image: bottom half of the cover jacket of Brett Christophers’ The Price is Wrong: Why Capitalism Won’t Save the Planet (Verso, 2024).
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March 6, 2024
When I was a research analyst at the U.S. Treasury, my team’s work centered around promising private investors that we would make it easier for them to invest in renewable energy projects across the Global South. I kept hearing that our job was ultimately to make these projects “bankable”: as the logic went, “there is a sizeable universe of good projects that fall just below many private investors’ desired rate of return,” and lowering the risks of investing in these “good projects” would put them within reach of private investors’ return expectations. We had to make decarbonization profitable.
This argument cuts straight through Brett Christophers’ latest book, The Price is Wrong. (Thanks to Verso for an advance copy!) The thrust of the book is that the cost of developing and generating renewable energy is not what will determine the speed or scale of its uptake. Whether or not coal and gas plants are more expensive than solar and wind resources to build and generate energy from does not have much bearing on what gets built or what we rely on. Rather, given the structure of our energy markets today, the development of utility-scale solar and wind assets is a direct function of their profitability to private investors. My old colleagues might have already been aware of this fact, but, as Christophers highlights, it’s certainly not intuitive, even to many analysts.
Nor are its implications: decarbonization won’t happen if it’s not profitable enough―and it’s not profitable enough. The book convincingly depicts how no large-scale private investment in renewables, anywhere, has been possible without significant government support. To make his case, Christophers highlights the vicious feedback loop affecting renewables endemic to today’s energy markets: government support to build more renewable energy drives down the marginal cost of generating renewable energy, because there’s more of it available at any given moment, but the falling costs cut into developers’ expected returns, requiring more government support in order to keep investors and developers interested in the sector.1 Moreover, energy prices in wholesale markets are perennially unstable; this volatility throttles the expected returns on any investment in renewable energy. Under these conditions, private investors and developers won’t decarbonize our globe at the speed or scale we deserve.
Christophers leans on two theoretical guideposts here. First, Andreas Malm, whose assessment of how the profit motive, not relative costs, drove Britain’s first energy transition from water-wheels to coal and steam is an unmistakable conceptual parallel to today’s transition. Second, Karl Polanyi, whose theory of fictitious commodities Christophers aptly applies to electricity and the artificial markets created around it. This robust theoretical foundation arms him to justify the implications of his findings.
But, rather than hew to theory to justify why the energy system needs to be socialized to achieve decarbonization―which is definitely true, by the way; the profit motive is supremely unhelpful here―Christophers embraces a holistic understanding of the economy as a set of financial relationships, supply chains, planned markets, and legal institutions connecting various public and private entities with different motives. This is more informative and, seriously, way more fun.
Christophers first describes how energy projects are financed before he hones in on the way markets for renewable energy actually function. First, the financing: countless footnotes labeled “interview with author” refer to admissions from investors that “low returns and volatility don’t go. No bank in the world will take power price risk at low returns” (Price, Ch. 6).
Much of the rest of the book is packed with well-defended judgments of regional energy systems and granular case studies, welcome admissions of how complex our financialized energy system is. Perhaps the most masterful case study here is his breakdown of the interlocking global energy crises in 2021 and 2022. Christophers jumps between Texas, China, South Asia, Australia, and across Europe to provide us with a play-by-play of how various shocks―deep freeze in Texas, drought in China, war in Ukraine―propagated through each energy market to the point of precipitating national crises. In most of these regions, “the crisis [was] not taken to be evidence of the failings of markets, or even a reason to question their role as the pre-eminent mechanism of coordination to the state’s electricity sector; the market was regarded as the very means to manage the crisis” (Price, Ch. 10, italics Christophers’). It’s darkly funny to hear the Public Utilities Commission of Texas admit that “pricing mechanisms were not generating an optimal response to the challenge” (Price, Ch. 10) knowing that they went on to devise new pricing mechanisms that are doing precious little to promote decarbonization. Christophers gives us the sense that, as Texas and these other regions came out of their crises, fossil fuels had a stronger grip over their governments’ energy policies than renewables did. (Latin America is conspicuously absent across Christophers’ various roundups and case studies.)
He ends the book with a call for socialized power, inspired by the Green New Deal and New York’s Build Public Renewables Act―championed by the state’s socialists on the explicit grounds that, because delivering on the state’s emissions targets is not profitable enough for the private sector to do alone, the public sector must get the job done. With the force of the whole book’s arguments and evidence behind it, this policy prescription hardly appears radical. It feels like the only reaction that makes any sense!
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how to intervene in an energy market
Christophers admits in his introduction that he is more focused on unearthing the fragile relationships among actors across the renewable energy industry than on describing the different ways a New York-inspired socialized power sector could function. Given how much there is to unearth, it’s a reasonable choice. But I think it leaves readers without an explicitly systematized heuristic for the different ways states can intervene in the business of energy. I’ll attempt to flesh one out.
Energy must be financed, generated, distributed, and consumed. Government intervention in favor of decarbonization looks distinct at each step.
Governments can provide consumption support by shielding ratepayers from the higher electricity bills that come from potential utility investments into renewable energy procurement and decarbonization-related grid management―backstopping utility investments through a demand guarantee. Consumption support is equitable, but it only incentivizes decarbonization indirectly, and incompletely: it might provide a utility with more financial breathing room to procure or develop renewables―but, if renewables are not available to procure on the grid and/or are not easy to develop, this demand guarantee likely just pads the utility’s bottom line.
Governments can provide distribution support by encouraging distribution utilities to purchase renewable energy. Distribution support most often takes the form of regulatory nudges: in the United States, state mandates like Renewable Portfolio Standards (RPS) force utilities to increase their procurement, backstopping generators by guaranteeing purchase demand for their electricity, or their Renewable Energy Certificates (RECs). These demand-guarantee interventions have helped speed up renewable energy development nationwide―but Christophers details the limits of the RPS framework, how utility PPAs don’t provide renewable energy developers with adequate price stability, and why corporate PPAs cannot be relied on at scale. Supporting distribution utilities’ efforts to decarbonize will not call forth adequate renewable energy generation sources into existence.
Generation support is what most governments already do. Whether through feed-in tariffs (FITs), production tax credits, or contracts for difference, generation support entails propping up generators’ profitability, ensuring that the sale price of their energy is never too low. Christophers details how these mechanisms, direct price supports for generation companies (a revenue guarantee, rather than a demand guarantee), are deeply necessary: renewable energy sources and the energy markets they’re plugged into are both structurally volatile, so, no matter how much energy they generate, they never generate all that much profit. Withdrawing generation support is, in no uncertain terms, a death knell for renewables development.
And, finally, financing support targets renewable energy sources’ nature as capital-intensive assets with high amounts of debt incurred upfront as a percentage of total capital expenditures. Whether through the investment tax credit, viability gap funding, concessional financing, or other forms of cost-share plans, financing support is centered chiefly around ameliorating debt burdens. Financing support is another form of direct price support for generation companies, because, by lowering a project’s cost of capital, it helps lower its developer’s threshold for project profitability; generators pay less debt service and keep more of their revenues. High interest rates have lately forced up the cost of debt for renewable energy projects unsustainably, far above private developers’ prospective rates of return. Financing support is a must-have these days―and it’s all the more necessary across the Global South, where the costs of capital are far higher.
Christophers argues that, rather than simply provide generation and financial support to prop up private profitability, governments should go the way of New York and build renewable energy themselves. Public developers can accept lower profitability thresholds and public finance institutions can provide debt on more forgiving terms; under the public aegis, rates of return and costs of capital become policy choices. That’s not to say that socializing generation and finance solves every problem―as far as the United States is concerned, non-financial barriers abound, such as regulations and interconnection queues―but, within the existing structure of energy markets, public ownership does solve a lot of problems.
What does direct government intervention into energy consumption and distribution look like? Public ownership of local distribution utilities is a start. Unlike private utility companies, they don’t need to promise ten percent returns to shareholders, and can use the financial breathing room that comes from lower profitability thresholds to tamp down rate hikes and, perhaps more importantly, rate volatility. Public utilities will not drive decarbonization, but they could potentially help advance transmission reform and integrate distributed energy resources into the grid.
Christophers all but argues that the best thing governments can do for all four support categories is to redesign energy markets. Beyond simply incentivizing the deployment of clean firm and battery technologies to complement renewables, policymakers’ biggest task is to build an energy system where volatile wholesale energy prices―which even publicly owned renewable energy developers will have to face for the foreseeable future―are not the reason that a project fails to get built. That would be a policy failure, and we don’t have time for those.
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uncertainty—the only certainty
In the first half of the book, Christophers discusses the role uncertainty plays in the investment decisionmaking process. In particular, as climate change makes the output of all energy sources more volatile, and as climate risks add volatility to calculations of the expected return on most assets, private investors will shift their return expectations on most capital investments downward. Investments that grow more and more unattractive will require more and more support; renewable energy already militates against its own profitability.
I don’t think Christophers adequately stresses the implications of this doom loop-style dynamic in the book’s assessments of the state of renewable energy finance, at least not where policy takeaways are concerned. Take the concluding case study, the 2021-22 interlocking energy crises. What happened after? China’s government is building more coal plants to ensure grid reliability, and India’s government is building more coal plants and inking LNG deals and boosting CCS to meet its massive energy demand growth. Even Texas’s leadership wants to build more gas plants now. Policymakers are responding to climate shocks by deploying the technologies they trust. These responses appear self-defeating to me, and maybe to you: if these technologies caused the crisis, and if they fail during crises, too, how can they solve it?
There’s a pernicious interaction between, on one hand, the fact that profit-seeking investors will avoid building renewables to the extent that its profitability is uncertain and, on the other, the political quasi-commandment that modern states must preserve energy grid stability. The result: in lieu of sufficient private clean energy deployment, the state doubles down on fossil fuels, which, as dispatchable resources, have considerable near-term crisis-fighting benefits. The longer-term problem, though, is that the localized and short-term mitigation of uncertainty through fossil fuels simply displaces that uncertainty both geographically and temporally. Borrowing local certainty in the present through claims on the global carbon budget has put these governments on the hook to pay us back in planetary uncertainty―with interest.
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policymaker failure
Christophers’ book goes quite a long way toward providing its readers with a more correct picture of how the energy system interacts with market systems. I recommend it, especially for anyone in government or in energy policy.
Getting “how the economy works” wrong has serious consequences. Policymakers who misunderstand how the economy works will hurt people, no matter their intentions. But policymakers who do understand how the economy works can fail to do what’s right, despite that knowledge. That feels just as dangerous.
When I was at Treasury, I once emailed my team offering an argument pretty similar to Christophers’: beyond simply continuing to de-risk investors so that renewable energy development could be profitable, why not push strategies that lowered their thresholds for the level of expected returns they would find acceptable? The evidence didn’t suggest that simply making financing cheaper for investors would lower the returns they expected from projects, anyway, so I thought a different approach was required. The strategies I remember suggesting, in brief, included promoting directly regulating maximum returns on assets receiving public support or supporting public renewable energy developers. (Christophers would probably argue that the first is useless. Fair—I didn’t know better then, anyhow, but at least I got the second prescription right.)
Nobody engaged with my email or brought it up in conversation. In all fairness, we are all busy people and I was a talkative junior staffer. But this dynamic repeated itself across a range of issues. I don’t think they were willing or able to engage with the idea that, as policymakers, we could do more than prop up the profitability of developers and investors, that we could use the weight of public policy to target those profitability expectations themselves. Unfortunately, where international development finance is concerned, it’s hard to find anyone who isn’t calling on governments to “mobilize private capital” by making decarbonization profitable for investors. In these policymakers’ visions, the private sector will deliver decarbonization. It’s conviction—it’s ideology. And it’s dead wrong.
So long as our policymakers are gripped by this delusion, they will fail to deliver us from the climate crisis. Reading the Price is Wrong, it’s hard not to feel like our policymakers, not just their policies, are policy failures, too. We don’t have time for that.
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footnotes
- There’s more to it. This trend toward price cannibalization is a function of the intermittency of renewable energy resources within already-volatile wholesale energy markets. When the wind is blowing or the sun is shining, renewable energy is dirt-cheap to generate, driving wholesale market prices down; more renewables drive prices down further. Renewables earn revenue, but they don’t earn too much. And when the skies are still or when it’s dark out, renewables generate nothing and earn no revenue. Developers have attempted to hedge against this price volatility and preserve stable expected returns through power purchase agreements (PPAs), but Christophers argues that this trend has not solved developers’ need for government support.
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