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  1. The Weekend Essay
16 March 2024

The price of survival

Why the energy transition can’t be left to the market.

By Adrienne Buller

At the start of February, Ørsted, the world’s largest offshore wind developer, announced a major scaling back of its operations, exiting wind markets in Portugal, Spain and Norway and cutting both its dividend and its 2030 target for the number of new installations. The announcement followed the firm’s shock decision last November to back out of two major wind projects in New Jersey. Last week, it agreed to sell stakes in four US onshore wind farms for around $300m.

But Ørsted’s troubles are hardly unique. In September 2023, the UK government’s offshore wind auction failed to secure a single project from developers, who argued that the government-guaranteed prices on offer were too low in the face of rising costs. Two months before that, Vattenfall pulled out of a major wind UK development for the same reason. And in February, the German energy giant RWE – which provides 15 per cent of the UK’s power – warned that without more money on offer, the UK’s next auction, opening this month, might just fail again.

These cases are only a handful among many and have come as jarring setbacks for an industry grown accustomed to triumphalism: headlines over recent years have routinely celebrated the plunging cost of renewables and the seemingly unrelenting transition to clean energy advancing around the world. A quick Google of “renewable energy deployment” yields no shortage of charts with impressive upward slopes.

Much of this enthusiasm has centred on a metric called the Levelised Cost of Electricity (LCOE), which represents the average cost per unit of electricity generated over the lifetime of a generator, be it a wind farm or a gas power station. The LCOE has something of a cult status among industry analysts, journalists and even the International Energy Agency as the definitive marker of the transition to clean energy. When the LCOE of renewables falls below that of traditional fossil fuel sources, the logic goes, the transition to clean energy will be unstoppable. If only it was that simple, argues the economic geographer Brett Christophers in his latest book The Price is Wrong: Why Capitalism Won’t Save the Planet.

As Christophers writes: “Everyone, seemingly, has gravitated to the view that, now they are cheaper/cheapest, renewables are primed for an unprecedented golden growth era” that will see them supplant fossil fuels. Doing so will be no mean feat. Despite the vertiginous growth of new renewable capacity in recent years, renewables have scarcely made a dent in the proportion of global power that comes from fossil fuels. The overall share of fossil fuel power in the energy mix has remained broadly stagnant for an astonishing four decades, from 64 per cent in 1985 to 61 per cent in 2022. Critically, the absolute amount of fossil fuel power generated each year – the figure that ultimately matters for the climate – has continued to rise.

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In large part, this stems from overall growth in electricity consumption, which will continue apace in the coming decades as millions around the world gain access to electricity and as we race to electrify the economy. Thus, for all their upward momentum, global electricity consumption is still growing faster than solar and wind power is coming online, meaning the gap is widening. To close it, by the IEA’s estimates, the world needs to install 600 GW (gigawatts) of solar and 340 GW of wind capacity every year between 2030 and 2050. By comparison, the UK’s current total installed wind capacity is approximately 30GW, the sixth largest in the world, while Germany’s domestic transition plan implies installing the equivalent of 43 football pitches of solar panels every day to 2050. In short: the task is immense – almost unimaginably so. It is similarly urgent.

Where will the momentum needed to build this clean energy future come from? As Christophers documents in detail, the industry has thus far relied on an array of subsidy and support around the world. Extensive state support is hardly unique to clean energy, much as detractors and climate deniers may like to highlight it: the fossil fuel industry benefited from tax breaks and direct subsidy to the tune of £5.5trn in 2022 according to the IMF. The declining LCOE of renewable energy has been increasingly viewed as an argument for unwinding this government-backed support. As Christophers shows, however, in practice this has proven a near-impossibility. The question he therefore asks is why, in the face of declining costs, subsidies continue to be necessary, and what this tells us about whether the current approach to decarbonisation is fit for purpose.

The answer, Christophers argues, is that we’ve got it all upside down. When it comes to investment in renewable energy, as in anything else, it’s not cheapness that matters. Just take it from the investors themselves, he notes, citing one former JPMorgan investor who described the LCOE as a “practical irrelevance”. What matters instead is profit, and expectations of it.

Despite its simplicity, Christophers’s account is a quietly radical one that contravenes the received wisdom of not only the technocrats, mainstream economists and free marketeers who tout the wonders of the market, but also many on the left, for whom the problem with profits is typically their being far too high. Instead, as he demonstrates, the trouble is that renewable energy is nowhere near profitable enough, and certainly not reliably so, for the market to deliver it with anything like the pace, scale or certainty that is needed.

If the costs of renewables are indeed so low, one might ask, and profits are equal to revenues minus costs, then surely plunging costs should mean higher profits. But Christophers shows that low and unreliable profits are the definitive obstacle to the decarbonisation of the electricity system and, by extension, the wider economy.

The precise answer as to why low costs don’t necessarily translate into high and steady profits in this sector is technically complex and multifaceted, deftly handled by Christophers, a reformed management consultant, over nearly 400 pages of fine detail drawn from company documents, interviews and dense sectoral reports from global energy agencies. Put simply, the core of the problem is that the very features of markets so celebrated by mainstream economics – mediation via the price signal, increasing competition and private investment – are the undoing of a private-sector led transition to clean energy.

For Christophers, the commitment to marketisation in electricity systems is increasingly self-defeating. At the heart of this problem is the so-called “wholesale market” that prevails in many parts of the US and Europe, including the UK. Under this system, generators are paid a single price per unit of electricity for a given period, regardless of whether it is derived from a wind turbine or a coal plant. This price is based on what’s called a “merit order”, with the cheapest sources – generally renewables – being deployed first, followed by as many sources as are needed in order of escalating price. The wholesale is set by the last unit of energy needed to meet demand. In the UK, this is typically gas.

The defining feature of this wholesale pricing system, cast in sharp relief over the period of sky-high energy prices in 2021-2022, is volatility. With a host of factors potentially feeding into the price – from the balance of supply and demand through to global gas prices and geographic location – the swings can be enormous, regularly spiking from double to triple digit prices and back again within a matter of hours. In times of crisis, the figures can become outlandish, with the price of electricity in Texas during the state’s 2021 shock winter storms reaching $9,000 per MWh.

For Christophers, this volatility is nothing short of “an existential threat” to the “bankability” of a renewable project – that is, its ability to secure financing – because it makes profitability so uncertain. Worse still, within a competitive wholesale market, as the proportion of renewable generation in the market grows, and by extension the proportion of time in which renewables drive the wholesale price, the more frequently and strongly prices swing to the lower extreme, a phenomenon known as “price cannibalisation”.

The energy industry and governments rely on an impressive array of methods to circumvent these problems, from financial hedging to feed-in-tariffs, and from mega corporate Power Purchase Agreements with the likes of Amazon and Google to the UK’s “contracts-for-difference”. As Christophers writes: the reality of “liberalised electricity systems such as Europe’s is that, to secure financing, renewables developers ordinarily do everything they can… to avoid selling their output at the market price.”

Thus, despite ultra-high wholesale prices over 2021-2022, many renewables generators failed to enjoy correspondingly high profits, because they had traded the possibility of these certainties in the face of intolerable market volatility. For Christophers, this is the “signal feature” of the liberalised electricity market: that “the hallowed market price… is the one price that renewables operators endeavour not to sell at.”

It is in explaining this apparent contradiction that the book offers its most radical suggestion. Borrowing Karl Polanyi’s concept of a “fictitious commodity”, Christophers ultimately contends that electricity – like land, labour and money, Polanyi’s original trio – is not a commodity in the conventional sense of having been created for sale, and is therefore ill-suited to market exchange and coordination. This incompatibility sits at the root of the spiralling complexity of interventions that policymakers are obligated to make in the name of upholding the freedom of the “market”. The result, in the words of the energy expert Meredith Angwin, is that today’s electricity markets are less market and more “bureaucratic thicket”.

Thankfully, if the forces of capitalism, defined in terms of private ownership and the profit imperative, are fundamentally ill-equipped for this task, then we are not for want of alternatives. Public ownership and financing of energy, if freed from a faux market and the straitjacket of the profit motive, seems an obvious one. Christophers writes that the state is the only actor with “both the financial wherewithal and the logistical and administrative capacity” to take on the challenge of decarbonisation. The trouble though, when all you have is a hammer, is that everything looks like a nail. Thus, in the face of irreconcilable market failures, most policymakers seem only to offer more market-based fudges.

In this context, the tremors in renewable energy investment that we have seen with increasing frequency over the past several months are more than just a blip. They represent a potentially fatal flaw in the prevailing approach to the task of decarbonisation. From the perspective of the climate, every tonne of carbon matters, and every delay is significant. To continue to leave the future of electricity, and by extension global decarbonisation, to the whims of profit-motivated firms, is an intolerable risk. Rome is already burning, and there’s no time left to fiddle.

[See also: The wrong side of history

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