The Price is Wrong: Why Capitalism Won’t Save the Planet
By Brett Christophers
Verso 2024
Given that renewable energy has become the cheapest energy source in recent years, it should be supplanting fossil fuels by dint of common logic and even by the logic of the capitalist system. Unfortunately, as Brett Christopher points out in The Price is Wrong, contemporary neoliberal capitalism does not operate on such logic.
The danger of climate change and the consequent necessity for us to transition away from fossil fuel-based power generation has been recognised for decades.
But the relative expense of renewable energy has been the great stumbling block to actually altering course and replacing fossil fuels with renewable energy, especially in a capitalist system where profits reign supreme.
Conversion to renewable energy requires either a strong commitment to the environment overriding cost concerns and/or some form of government subsidy to make it competitive with fossil fuels.
The cost of renewable energy, though, has been on a steep decline. In the United States the price of solar photovoltaic modules dropped 85% between 2010 and 2020.
Around the middle of the 2010s, the cost of renewables reached parity with fossil fuels and they have continued to become cheaper since.
In 2015, the International Energy Agency (IEA) — formed in 1974 and largely seen as a mouthpiece for the hydrocarbons industry — declared that “the cost of renewable technologies for electricity generation — in particular solar photovoltaic — have declined significantly over the past five years, and … are no longer cost outliers.”
This has lead many to assume that we needn’t just rely on a commitment to the environment for the transition to take place, the profit motive should also be driving the transition. It has also led many to claim that government support is no longer necessary.
The growth of renewable energy has indeed been accelerating. Christophers states, “In 2022, global production of electricity from solar and wind increased year on year by over 500 Twh, which was roughly the total annual output from solar and wind a decade earlier.”
In isolation, this seems impressive. However, while renewable electricity generation is increasing, electricity demand is also increasing, and at a faster rate.
Global electricity demand in 2022 was 28,500TWh. The IEA predicts that by 2050 it will be around 60,000TWh.
As electricity demand is increasing renewable energy is supplying a significant part of that increase. However, fossil fuels are also supplying a significant part of increasing demand as well as existing demand. Renewables are not replacing fossil fuels but only ameliorating their increasing use.
Economics
Certainly much of this is due to the wealth and power of fossil fuel corporations and their lobbyists which allows them to play puppet master to our politicians. But Christophers sets these issues aside to look at more purely economic matters.
He argues that simply looking at the price of renewables is misleading. Companies don’t invest in anything because it is cheap, they invest in it because it is profitable. And the relationship between price and profit is not as simple as might be assumed.
In the post war era, the global trend was for whole electricity systems to be integrated into single publicly-owned providers.
In the era of neoliberalism, beginning around the early 1980s, this was turned around with utilities becoming part of the wave of privatisations that swept economies worldwide. The process of privatisation also involved a process of de-monopolisation and unbundling — electricity networks were not sold as a whole but in separate parts.
Owners of electricity generation are now not typically also owners of the electricity transmission infrastructure through which that electricity is distributed to neighbourhood substations. The networks through which electricity is then distributed to individual consumers are likely to be under different ownership again.
On top of such vertical unbundling, ownership was also broken up into smaller geographical units.
As for the electricity itself, it is rare that consumers buy electricity direct from electricity generators. They generally buy from retailers. Neither are those retailers usually buying direct from the generators. Retailers are usually reselling electricity they bought through the wholesale electricity spot market into which the multiples of generators sell their electricity.
Moving further up this chain of transactions, behind the generators, we usually find, importantly, the financiers.
Cheaper electricity generation does suggest that there should be profits that can be made but it doesn’t tell us where and in what proportion along this chain of transactions that the profit will be captured or if and how much of cost reductions are passed onto consumers.
Renewable energy projects are heavily dependent on finance. While the fossil fuel industry is dominated by large companies with large assets and deep pockets, including some of the 20th century’s notorious corporate behemoths, renewable energy has been a field for relatively small players.
As small players they usually need financial backing. This is all the more so since the costs of renewable projects are heavily weighted upfront toward the planning and construction phases before any energy can be produced and any revenue earned.
Around 80% or 90% of the cost of electricity for wind and solar plants respectively is from upfront investment. Ongoing maintenance and operation are relatively small costs.
By comparison, coal-fired power plants require 40% or 50% upfront investment and natural gas as little as 20%.
So renewable energy plants require more finance compared to fossil fuel companies that are more likely to be able to do without finance at all. Financiers, of course, take their cut of the profits.
Getting finance at all for renewable projects is more difficult. As less-established companies financiers are more likely to baulk at providing backing.
Market volatility
Financiers are also adverse to risk and electricity markets are extraordinarily volatile.
Generators usually sell into the wholesale spot market where retailers bid for electricity, usually for half or one hour blocks for the next day. Electricity is bought in merit order, the cheapest generators’ offers are first in line up to the final offer that is required to meet demand and that offer sets the market price.
As the cheapest, renewables normally go first in merit order while it is often gas or other fossil fuels that go subsequently and set the market rate.
For those that set the market rate, the rate generally goes up and down according to their costs. For them this provides a natural hedging mechanism to offset ups and downs in their costs.
But for cheaper renewables, those ups and downs are unrelated to their costs which increases the volatility of their profits. This can be offset using hedging mechanisms such as buying futures but such hedging mechanisms come with extra costs.
Market prices can vary wildly from hour to hour, month to month or year to year.
Among the examples Christophers cites is Australia’s energy market in mid-2022 when increased power demand coincided with a shortage of coal and gas. Spot market prices shot up to more than $15,000 per Mwh. (The average market price in different states for 2022 was between $84 and $132.)
The Australian Energy Market Operator (AEMO) stepped in to set a price cap at at more reasonable $300 per Mwh. But, given their costs had increased, many fossil fuel generators decided just to shut down rather than supply at a loss.
AEMO then responded by suspending the market for more than a week and exercised its power to force generators to supply electricity.
At the time of writing AEMO’s dispatch prices for electricity generators on the National Energy Market are between -$18 (yes, that is right) and $55.
Such volatility means that finance for rewewables comes with extra costs. Christophers quotes one banker at a European bank involved in the renewables market: “We don’t like to absorb power price volatility. We’ll take the merchant price risk … but we’ll charge three times more for it.”
Capitalism not up to the task
There has been hope that, given its decreasing cost, some of the fossil fuel giants would be attracted to shift their hefty resources into renewable energy. Indeed many have made forays into renewable energy, however, such forays have been insignificant.
Relative to fossil fuel projects, startup costs for renewables are relatively low. This may seem like a positive but for the traditional fossil fuel companies it is a problem.
The cost barriers to entry for fossil fuel projects gives oil and gas companies a relative monopoly. Consequently they are able to enjoy relative monopoly profits.
Typical investments in oil and gas project can expect to earn around 15%. Companies that can earn this sort of return aren’t going to be interested in investing in renewable projects that would typically return 5–8%.
Rather than being able to thrive in the free market, renewables projects are still almost entirely reliant on some extent of state support to remain commercially viable.
As Christophers argues, even the few projects that are trumpeted as being subsidy free generally turn out to rest to some extent on state support not on the free market – indirect state subsidies such as through subsidised land or government provided grid connection or on state price stabilisation mechanisms.
For example Britain’s Renewables Obligation scheme helped onshore wind installations grow impressively. But, when after it ended in 2017, new onshore wind capacity dropped 80% in 2018.
The chief executive of Scottish power said: “If you think I’m building a £ 2.5bn wind farm at merchant risk on wholesale power prices then you’re bonkers.”
Christophers summarises his book: “[I]f 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 fast as they have, it is surely as clear a sign as possible that capital is not designed to do the job.”