guaranteed at all.
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.
Wolf’s basic proposition? That, whether the outcome is planet-saving or anything else, under capitalism, ‘if something is profitable, it will be done’.
unlike many companies in other industry sectors, renewables operators generally do not have the luxury of funding major new capital expenditure out of operating cash flow.
In recent decades, the hydrocarbon ‘majors’ have been able to fund the lion’s share of new exploration and development using profits from existing operations, relying only minimally on external financing.
‘The “wall of capital” that was supposedly coming to finance the global energy transition’, Marsh succinctly put it, ‘has proven to be more of a dam.’31
Rather, the point of this book is to accentuate the mistake of presuming that simply because renewable power is relatively cheap, it will be built. For good or ill, that is not the way capitalism works.
A very different conclusion, however, would be this. Insofar as capital and markets still seemingly cannot do without government subsidy, despite the historic fall in costs that was widely expected to remove the need for such support, we clearly should not in fact be relying on markets and the private sector to deliver the energy transition in the first place. They have been given the opportunity and found wanting. In short, it is the wrong model.
China’s Three Gorges Dam, for example, operating since 2012 and with a gigantic capacity of 22.5 GW, is the world’s largest power station of any kind.
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.
On the face of it, the shift to a decarbonized global infrastructure of electricity generation is simple to get our heads around, albeit – as we shall see – maddeningly difficult to achieve in practice.
That investment challenge is as nothing compared to that which looms elsewhere, however. Take Africa. Home today to around 1.4 billion people, almost half of those people still lack access to electricity.
Commentators often mention India and China in the same breath when it comes to electricity and climate, but in terms of consumption they are poles apart: per capita output in India is still only around a fifth of what it is in China.
Developers of wind and solar power are not able to simply rip up the rules of the actually existing electricity industry; at best, they can chip around its edges.
As has been fulsomely documented, far-reaching neoliberal reforms were widely foisted upon countries across the Global South in the 1990s and 2000s as the price to be paid for much-needed fiscal support from bodies such as the World Bank and the International Monetary Fund (IMF).
the aggregate national level, the share of electricity generated by independent (non-integrated) power producers (IPPs) increased from less than 2 per cent as recently as 1997 to 42 per cent by 2020. But the share of generation specifically from non-hydro renewables that is controlled by these independents is much, much higher – reaching 80 per cent in 2020.21 And, to one degree or another, what is true of the US is also true elsewhere.
In several countries, the entity or entities that control the grid in many cases also possess proprietary fossil fuel interests and have consistently erected impediments to equality of grid access for renewables generators, thus limiting the extent of competition provided by those generators.
Having wholly privatized the ownership and operation of its electricity grid in the 1990s, for instance, the UK – for so long a standard-bearer for privatization – announced in 2022 that it would be renationalizing the operation of the country’s transmission system.
At one extreme there is a cluster of countries in which 80 per cent or more of generating capacity is now privately held, including several countries we have previously discussed (such as Argentina, New Zealand, the UK and the US), but also several we have not (such as Chile, Japan, Portugal and Spain).41 At the other extreme, however, is a cluster of countries where less than 30 per cent of generating capacity is privately held, ranging from Croatia to Israel and from Indonesia to Mexico.
In both the Global South and especially the Global North, the green energy world to which we are gradually transitioning is, as things stand, overwhelmingly a privately owned one.
Particularly in the Global South, the governments to which the world is looking to increase the scale and pace of decarbonization remain directly and disproportionately invested economically in the business of continuing to burn fossil fuels to keep the lights on.
In capacity markets, generators bid not to sell electricity but to be available in the future to generate electricity when called upon at short notice.
Similarly in the US: capacity markets are used by grid operators in, for instance, New England and the PJM region, but not in Texas. Where capacity markets are not used, there is said to be an ‘energy-only’ electricity market.
The LCOE measure attempts to render technologies comparable by discounting all costs to the present (as a so-called ‘overnight cost’), but, nonetheless, a plant where essentially all costs are incurred upfront is, in economic terms, nothing like a plant where costs are spread broadly equally over thirty years, even if both happen to have the exact same LCOE.
Essentially, solar and wind defy classificatory convention. Always ‘on’, they will sometimes fail to produce even baseload requirements, while at other times meeting baseload and peakload requirements with something to spare.
large, utility-scale solar and onshore wind facilities tend predominantly to be located in precisely those parts of countries where most electricity users are not located,
This is that, whoever they are, and of whatever institutional type, private sector developers of wind and solar power have a strong preference for debt, and ordinarily try to maximize the proportion of construction finance that is raised with debt as opposed to equity.
The higher the proportion that comprises debt, the more highly ‘geared’ or ‘leveraged’ funding is said to be.
In 2020, for instance, Guy Brindley reported that the proportion of debt in wind finance is typically in the 70 to 80 per cent range.
financing represents the ultimate chokepoint – the point at which renewables development most often becomes permanently blocked.
At any rate, where an SPV structure is used, financing occurs at the project level, and hence the label that is used – project finance. Equity investors acquire shares in the project SPV, and banks lend to the project (not to the developer).
So much explanatory baggage was attached to LCOE that it became – and remains – nothing less than a fetish.
It is, arguably, for its annual Outlook that the IEA is today best known, and LCOE explicitly underwrites the forecasts it contains.
Recent research found that in a sample of leading emerging economies (Brazil, India, Indonesia, Mexico and South Africa), the average cost of capital of a utility-sized solar farm is presently some 660 basis points higher than in the EU (10.6 versus 4.0 per cent).
Both the Chinese and Japanese central banks launched the mechanisms of greatest relevance to domestic renewables projects – the Carbon Emission Reduction Facility (CERF) in the former case and the Climate Response Financing Operation in the latter – in 2021. Each such mechanism works not by direct lending to renewables companies, but through the refinancing of loans extended to those companies by commercial banks.
In Sweden, where a certificate scheme is the principal form of government-sponsored support for renewables generators, the sale of such certificates accounted for 15–25 per cent of wind operators’ revenues in the years 2018–20.37
Third, and finally, policymakers introduced various forms of price control. Worldwide, this final form of renewables support from governments has been easily the most consequential of all the mechanisms surveyed here, which is to say it is the one that has had most influence in nurturing and buttressing the rollout of renewables installations. Not unrelatedly, it has been the mechanism most favoured both by actors within the renewables sector itself and, no less importantly, by their financiers – on which more in due course.
Whatever the actual argument, however, the key point for our purposes is that the problem – the force retarding the transition to clean electricity – is deemed to be anything but economics. With renewables now so cheap, after all, how could it be economics that is standing in the way?
Should they not foresee profitability, in short, capitalists do not invest. If there is one theoretical principle above all others that underlies the present book, this is it.
It is simply not true that steam was cheaper. On the contrary: water was, and remained, cheaper, mainly because it required no human labour to call forth its powers, whereas coal could only be transformed into an energy source through massive inputs of costly human labour power.
The investment decisions that drove the early nineteenth-century energy transition ultimately hinged not on price, but on profit. The spatial and temporal advantages of steam all consisted in one way or another in the fact that steam better enabled capital to secure a reliable and disciplined supply of labour power and accordingly represented ‘a superior medium for extracting surplus wealth’.
First, there is a condition relating to industry structure. Is the company that sells the electricity (or smartphone) to the end user the same company that produces it? Or, to use the technical argot, is the industry vertically integrated? As we shall see, relative costs tend only to win out if it is.
The great irony, then, is that the constituency that matters most to the materialization of new renewable power capacity is in fact the one constituency among whom LCOE data are generally neither here nor there, are rarely looked at, and are almost never spoken about.
The point, more generally, is that the distributor, unlike the vertically integrated energy company in model 1, does not have the option of itself generating the power renewably if the power is not for sale on the market at the right price. That is not its business.
As Martin Wolf of the Financial Times has put it, and precisely in the context of the political economy of the stuttering energy transition, ‘while it is possible to prevent businesses from doing profitable things, it is impossible to make them do things they consider insufficiently profitable’.12
The general point to take away is this: for capital to be able to realize the benefits of cost reductions, a degree of monopoly power is necessary.
transition from fossil fuels to renewables in the first place. The question that nobody – not economists and not McKibben – ever asks, is, why, unless externally forced, would the electricity industry accept, let alone actively embrace, a highly disruptive transition that lowered production costs but saw little, if any, of the resulting efficiency gains accruing to industry actors?
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.
