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January 12 - January 18, 2025
That external economic support for the development of solar and wind power, despite the historic cheapness today of such power, remains utterly fundamental to the renewables landscape is, ironically, perhaps clearer and more explicit in the US – the putative home of ‘free markets’ – than anywhere else in the world.
What we have seen is effectively a variant on the phenomenon of price cannibalization (Chapter 7). The Indian government has been required to reinforce its role in supporting the renewables sector because falling generator costs and thus auction prices raise expectations of more of the same, exerting a chilling effect on the willingness of off-takers to lock in prices that may in due course appear uncompetitive.
Companies developing new renewables facilities in China today typically have a choice between selling power into China’s embryonic wholesale markets, or taking a twenty-year contract that, in place of the specific renewables tariff previously available, pays a fixed price pegged to the regulated provincial benchmark (that is, coal) tariff.46 ‘In most provinces,’ the IEA remarked in late 2021, ‘utility-scale onshore wind and solar PV projects can achieve reasonable returns with a twenty-year fixed price contract at provincial coal prices.’
It is surely significant that just as the government was eliminating its central feed-in tariffs, the PBOC – an arm of the self-same government – was introducing the Carbon Emission Reduction Facility (CERF), which, it will be remembered from Chapter 4, helps lower the cost of borrowing for renewables developers.
That investment plummets when meaningful support for renewables investment is substantially or wholly removed demonstrates precisely how significant that support in fact is, and also just how marginal – or even downright unappealing – revenue and profitability prospects, in the absence of such support, actually are.
But there is in fact a serious question mark as to whether a single example of a substantive and truly zero-support facility even actually exists, anywhere in the world.
Numerous renewables generators failed to produce enough power to satisfy the terms of their hedges, thus having to turn to the spot market, at $9,000 per MWh, to comply with their delivery obligations. RWE, the German company with wind facilities in the north and west of the state, alone reported a staggering €400 million hit.13
While the exact outcomes would be different, the brief Texas electricity crisis of February 2021, in surfacing this complex but crucial interplay between the respective dynamics of price, profit, power and place, proved a potent harbinger of what was to come.
Perhaps it was indeed the self-interest of the butcher, brewer and baker that kept people fed in Adam Smith’s eighteenth-century Scotland, but the self-interest of the coal-fired power generator did not serve to keep lights on in China in 2021–2.
The proportion of the time when gas provides the all-important market-clearing and price-setting ‘last unit’ of supply in Europe’s merit-order-based electricity sector substantially outstrips the proportion of electricity that gas actually physically serves to help generate.
This revealed, in short, an institutional community that, in its efforts of the past three decades first to liberalize, and then to decarbonize, the continent’s power sector, has fashioned a creature whose complex and contradictory nature they barely even understand, let alone can begin effectively to manage.
To read Europe’s fortune in avoiding the traumas of, say, China or Texas as evidence of the wonders of price signals in nudging market actors to adapt is to ignore the role of other, considerably more consequential, forces.
‘The European gas crisis is sucking the world dry of liquid natural gas,’ Valery Chow of the energy research firm Wood Mackenzie observed in July 2022. ‘Emerging markets in Asia have borne the brunt of this and there is no end in sight.’
Whereas energy contracts with Western customers typically incorporate ‘failure-to-deliver’ penalties of up to 100 per cent – recall the owners of frozen Texan wind farms being required to buy power at sky-high prices on the spot market to meet the delivery terms of hedges – Pakistan’s contracts evidently contained a cancellation penalty of only 30 per cent – ‘most likely’, Stapczynski and Mangi conjectured, ‘in exchange for lower prices’. The reporters estimated that in the summer of 2022, the price at which natural gas could be sold in Europe was more than 150 per cent higher than the price
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Europe’s answer to the gas crisis that Vladimir Putin dramatically escalated in early 2022 was, in large measure, effectively to export that crisis to the Indian subcontinent.
‘Even if projects remain profitable,’ Bullard observed, ‘the tax injects uncertainty that could impede further renewable development.’
Both chose, instead, principally to use the vast surplus capital freshly at their disposal to return money to shareholders via dividends or share buybacks, with BP, one research group calculated, spending more than fourteen times as much on such payouts in 2022 as on ‘low-carbon’ capital expenditure.
That is, governments regard privatization and marketization, in particular, as a means to the putatively desirable end of reducing both state funding and involvement in the electricity sector.
What is the greater risk we face? Is it states continuing financially to support private sector renewables development, and thereby continuing to pad investor returns? Or is it states not deigning to de-risk, and potentially seeing renewables development – for as long as it is something expected principally of private sector actors – wither on the vine?
‘If the share of renewables in the electricity generation mix is to rise as envisioned in the Net-Zero Emissions by 2050 Scenario, it would’, the IEA maintained, ‘be highly desirable to effect significant changes in the design of electricity markets so as to provide signals for investment.’
when lenders do finance merchant projects, they require around twice the share of equity financing compared to subsidized projects.23 Providers of funding on terms that developers are actually comfortable with accommodating are, as the aforementioned investor conceded, ‘still struggling with full merchant exposure’ – and the struggle looks set to continue.24
renewables developers ordinarily do everything they can – whether it be through feed-in tariffs, corporate power purchase agreements or financial hedges – to avoid selling their output at the market price.
we have a market that perversely requires certain increasingly significant participants to systematically evade its own price signals.
More generally, as Simon Pirani has observed, in most times and places around the world since its invention, humanly produced electricity has been regarded ‘more as essential infrastructure, or a means of social provision, than as a business’.43 A commodity by its nature, electricity is not.
The point of relevance for us is that, as we have seen in this book, there is ample evidence of various props, rules, regulations and norms being required to render electricity buyable and sellable at profit – that is, to tame its unruliness and render it commodity-like – and to sustain the fiction that all of this somehow represents ‘real’ profit in a ‘real’ market.
After all, this market’s signal feature in the age of climate crisis is, as we saw earlier, that the hallowed market price, which theoretically congeals all relevant information and sends signals to actors as to how to respond, is the one price that renewables operators endeavour not to sell at. It would be hard to imagine stronger refutation of ACER’s risible claim, at the height of Europe’s energy crisis, that, under ‘normal’ conditions, the continent’s electricity markets work well.
To render a commodity out of the unruly object that is electricity, market makers and regulators such as CAISO and FERC have had to fashion all manner of guidelines, norms and conventions. In turn, to enable the production and reproduction of markets in said commodity, the same institutions have serially depended on market actors respectfully observing those guidelines, norms and conventions.
Did the case lead to the world’s experts patching remaining holes and finally getting electricity market design ‘right’, at least in terms of immunity from manipulation? Of course not. Polanyi’s teaching is that an infallible market in a fictitious commodity is a contradiction in terms.
Several conventional generators had been achieving huge profits by engaging in so-called ‘off–on’ supply gaming: essentially, claiming an inability to deliver in the day-ahead market, which serves to push wholesale prices up, only then to actually deliver – and thereby exploit those inflated prices – in the real-time balancing market (see Chapter 2). As in the case of JPMVEC and California, such gaming did not contravene existing market rules. It was considered, rather, ungentlemanly.
Markets never will cohere ‘naturally’ and unproblematically in this setting. Doing the same thing over and over again and expecting different results may not always amount to insanity, but nonetheless, attempts to ‘reform’ and ‘improve’ the electricity market are doomed, and, as the climate crisis escalates, such attempts summon a mishmash of fearful metaphorical imagery. ‘Roads to nowhere’ is certainly one such image. ‘Fiddling while Rome burns’ might be more apposite yet.
Part of the logic of this standpoint is that, as we have seen at length in this book, the state is in fact already deeply implicated in the project of electricity decarbonization. Through renewables capacity auctions and feed-in tariffs and the like, it plays a fundamental role not just in shaping the pace and form of decarbonization, but also in funding it. Only it typically does not own and control the assets and income streams that eventuate; it takes the risks – actively removing them from the shoulders of reluctant developers and financiers – yet seldom gets any of the pecuniary rewards.
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As Keynes argued, market signals fail when it is the case that numerous different actors need to make coordinated changes and yet none can take all others’ choices as given. Only a central decision maker, Keynes’s successors insist, can hope to bring about such coordinated, collective transformation in a timely and effective manner. The interlocking matrix of changes required of innumerable stakeholders by the climate crisis is a quintessential example of a transformation of this type.
Riffing on Carroll, a slightly fuller and more precise synopsis of this book might read as follows: if private capital, circulating in markets, is still failing to decarbonize global electricity generation sufficiently rapidly even with all the support it has gotten and is getting from governments, and even with technology costs having fallen as far and as fast as they have, it is surely as clear a sign as possible that capital is not designed to do the job.
One does not in any way have to be an admirer of China’s political economy to acknowledge that, as Michael Davidson has pointed out, while Western policymakers – including those holding the reins of power in New York State – remain broadly convinced that they really do possess only one trick, namely deference to capital and the price mechanism, ‘markets represent just one tool among many available to Beijing’.
