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

by Brett Christophers

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

Here is another irony, and one with a still broader and deeper import: when strong profits from the development and operation of renewables facilities are, or at least seem to be, attainable, the confidence to invest that is inspired by such (actual or apparent) attainability tends rapidly to set in motion actions and events that serve – with almost equal rapidity – precisely to render strong profits unattainable.

If incumbents in profitable sectors have the capacity to resist increased competition, then above-average profitability can sometimes be maintained. But there exists precious little monopoly power in the business of developing and operating wind and solar farms, and almost no substantive entry barriers.

As a result, in places and periods in which renewable power is seen to be an economically attractive option, activity can be feverish.

In short, even where they actually do exist in the first place, strong renewables profits rarely last for long.

“When competition picks up, margins start to erode,” said Guggenheim analyst Shahriar Pourreza.’23

And, for all the fact that various species of government intervention frequently do help to bolster profits, they generally do not stop the renewables industry from competing away those profits when it elects – or, after Marx, is compelled – to do so.

such auctions had become ‘extremely competitive’.26 Indeed, so competitive has bidding become on European auctions for offshore wind FiTs and the like, that, according to one study, the strike prices agreed by winning bidders have fallen faster than the costs of generation have.27 Precisely the same price–cost dynamic has played out in India.28

demand both nationally and within particular regions. Moreover, the potential for the crystallization of profit-suppressing conditions of oversupply as a result of sporadic renewables booms is aggravated by the fact that, in such free-market contexts, conventional generating sources are not being systematically retired.

Consider the crucial cases of China and India. Renewables have long enjoyed must-run status in both places, meaning that their curtailment is only permitted on grounds of grid security, with generators being instructed to lower output when transmission lines reach safe loading limits. But, in both countries, the past five to ten years have nonetheless seen curtailment rates reach unprecedented levels – of as high as 40 or even 50 per cent – in some regions, such as Xinjiang in north-western China and Tamil Nadu in southern India.39

In certain places and periods, margins have been sufficiently narrow – to the point of being non-existent – to make even renewables’ staunchest supporters squirm.

But here is the problem: the returns ordinarily associated with wind and solar power are much lower than those to which fossil fuel companies are accustomed in their core businesses.

If the key decision in the development process is the lender’s decision to advance credit or not, and if, accordingly, we should be looking at the matter of returns as much from the lender’s perspective as from the borrower’s (if not more so), then perhaps a lower cost of capital is not such a good thing after all. Ceteris paribus, it would seem likely to lower, not raise, the likelihood of a project proceeding.

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.

Yet, if lower power prices rooted in high renewables penetration is a boon for ratepayers, what about for the future of renewables investment? Here, the answer is: not so much.

As various studies have found, the output of renewables facilities tends to be sold on wholesale markets disproportionately when electricity is cheap.75

a tendency for renewables to eat themselves – or their progeny – alive as they increasingly become mass-market, price-setting propositions.

Corporate PPAs have surged in importance since the early 2010s. Globally, the amount of wind and solar power procured annually under such agreements increased no less than a hundredfold between 2012 and 2021, from around 300 MW to more than 30 GW.

Across the US as a whole, the proportion of new renewables projects that were financed and built with corporate PPAs in place had increased to around 25 per cent already by the mid-2010s, despite the fact that such agreements did not feature at all in the relatively large number of states where utilities retained local vertical monopolies.10 The flip side to this trend was the waning of utility PPAs: in the space of just two years, from 2012 to 2014, the share of new US wind capacity commissioned with utility PPAs in place slumped from 76 to 40 per cent.

at year-end 2020, more than 90 per cent of NextEra’s net renewable generating capacity was committed under such contracts.14

Some large countries with large populations, economies and electricity sectors – the likes of France, Germany and Italy – have seen almost no significant corporate PPA activity.

Insofar as security of supply is the principal motivating factor, utility PPAs tend to be baseload contracts, meaning that the off-taker buys a specified (and typically constant) volume of energy every hour of each month.

Hence, utility PPA prices are usually indexed to the spot market – so-called ‘mark-to-market’ contracts.

For the purposes of corporate planning, if nothing else, it can be enormously helpful for major consumers of power to know whether, in future, they will be paying closer to $10 or $100 per MWh consumed – unpredictability of significant items of expenditure intrinsically compromises meaningful planning capacity.

Generators evaluate the opportunities occasioned by PPAs first and foremost in the bankability light.

If government feed-in tariffs and the like represent one such mechanism (and easily the most important historically), then fixed-price long-term corporate PPAs are clearly another, whereas utility PPAs – generally featuring variable, mark-to-market pricing, as noted above – conspicuously are not.

Of course, just because a PPA provides fixed prices and therefore mitigates the revenue risk faced by generators, it does not necessarily mitigate profit risk, any more than government-provided, fixed-price feed-in tariffs themselves do.

Long-term fixed-price output deals – whether with government (as with the Spanish feed-in tariffs) or with market actors (as with the Massachusetts PPAs) – internalize assumptions about generators’ likely costs.

As we saw earlier, utility PPAs are generally baseload PPAs, whereby the off-taker contracts to purchase a specified volume of power. Corporate PPAs, by contrast, are usually ‘pay-as-produced’ contracts, meaning that the buyer takes all, or a fixed percentage, of the generator’s power output, no matter what the production profile is.

Under pay-as-produced deals, the generating facility assumes no trading risk. But baseload deals are another matter: if the generator fails to meet the specified demand because, say, wind speeds are too low, it must acquire the shortfall on the spot market – where, of course, the price is unpredictable.

Credit-rating agencies have adopted more stringent treatments of the balance sheet liabilities that, for off-takers, long-term PPAs represent, and electricity resellers have adjusted terms, unfavourably for generators, accordingly.

Today, globally, utility PPAs are usually characterized by shorter contract periods than corporate PPAs.

Lastly, the US is an example of the final country type. It has, of course, historically offered very generous tax subsidies, but, as we have seen, these, unlike feed-in tariffs, do not stabilize power prices. Hence, in part, the long-term buoyancy of its corporate PPA market. Indeed, corporate PPAs have frequently served to render bankable US renewables projects that are also supported by tax equity financing and investment or production credits, but which would likely not have proceeded without the PPA.

But arguably, relying on a small coterie of big-tech companies, and their idiosyncratic energy-purchasing habits, to drive the transition away from fossil fuels seems, in political terms, even more problematic.

Buying extant green power is simply not the same as helping to enable investment in new green power.

The key issue here, simply stated, is that there are few credible, bankable off-takers – far too few to enable corporate PPAs to power the renewables market at large.

By their very nature, long-term bilateral PPAs of any kind entail massive counterparty risk – on both sides.

Indeed, as one solar trade association has noted, ‘a lower [electricity] price from a very secure creditor . . . may be worth more [to a lender] than a high price from a less creditworthy counterparty’.

If the answer to the interconnected problems facing the renewables sector of uncertain profits, volatile spot markets and jittery financiers is to agree to sell the power produced by future solar or wind farms to an Amazon or Google, it is difficult to get past the fact that there simply are not so many Amazons and Googles out there.

As two industry experts explained to the Financial Times, the Amazons and Googles of the world are effectively able to bend the corporate PPA market to their own demands. ‘The tech companies really do dominate the whole market from a size perspective,’ one said. ‘Their influence is huge. These guys have a lot of market power,’ confirmed the second.

The threat that such aggressive pricing of corporate PPAs poses to growth in renewables development is, of course, that developers will not in fact build solar and wind farms and – ultimately amounting to the same thing – that banks and investors will not finance new such facilities, because the terms of corporate PPAs are simply not attractive enough: because, that is, the market power of Amazon, Google and the like squeezes developer and financier profitability too far.

‘Essentially,’ the same asset manager put it, ‘Google and co are profiting from investors’ desperation to go green.’

Asked to speculate about the extent of likely future growth in the corporate PPA market, one banker opted for a blunt, one-word answer: ‘finite’.

First, we know that what ultimately determines whether solar and wind farms get built or not is not price – relative to that of other technologies of electricity generation – but profit, and, more particularly, expected profit. Is the investment expected to yield an economic return that the developer deems acceptable? That is what matters. Second, we know that the relationship between price (of electricity generation) and profit is anything but straightforward. It would be easy to imagine that the cheaper it becomes to generate electricity, the more profit the generator will earn. But it would also be wrong. This was the lesson of Chapter 5: there is no straightforward such relationship, and thus even if solar and wind power are now ‘cheap’ it does not mean that profit-maximizing actors in the field of power generation will necessarily privilege them. Third, from Chapter 6, we know that in the type of electricity sector that dominates the Global North, and towards which the rest of the world is indubitably shifting – which is to say, a sector in which electricity is predominantly traded in spot markets using merit order dispatch – renewable generators’ expected profit is highly uncertain and unpredictable because wholesale prices are highly volatile. This, as we saw, represents a significant challenge to the bankability of proposed new capacity investments, at least in the absence of explicit mechanisms of price stabilization, of which government support schemes historical...

In every year since 2016, three-quarters or more of all net new solar and wind capacity globally has been installed in Europe and just three other countries – China, India and the US.

For onshore renewables plants, most studies suggest that grid connection accounts for in the region of 10 to 15 per cent of total capital expenditure – a not insignificant proportion. But, in the case of offshore wind farms, of which HKZ is of course one example, the proportion, unsurprisingly, swells. Anywhere between 15 and 30 per cent of the capital cost can go to grid connection.

But in reality, the role of deposit protection, as of CfDs, is not just to mitigate retroactively actual losses or revenue shortfalls incurred. It is as much, if not more, to provide, a priori, confidence in the existence of an eventual (strictly as necessary) safety net, this confidence being required to summon the relevant actors – depositors in the first hand, renewables generators in the latter – to even participate in the relevant market.

The more general point is that where it is specifically revenue that in one way or another is ‘controlled’ (by being delinked from market spot prices), renewables profits always remain uncertain until such time as the costs of construction and its financing have been locked in.

In repeatedly hazarding withdrawal, the US, like the perennial junkie, has repeatedly failed, the IRA representing the latest and most dramatic failure.

Price volatility, low underlying profitability, and boom–bust dynamics are, in the US renewables sector, long-standing historic facts