Are markets the right tool for decarbonizing electricity?

Volts

In his book The Price Is Wrong, Brett Christophers argues that, contrary to recent economic triumphalism among renewables advocates, wind and solar are not profitable enough to attract the private capital necessary to scale as fast as they need to scale. In this episode, he and I dig deep (extremely deep) into the details.

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David Roberts

There is an optimistic story about renewable energy that has become something close to conventional wisdom in energy circles in recent years. To wit: decades of deployment and innovation have driven down the cost of wind and solar power to the point that they are now cheaper than their fossil fuel alternatives. While there may be bureaucratic and political barriers to the clean energy transition, the economic barrier has largely been brought down. I have echoed this optimistic story many times myself.

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Brett Christophers, a geographer who teaches at the Institute for Housing and Urban Research at Uppsala University in Sweden, is here to rain on that parade. In his much-discussed new book, The Price is Wrong, he makes a relatively simple argument: for any technology, the key to being built and deployed at speed is not comparative cost but profitability, and renewable energy development is simply not a particularly profitable undertaking.

Insofar as it has been profitable to date, it has been thanks to government support and price stabilization that have shielded it from market forces. But neoliberal-leaning lawmakers seem enamored of the notion that it is markets that have produced all the progress — and are threatening to remove those supports as a consequence.

Brett Christophers

Now, when you hear the elevator-pitch version of this argument, you probably have all sorts of strong feelings about it. I certainly did when I read the book jacket. But as I say several times in the discussion that follows, this book is not a philosophical or ideological polemic. It engages deeply, sometimes dauntingly so, with the actual details of actually existing electricity markets and energy financing. Even I found some parts of it dense and technical, and y'all know I love this stuff. Whatever else you can say about Christophers, he’s done his homework.

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I'm still not sure where I come down on the argument, but I find it interesting and provocative, so I spent quite a while with Christophers walking through it and pondering some possible responses to it. Yes, this is a long one, but if you are interested at all in the markets that most countries are using as their primary tool for decarbonization, I believe you will find it as fascinating as I did.

All right then, with no further ado, Brett Christophers. Welcome to Volts. Thank you so much for coming.

Brett Christophers

Thank you for having me, David. It's great to be with you.

David Roberts

So, I finished your book a couple of days ago, and — it's a lot. It's a lot. It's more than I expected. So, my head's still a little bit of a jumble about it. So, I'm going to try to make this a reasonably rational walkthrough of the thing. Uh, needless to say, I have all sorts of good questions that may pop up at random. I want to start by just stipulating a few things that I think listeners of Volts already know and agree with. So, we do not need to sit and establish.

Brett Christophers

That is a good idea.

David Roberts

You know, climate change exists; it's bad. We need to reduce greenhouse gas emissions. Great. Decarbonization is mostly going to be about electricity. This is, uh, you say for better or worse. I say just simply for better. But either way, that's what's happening. That's what the world is doing. So, absolutely, when you talk about decarbonization, you are mostly talking about electricity.

Brett Christophers

I am.

David Roberts

Thirdly, many places in the world now, and more and more all the time, are generally using markets as their primary tool for decarbonizing the electricity sector. Now obviously, there are, as you make very clear in your book, an enormous variety over different geographies in different countries, different jurisdictions. But the general motion is toward more markets, towards markets. So, there's been a story that has been going around the renewable-energy-world, among green people, which goes like this: renewables are getting cheaper and cheaper and cheaper. They're cheaper than fossil fuels. Now, it is cheaper to generate a kilowatt with renewables than it is with fossil fuel generation.

And this is great. This means that economics is no longer a barrier. The remaining barriers are bureaucracy, politics, NEPA, and all these environmental rules that are slowing things down, NIMBYism, and interconnection queues and all these sort of bureaucratic tangles. But the economics part, we've got done, that's kind of the dominant story. But despite that, we don't seem to be moving at the pace we need to be moving. I mean, I think anybody who looks at recent progress will see that even though progress is probably moving as much in the electricity sector as anywhere, it's not fast enough.

And in fact, despite the sort of prodigious deployment of renewables, deployment of fossil fuel-generated electricity continues to rise also. Rise alongside the prodigious deployment of renewables. So, despite this story about renewables now being the winners in economics, they're still not winning, at least at the scale or speed they need to be. And so, your book is sort of an attempt to answer the question, "Why is that?" And so, I really think, I mean, I hate to start on a negative note. But I really think, like, whoever persuaded you to use that subtitle has done you a disservice.

The subtitle is about capitalism, which I think is going to make people think that this is a kind of polemic, a kind of broadside against capitalism writ large, which it very much is not. It is very much not a polemic. I just wanted to get that out on the front because I'm worried that a lot of people who would benefit from or be interested in reading this will be put off by that title. It's a very, it's — a more accurate subtitle would be "Why spot markets with merit order dispatch are adverse conditions for renewable profitability," which maybe wouldn't sell as much but would be more accurate.

Brett Christophers

Yeah, I mean, that's a good place to start. And I think I agree with every single thing you said in terms of the basic points that you were stipulating about where we're starting from in this discussion. And I also agree, I mean, the title — yeah, I mean, I think that was where I was torn, right? Was that I'm trying to reach such a wide range of audiences that it was always going to be impossible to find a title that appealed to or drew in or didn't send away one audience or another. But you're absolutely right.

David Roberts

I would just say, like, you do come out in the end behind the position that, "Yes, I don't think markets are the right tool," but you don't really show your hand on that until the last half of the last chapter. Everything else, I think, stands on its own.

Brett Christophers

Correct. And as I say, right at the beginning of the book, I just, the whole thing is so complicated that I honestly don't feel that I have the answer. And so, that's why I only kind of tepidly put a kind of "solution" on the table, because I just don't feel that I am qualified to put a kind of a more full-throated position on the table. This is about, the book is very much about what's going wrong, rather than my view on what would definitely put it right.

David Roberts

Right. Although, I do want to press you a little bit on solutions toward the end. So, I thought by way of structuring this sort of the first part of this discussion, at the end of your Chapter Eight, you very helpfully sort of summarize what you've said so far, your basic case with five points. So, I thought maybe it would be helpful to kind of structure our conversation around those five points. I think the first two we can take together. The first I would summarize as "profit matters more than comparative cost," and then the second is "low cost does not equal high profits."

So, maybe just expand on those just as conceptual points to begin with.

Brett Christophers

So, the first of those is to say, yeah, absolutely. So, as you said right at the beginning, to the extent the debate is about economics, it has been about the price or cost of generation; that's where the focus has been. And the simple point I make is, well, yeah, but at the end of the day, we are relying not just on markets, we're relying principally on private sector actors to do this. And private sector actors are motivated predominantly, if not exclusively, by profit motivation. And it's expected profitability that drives investment decisions. So, that's where we need to be focused.

And of course, the price of generation factors into profitability, but it's by no means the totality of the story. So, I'm basically saying, let's think about this through a different lens. Let's look at it through a different lens. And in doing that, it can be more helpful.

David Roberts

No developer is going to invest in a solar farm because the price of generation is cheaper than some other form of generation. No, they're going to invest in it or not invest in it based on whether it's going to be profitable for them.

Brett Christophers

Yeah, and more importantly than that, I think on where that expected profitability is going to sit versus alternative investment opportunities. And all I mean by that is that profitability is always a relative phenomenon. Whoever you are, as a capitalist actor, you always have alternative investment opportunities, even if the alternative is just leaving money in the bank. And of course, that matters, not least because if the returns in renewables, say, are 5%, 6%, 7%, 8%, that looked a heck of a lot better when interest rates were zero than when interest rates themselves are five or 6%. So, the point there is that profitability is always a relative phenomenon rather than an absolute phenomenon.

So, yes, that's the first point. The second one was that, yes, even though the cost of generation might be low, lower than they were, lower than they might be for, say, coal or natural gas, that does not necessarily tell you anything useful about a level of expected profitability. There are lots of different reasons for that. But, you know, just to put one on the table straight away would be, well, just because I have lower generating costs than someone else, if the electricity that I produce is worth less on the market than the electricity that somebody else produces, then I may well have lower profitability even though my generating costs are lower.

So that's one possible reason. But there are other reasons as well.

David Roberts

Right. So, just conceptually, to begin with, the focus here is on profit.

Brett Christophers

Exactly.

David Roberts

It can absolutely be true that the generation costs of renewables have declined and are declining, and are remarkably low, and still have problems with profitability. That the one does not entail the other.

Brett Christophers

Exactly. And in a way, that's the core argument of the book.

David Roberts

First, we need to establish "deregulation," which, as I think everyone familiar, everyone that's listening to this pod realizes, is a terribly deceptive term. But basically, it's the unbundling of what were previously vertically integrated utilities. Just so we can establish that, basically, generators now are not attached to, wrapped up with, or part of the same business as transmission and customer service. Generators have been separated out in these deregulated markets and are now competing with one another in basically a generation market.

Brett Christophers

And that's incredibly important.

David Roberts

That's happened in like two-thirds of the US, two-thirds of US consumers. I think it's happening in a lot of Europe and I think the sort of trend is to do that to sort of get rid of vertical integration and just let generators sort of compete with one another.

Brett Christophers

That's exactly right. It's happened in large parts of the US, but not obviously, not all of the US. Florida and large parts of the Southeast are obviously a big exception to that. It's happened basically throughout Europe, it's happened in large parts of South America, and it's happened in New Zealand, Australia, and so on. And it's happening to one extent or another and at one speed or another in other parts of the world. And it's worth saying a little bit about why that's happening. But at least as I understand it, the main reason it's been happening is as a means to an end. By which I mean, if you want to try to introduce privatization, competition, and markets, both retail and wholesale markets, to electricity, you can't do that without unbundling.

You have to separate things out in order for those things to be possible. So, I don't ever really think it was like the goal in and of itself, but it's been absolutely seen as something you have to do if you want there to be electricity markets among private sector actors who are competing with one another, but specifically in generation and in retail markets. So, unbundling is absolutely key to this because, as we'll see, it's in part because generators are this kind of standalone sector now, which is a very competitive sector that we get some of the issues around profitability that we do.

David Roberts

Yeah, that's sort of a precondition to all this. All this discussion of profitability is that generators are competing with other generators in their own kind of separate markets. These are called spot markets, and they use merit order dispatch. Now, you're going to tell us what we mean by spot markets. What are generators doing when they compete in spot markets?

Brett Christophers

Yeah, so spot markets are — the first thing to say is that they are wholesale markets. These are markets where essentially the main participants are the generating companies, on the one hand, and then the resellers who buy that electricity from the generators and then sell it on to electricity consumers, whether those are industrial consumers or household consumers or whatever else. So that's separate from retail markets, which is obviously where the consumer meets the reseller. Wholesale markets come in lots of shapes and sizes, but the biggest and most important are the spot markets, which are essentially for current consumption. It happens to be day-ahead consumption, mainly for all sorts of complex reasons.

But basically, what happens there is generators for the following day and for particular time periods of, say, half an hour or an hour or whatever else it might be in the market, will say, "I think or I know that I can produce x amount of electricity between, say, 12:00 p.m. and 01:00 p.m. tomorrow, and I can sell it at this price." So that's the bid price into the market. And so all electricity generation companies in a relevant geographic market make their day-ahead bids at particular prices for particular amounts of electricity. And obviously, in the case of renewables companies, those forecasts are somewhat uncertain.

They don't know for sure how sunny it will be, how windy it will be. And so, there are adjustments that occur on the day itself, but we can forget those for this discussion. So, everyone bids into it. So, that's the key thing to understand. Now, the grid operator, whoever that happens to be, has to match total supply and demand on the grid at all times. And so, they take all those bids and then they look at what the total expected demand is going to be for that particular period, and they say, "Okay, what I'm going to do is this."

I'm going to line those bids up in ascending order of price, and I'm going to take all the bids going up what's called the bid stack. I'm going to go up that bid stack and take all of the bids that are necessary in order for me to have sufficient cumulative supply during that particular time period to meet the cumulative expected demand." And so, if it's a really low demand period, say, and or if it's expected to be really windy or really sunny or both, it might well be the case that they just take, say, renewables bids. If renewables bids happen to be the cheapest, whereas if there's no sun or wind and it's going to be a really high demand period, they might have to take gas, they might have to take coal, they might have to take even nuclear, which tends to be the most expensive.

They might have to take all of it to meet demand. So, that's basically what spot markets are.

David Roberts

Yeah, and one thing to add, I think, is just that, and maybe everybody already knows this, but it's worth saying explicitly, is just that solar and wind, all your investment is on the front end building them. You have very low to zero operational costs, which means the cost of generating that additional electricity the following day is basically zero to you. Which means solar and wind always have the lowest bids in that merit stack.

Brett Christophers

Yes, it's also worth pointing out that one of the reasons they have low bids, typically the lowest bids, is because of the nature of the subsidies that they receive. So often, they will be negative bids because they can bid at low prices, because they can still make money because of the nature of the subsidy mechanisms.

David Roberts

Right. So, if you're getting like a per kilowatt hour chunk of money, you could rely on that for your profit and then bid into the market at basically zero costs and still have a little bit of profit.

Brett Christophers

Yeah, or minus $20 or whatever it might be.

David Roberts

Or even minus.

Brett Christophers

Yeah, exactly. So, that's how the spot markets work. Now, merit order dispatch: all that means is that — so the merit order is that ascending order of bid prices that the grid operator takes. And so, what they do, as this will be, they take all the bids that are necessary to meet the cumulative demand. But the key thing really is how the electricity is priced. And so, say they take the first 50 generators who are necessary. What doesn't happen is all the generators that bid and successfully bid are paid the price they bid. They all get paid the same price.

This is called the "single clearing price mechanism," which is dominant across these types of markets. They all get paid the same price, which is the price of the last accepted bid, the most expensive bid that was necessary to meet cumulative demand. And that really matters because that gets us into this question of volatility that you mentioned earlier, which is very, very important.

David Roberts

Right. So, they'll dispatch the solar, they'll dispatch the wind, and if they need more, maybe they'll dispatch the gas. But if they do that, everything gets paid at the price the gas bid in, including the solar, when they all are getting the gas bid price.

Brett Christophers

Yeah, so when they're just taking the solar, for example, and if all the solar operators in that particular region have the types of subsidies you're referring to, that's when you end up with negative wholesale prices, because they're all bidding at that negative price. So what happened in large parts of Europe, for example, in 2021 and 2022, and lots of listeners might know about this, was you had this huge spike in natural gas prices, not least, but not only what was going on with Ukraine and the cutting off of Russian gas supplies into Western Europe.

So, what would happen there would be one hour renewables would be supplying all the electricity. So, wholesale electricity prices were kind of zero or close to zero, but then suddenly the wind dropped or demand spiked, and suddenly gas turbines had to be turned on. And what that meant was that instead of the wholesale price going from €0 to €20, which might have been pre-crisis, suddenly it was jumping to €1000 or €2000, because gas prices had jumped. So, you had this extraordinary volatility. And I think the point to make here is that even at the best of times, by which I mean relatively non-volatile times, electricity pricing in these spot markets is pretty volatile compared to other types of commodities.

David Roberts

Right. So, you have two sources of that. One is when you jump on the merit order stack from solar and wind to gas, you jump way up in price.

Brett Christophers

Yep.

David Roberts

So, like, if you're turning the gas plane on and then demand declines slightly and you turn it back off and are only using sun and wind, and then you turn gas back on, the price of wholesale electricity is jumping up and down, up and down. So, that's one source of volatility. And then, as you say, the price of gas itself —

Brett Christophers

Exactly.

David Roberts

is incredibly volatile. So even if your gas is setting, is consistently setting the market price, that price is also volatile for other reasons. Because natural gas is volatile.

Brett Christophers

Correct. And I think the only other thing that's worth mentioning here for listeners, because I think it is very important, is that because of the way the market works, because of the nature of merit order dispatch, fossil fuels are setting prices a disproportionate amount of the time, by which I mean much more often than their relative contribution to the overall supply mix. So, I think that the figure I saw in the UK for, like, 2020 or 2021 was that natural gas supplied something like 30% of overall electricity, but it was setting the marginal price 70% of the time. So, that's incredibly important.

And that's obviously purely because of the nature of that market mechanism. So, in one particular hour, it could be supplying only 1% of the electricity, but it's still setting the whole market price because it represents that marginal unit. So, that's very, very important.

David Roberts

So, because the price of wholesale electricity is extremely volatile in these spot markets, that means the profits of the participants in these spot markets are incredibly volatile. And so, you say this makes solar and wind difficult to finance because it's rarely the developers themselves who are financing their projects. They're almost always going to financial institutions, to banks or something like that.

Brett Christophers

Absolutely. This is really important.

David Roberts

So, it's the banks — developers might be adventurous about the amount of risk they take, but big banks are not. And so, they hate volatility.

Brett Christophers

They do. So, if you go to your bank and say, "I want to develop this wind farm, and it's going to cost me $200 million to do it," typically a renewables developer, actually, whether it's a small developer or a large developer, will typically look to do that primarily with borrowing anywhere between kind of 60% and 90% would be kind of normal. And if you go to your bank and say, "Look, I'm going to borrow $150 million to do this," the bank managers will say, "Well, you know, I'm happy to do that. You know, I'm into ESG stuff.

"I want to be good to the planet. How are you going to pay the money back?" And you say, "Well, I'm going to sell the electricity." They'll say, "At what price are you going to sell the electricity at?" And you'll say, "I have no idea." And obviously, that has a very significant impact on your ability to raise finance. And I think you're completely right about what you said about adventurousness. So, my research that I've done suggests that actually there are plenty of developers out there, perhaps not the big publicly listed developers, but certainly smaller ones, who would be quite willing to take on a significant amount of profitability risk and who, in many cases, probably wouldn't care if they're making huge amounts of money or not.

But it's the ability to raise finance that is the sticking point, which is an important point. The book is about electricity, but it's just as much about finance.

David Roberts

Just so everybody knows, this is called merchant risk. You're doing merchant selling. A merchant project is just making all its money by selling on the spot market.

Brett Christophers

Into the spot market, and banks hate merchant risk.

David Roberts

Banks hate merchant risk. So, that's a key point. The intuitive response here is, this would seem like a problem that afflicts all participants in spot markets, including gas plants themselves. So, why is it uniquely a problem for wind and solar?

Brett Christophers

I mean, it's a problem to a certain extent for all operators, but it's much less of a problem for fossil fuel-based generators. And there's a reason for that which is actually very straightforward once you understand it, but might not immediately spring to mind. And the reason is simply this: So, if you are that generating company that I mentioned, a hypothetical generating company that's going to the bank to raise finance, if you're not a wind farm developer, but you want to develop a gas-fired power plant, which are obviously still being built, and the banker says to you, "What type of price are you going to sell your electricity at?"

And you say, "I don't know." That banker is going to be much less concerned about electricity price volatility than they would be if they are looking at financing a wind farm. And the reason for that is that they know that if, say, electricity spot prices fall from, in a year's time, from $50 per megawatt hour to, say, $10 per megawatt hour, they will know that in all likelihood, the reason electricity prices have fallen is because gas prices have fallen.

David Roberts

Right. So, the gas people will be saving money on one hand, even as they're — right.

Brett Christophers

Exactly. So, yes, their revenues might have gone down, but so will their costs have gone down because of the degree of influence on fuel prices, on electricity prices in these types of markets. And so, whereas if you're a renewables developer, if electricity prices go down, your costs haven't gone down at all because your basic costs are financing costs. That's the only cost that you have is financing the original upfront investment. If you talk to bankers like this, they'll say, "There's an inherent hedge on the fossil fuel side that does not exist on the renewable side."

David Roberts

Right. Right. This is a uniquely bad problem for wind and solar developers. So, the upshot of this is that in almost all cases, if you want funding from one of these big banks, you need some mechanism to stabilize the revenue you're going to get. To stabilize prices. Now, in some —

Brett Christophers

Over the long term.

David Roberts

Over the long term, and in some places, government mechanisms do that. And in some places, I think what you'd call private mechanisms do that, and we're going to get into those. But let's talk about the government mechanisms that do it. Mostly, I think, in Europe. Is that fair?

Brett Christophers

Yes, it is fair. And historically, I think, certainly until 2021, 2022, and one in China as well, this was very significant. It's less significant now. And you know, the kind of default instrument to do that is what is typically referred to as the feed-in tariff. And it changes a bit in some markets. Sometimes you get what are called feed-in premiums, contracts for difference, but essentially they all do the same thing. And basically what happens there is that either the government itself or more commonly a government-backed entity like a government-backed utility, will basically say to the developer, "Look, we will offer you a long-term contract to buy your electricity over, say, twelve years at a fixed price for that twelve-year period."

And then, essentially, what happens then, if you think about what this looks like in practice, is the developer then kind of takes that agreement, goes back to the bank, and says, "Hey, you know, you were really worried about price volatility. You don't need to be worried about price volatility anymore. So, because I have this promise from the government or a government-backed entity, give me the money." And that's really important to recognize because people often think about feed-in tariffs as instruments that exist for the renewables company, but they don't really, they're there for the bankers, they're not really there for the renewables company.

They are a means of providing what's called bankability to make the project bankable in the first place. So yes, that has been the predominant mechanism in large parts of the world, and most particularly Europe. And there are numbers out there that show that a very significant proportion of all renewables investment ever historically in Europe has been backed by a feed-in tariff of one kind or another.

David Roberts

So does that mean if you're getting a feed-in tariff that you're not selling into the spot market? Is it one or the other?

Brett Christophers

So, what will often happen is that developers will sell, say, 80% or 90% of their expected output through that type of mechanism, which means they're essentially circumventing the spot market, but they might retain some of their output for the spot market as a way of kind of boosting profitability if spot prices tend to be high — and banks are normally pretty happy with that. So, it can be all of their output, but it doesn't necessarily have to be.

David Roberts

Okay, and we'll get to the stabilization mechanisms that are in use in the US in a minute. But I wanted to get to the fourth point, even more interesting in some ways, which is to say that not only will renewables' profits tend to be volatile, they will tend over the long term, on average, to be low, to be not particularly profitable. Not as profitable as, say, a gas plant. And there are a bunch of reasons for that. Why don't you just go through some of them?

Brett Christophers

Yeah, there are, and I've mentioned one of them already, and the point is a really important one, which is just, if we step back for one second, is to say that the argument of the book is that there are these profitability constraints which often have a kind of stymieing effect on renewables development, and that that profitability problem or constraint is a mix of volatility and level of profitability. Both of those parts are very, very important. In some instances, the volatility is likely to be more a problem and others the level is likely to be more of a problem. But it's the combination of the two that is the macro problem.

So, why are profits relatively low, on average, as you say, and over the long term? We're typically talking about in the range of 5% to 8%, is where most studies come in on this. And as I said earlier, that could sound quite high in certain historic contexts, in certain macroeconomic environments, but not others. And it certainly doesn't look high, obviously, to the big oil and gas companies who don't get out of bed for profits in the last ten years of anything less than 15% returns. This completely explains why they're just not interested in renewables, because it's much lower profitability.

That's the basic story. So, why are they relatively low? I think that there are three main issues here, but what I can't say is that, you know, they're in this particular order of importance. Again, it varies across time and space. But the first one, and if I was pushed, I would say that this is probably the most important one, is that, and this goes back to the importance of your point about unbundling and this being kind of a separate sector, is that electricity and generation in general, and renewables generation in particular, is a really, really competitive business, and the competition occurs exclusively on price.

It's not that you're selling a different quality of electricity. Electricity is just electricity. And so, competition is purely on price.

David Roberts

Like commodity markets in that respect.

Brett Christophers

Exactly. And so, again, think of a hypothetical example here. So, say you are a wind farm developer and you've been in operation for 20 years. And over those 20 years, of course, you've seen huge reductions in the technology cost, in the cost of generating electricity through your wind turbines. So, intuitively, you might say, "Well, okay, those costs have come down a lot. So surely my profits have gone up a lot commensurately with those cost reductions." But of course, it all depends on your ability as a generating company to capture the benefits of those cost reductions. And of course, if you have considerable market power, if you're a monopolist, then you can just keep your selling price as it is.

But if you are operating in the kind of coercive context of competition, you don't have the power to do that because those "nominal excess profits" simply get competed away and get passed downstream through this unbundled supply chain. They get passed on to transmission companies, distribution companies, retailers, and in large part actually to consumers. And of course, here's the thing, that's what governments want. They want the benefits of any cost reductions to be passed on to consumers. And of course, that's great from a consumer perspective, but it ain't so great from the perspective of those companies that were expecting to undertake the investment in the first place because they don't have the ability to capture the benefits of those cost reductions.

They get competed away. And I think the other thing that's worth mentioning here is that precisely because governments want consumers, as they should, to reap the benefits of those cost reductions, they design electricity markets and they often design the support mechanisms they provide for renewables precisely to exacerbate and enable that price-based competition. And so maybe this is going into too much detail, but I think it's really, really significant. Those feed-in tariffs we were talking about earlier, think about the way in which they get awarded in the European context. They get awarded through so-called reverse auctions where basically developers bid prices down.

So one will say, "Okay, we will bid to take one of these contracts from you, the government or the government-backed entity, and we'll bid to sell our electricity to you for twelve years at say €50 per megawatt hour." The next developer will say, "We can do it at 49," the next one will say, "We can do it —" and they basically bid that contract price down until the point at which there's no profitability left, there's no expected profitability left, or the point at which the expected profitability gets to the point where it just doesn't make sense to them anymore. So in other words, those government mechanisms are built to exacerbate and lubricate that competition, which, as I say, is great for the consumer, but perhaps not so great from the perspective of the generating companies that we need to do the investment.

So, competition is the first thing. And I think it's very, very, very important.

David Roberts

Maybe the way to summarize that is just like it's a commodity-style business with low barriers to entry, and any such business is going to be very low margin, very low profit.

Brett Christophers

Exactly. The even shorter way I sometimes like to put it is that there's no OPEC in electricity generation. And think about that, right? I mean, that's why OPEC exists in significant part to, you know, if, for example, there's a concern around excess production, they will say, "Let's reduce production to keep prices and profits up." That's why they do it. There's no OPEC in electricity generation. There are no mechanisms to do that. And so you get these periods of just intense investment and production when profits are thought to be high, and it has that depressive effect on profitability because there is no OPEC in electricity generators.

David Roberts

And as you say in the book, if something happens, like something geopolitically happens, or some new government support mechanism goes into place and renewables become profitable, briefly, a bunch of capital floods into it. It's like chum in the water; a bunch of competitors swarm and compete away that premium pretty quickly.

Brett Christophers

Yes.

David Roberts

So, competition is the first reason.

Brett Christophers

Yes, the second one, and this is kind of the one I like intellectually the most, because I'm a geographer at heart. This is a very geographical point, is about the geography of all this. I'm sure a lot of this will be familiar to your listeners, but it's worth spelling out what's going on here. So wherever you go in the world, whether it's the US, or where I am in Sweden or the UK, or China, Germany, India, it doesn't matter. You inevitably see the same recurring geographical pattern, which is that renewable facilities, wind and solar farms tend to be located predominantly where people don't live.

So, in China, for example, the population is predominantly in the east and south, and the major wind and increasingly solar facilities are towards the north and west. And there's a very good reason for that. There are lots of reasons sometimes, but the recurring reason, the one that applies everywhere, is that think back to that point about generating costs. What goes into your cost? The cost of generation as an electricity generating company, but specifically as a renewables company, as well as financing costs and the cost of the technology itself. Far and away, your most important cost line typically will be the cost of land.

Obviously, if we're talking about offshore, it's different. But in the case of solar and onshore wind, it's land. So all other things being equal, you will always try and establish your operation where the cost of land is cheapest. You're either going to be buying that land or leasing that land. And of course, land will tend to be cheapest where people in industry aren't located. And so, I think the figures I saw for the US, like the cost of land in Wyoming, is on average about 1% of the cost of land in New Jersey. So of course, all other things being equal, you are going to locate there.

Now, why does that matter? Well, it matters, of course, because we have this thing called a grid, which exists to get electricity from where it's produced to where it's consumed. And in general, the cost burden that a generating facility exerts on the grid will be greater the further away it is from centers of demand for electricity. And without getting into the complexity of this, grid operators do their very best to make electricity generating companies bear the costs of their locational decisions, by which I simply mean if you, a developer, set up your electricity generation facility a long way away from where demand is located, we will charge you more for that.

So, every participant in the electricity system has grid costs, whether that's consumers or generators. And so, if you are a generating company, if you are located a long, long way away from centers of demand, you will have much higher transmission costs than if you are located closer to centers of population in industry and typically conventional power plants, because they require much less land, are located much closer historically to centers of population. So, here's the thing: Your generating cost might now be very, very low as a renewables company, but they're only low in a sense because you have high transportation costs.

You can't have your cake and eat it. You can either have kind of low generating costs and very high transmission delivery costs, or you can have very high generating costs, which are high because of high land costs, and low transmission. So, all those cost comparisons that you read about, the levelized cost of energy, they completely exclude all those transmission and delivery costs, which is to say, they are a very, very misleading approximation of the overall cost for renewables companies, because renewables companies don't just have generating costs, they have other costs as well.

David Roberts

Right? So, transmission cost, transportation costs, getting the power to people adds a lot of cost to renewables in a way that it doesn't necessarily with fossil fuels.

Brett Christophers

Exactly.

David Roberts

And then, the third thing is simply timing.

Brett Christophers

Exactly. And it's a very, you know, to put it very generically, it's to say relative revenue potential. And all I mean by that is that the profitability of any business, whatever kind of business it is, is a function not just of your costs, but of your revenue. So, you might have very, very low costs, but if your revenues are low, then your profitability doesn't look great either. So, a renewables company, it may have total costs that are lower than a conventional power plant, you know, even with the transportation costs and grid connection costs and so on factored in.

But if its revenue potential is also lower, then its profitability is not going to look very good either. And so, this comes back to the question of the production profile, for want of a better term. Does that make sense? The production profile of a particular — is it producing its electricity at times of the day, week, month, or whatever else it is when electricity in those wholesale markets is disproportionately cheap, or when it's disproportionately expensive? And my research that I've done into this suggests that on average, and of course there are exceptions, but on average, and in general, the revenue potential for the average unit of power produced by a renewables facility is lower than that which is produced by a conventional power plant.

And actually, that goes back in part to what we were talking about earlier, in terms of the prices at which they're bidding into those markets.

David Roberts

Right. And part of that just has to do with all the sun is being generated at the same time, and none of the sun is being generated at night. And so, a kilowatt-hour is going to get you more at night than it will during the day when all the other solar generators are operating at the same time.

Brett Christophers

Exactly.

David Roberts

So, you have generally low prices due to intense competition, due to transmission costs that often don't get factored into these levelized cost of energy things. And the timing issue, which is that they're constrained in when they can produce. They can't necessarily time their production for times of high wholesale prices. They can't time their production at all, really, they produce what they produce. So, those are the three reasons.

Brett Christophers

And the other thing, of course, and I think it's worth mentioning this on that last point, is that they may be producing so much at a particular time that there's not sufficient demand to cater to that, and so the production can get wasted or what's typically called curtailed. Now, in some markets, you get compensated for that curtailed production — in the UK, I know you do, but there are definitely markets around the world where you don't get compensated for that.

David Roberts

Well, I got a few places I want to push back on that. But let's get through the fifth point first. So in Europe, they have these mechanisms, government mechanisms. Like, a feed-in tariff does two things: It subsidizes the generation, but then it also stabilizes the price that you get for your power. In the US, the policy mechanisms we've relied on, i.e., tax credits, which we just renewed a buttload of, subsidize generation, but do not stabilize prices. In the US, renewable developers have had to look elsewhere for mechanisms that do that. Which brings us to the corporate PPA (power purchase agreement).

Talk a little bit about what those are and to what extent do they stabilize prices and what are their limitations.

Brett Christophers

Yeah, just step back a wee bit. The corporate PPA, I think, has indeed become the main mechanism in the US to provide that price stability, but it's not the only one. So, there are also, as you know, various forms of financial hedging instruments which can kind of synthetically provide that stability, swap and forwards contracts and things like that. And they have historically at least been very, very important as well. But yes, the corporate PPA is kind of the main one now, has at least seemed to be where the big hope is being invested. And I think for good reasons.

I can understand that. So, a PPA, I mean, essentially all a PPA is a power purchase agreement, is an agreement by an off-taker, an entity on the demand side of the market, to buy electricity over a pre-stipulated time period. And actually, a feed-in tariff is itself a form of power purchase agreement, but it's essentially a utility PPA, where the buying entity is an electricity company buying it for resale rather than something else. So, what's different about the corporate PPA is that the buyer is not a reseller of electricity, the buyer is the consumer of the electricity.

That's the big difference. And before getting into who they are, why they do it, and so on, the reason why in the US, for example, they are seen as more propitious for renewables developers, is A) they're typically willing to enter these power purchase agreements for longer time periods than electricity utilities. So they might do it for say twelve years rather than say two years. And secondly, they're typically more willing to do it at fixed prices than utilities are. And that provides the all-important price stability we were talking about. So yes, these have become a big deal over, I mean, they've been around for 10-15 years or so, but they're becoming a bigger deal by the year, particularly in the US.

But not only in the US, but obviously in the US because of the added absence of other mechanisms of price stabilization to a significant extent. Essentially, what happens here is that a big industrial or commercial user of electricity will say to the renewables developer, "Forget about wholesale markets. Don't bother selling your electricity there. Sell it directly to me for my consumption." So, the classic examples of the types of companies that do this are the big IT companies, the Microsofts, the Amazons, the Googles.

David Roberts

Amazon, I believe, is the 600-pound gorilla. It's like something over 50% or 60%. Something crazy like that is just Amazon.

Brett Christophers

It's a huge percentage of the market. And so, here, Amazon will say to the developer, "Okay, we will provide a contract. We will enter into this agreement with you to buy your electricity at a fixed price for the next twelve years or so." And essentially, that agreement serves precisely the same purposes as the government-backed feed-in tariff that I mentioned earlier. Because again, the developer can then take that agreement to the bank and say, "Look, this can give you the confidence, yeah, this can give you the confidence to give me the financing because, and this is a really important point because you can be pretty sure that Amazon A) is still going to be in business in twelve years' time in the late stages.

of that contract and B) is kind of credit worthy, is a pretty reliable off-taker. They're not going to be struggling to make those payments." And that matters because there are a limited number, obviously, of credible off-takers out there. If you go to a bank and say, "Look, my corner store wants to buy my electricity," they're going to say, "Well, hang on a second, A) they don't have enough demand for electricity, B) they're probably not going to be in business in five years' time," and so on and so forth. So that's what corporate power purchase agreements are, and they have become very, very important.

And I think, in some parts of Europe in particular, governments have kind of jumped on the bandwagon and said, "Hey, these are great because we're not going to have to provide feed-in tariffs anymore because corporate PPAs represent this kind of alternative to them." So, instead of governments providing that kind of price stability that is all-important for bankability, the Amazons and co. are going to kind of take that job off our hands.

David Roberts

Right. But as you say, and this is the key thing here, the universe of entities that can say to a bank, "We have a lot of demand and a lot of money and will have a lot of demand and a lot of money for ten plus years into the future," is a small, is a relatively small number of off-takers. And I think that's reflected in the PPA market. It's a relatively small number of companies that are responsible for the vast bulk of these things.

Brett Christophers

Yeah, which has all sorts of interesting and important implications. And the other thing of saying that all of this is very geographically specific. Right. I mean, Amazon is not interested in establishing its new electricity-guzzling data center in Namibia or in, you know — it wants to do it either in North America or in Europe for the most part. So this can help drive bankability in certain parts of the world, but definitely not everywhere. That's the first thing. The second thing is, yeah, absolutely, it represents a finite source of bankability. And then the third thing, which I think is, again, really interesting and important is the fact that precisely because there are so few of these creditable PPA off-takers, they have all the power in the market.

David Roberts

"Monopsony power" , I believe, the geek term.

Brett Christophers

Exactly. You have this small number of big, powerful companies like Amazon, and then you have tens of thousands of renewables developers champing at the bit trying to get these contracts with them. What that means is historically it has almost always been a buyer's market. It's always been a market where the Amazons set the terms. And so, what does that mean? They push down the price? It's that competition question again. They push down the price in the same way that those government reverse auctions for feed-in tariffs push down the price. So yes, they're a source of bankability, but they're definitely not typically a source of high profitability for renewables developers.

They can help renewables developers get projects across the line, but not much more than that.

David Roberts

And they're not going to be enough for trying to decarbonize the entire US electricity sector.

Brett Christophers

They're not even close to it.

David Roberts

This handful of companies is not going to absorb all that electricity.

Brett Christophers

No.

David Roberts

All right, so those are the five basic points and that, I think, lays out the basic case of the book. So, let me throw just a couple of sort of semi-random questions at you that I think people will have on their minds. First, I think intuitively, is when people hear this, they're like, "Well, it sounds super grim for renewable energy. And yet, I turn around and look at the IEA and I find that renewables are galloping ahead. They're being deployed at a dizzying rate. They seem to be — they are being deployed and falling in cost faster than any previous energy technology in all of history. So, how, if they face all these constraints, how is it they're succeeding so well?"

Brett Christophers

Yeah, that's a great question. And of course, it's a great question with that all-important caveat you made at the beginning, which is to say, "Yes, they're growing fast, but not fast enough." But let's park that for now. But obviously, let's not forget that. So there are, I think, a number of different answers to that point, and the most important I can think of are these. So the first would say is a point you made earlier. And I think that people like me on the left, they often kind of forget this, which is, I think there are actors out there, certainly in the renewables industry itself, but also maybe even amongst some financial institutions, for example, some big pension funds and so on, who are quite satisfied with relatively low returns if they're stable, backed by PPAs or feed-in tariffs and doing something that's good for the planet.

So, let's not just assume that all capitalist actors of all types are kind of like inherent predatory profit maximizers. Let's grant that. So, that's one thing. The second thing is, I think that, and this is one of the, you'll have seen this in the book, one of the key chapters of the book is to say, "Look, the reality is that the whole industry remains ubiquitously underpinned by government subsidy and support around the world." So, a huge part of the reason, if not the biggest reason, that the growth is still occurring, is that governments are still hugely supporting it.

And yes, they subsidize fossil fuel stuff as well. We should never forget that. But where they have thought that they might be able to safely kind of remove or reduce subsidies and supports to renewables, they found that they can't. Investment collapses because of these profitability constraints. So they typically haven't, they've either kind of reintroduced them or restored them, like through the IRA.

David Roberts

Yeah, we don't have to get into this right now, but you go through a couple of cases in your book where there have been sort of confident claims of like, "We're now at an age of subsidy-free renewables." And then you take a look at any individual case of that and you dig a little, and you find that there is, in fact, some sort of government support.

Brett Christophers

Yeah, and usually very significant support as well. So that's the second thing is that. And I think that, but things like the particular form of feed-in tariff that you have in Europe now typically, which is a contract for difference, I think it's a great scheme. I think it works. And I think as far as renewables supports are concerned, that's the kind of gold standard, as I see it, because it provides both subsidy, where subsidy is required, and it provides stability, and it's doing a good job. I wouldn't want to absolutely dismiss that. So it's absolutely paramount to what growth is occurring.

But the third thing I would say, so that's the second one. The third thing I would say is, "Let's look at the geography of this." So, yes, for example, the International Energy Agency figures showed significant growth in 2022 and 2023 in renewables investment worldwide. But in 2023, 80% of that incremental growth was in China. And China is like the big exception to the story we've been telling because it's basically the government doing it. Essentially, 95% of wind energy development is state-owned enterprises, and they're financed by state-owned banks who are having their debt subsidized by the state-owned central bank.

And so it's like, "Yes, we're doing ' well', but it's China that's driving almost all of that positive story right now." And China's the big exception to the kind of private markets and private sector story that we've been telling.

David Roberts

And it's funny, China is kind of tiptoeing toward markets. It's sort of introducing some limited markets. But China, the vibe is always like, you can't imagine China being like, "Well, we can't build renewables as fast as we wanted to because the market isn't doing it. So gosh darn it." The idea that China would be deterred by market performance from its goals is ludicrous.

Brett Christophers

And actually, I had to just say that the session you did recently with Laurie on China was fantastic in terms of laying out — you know, I rely on the likes of him and others in the book for the China story I tell. And it's obviously a very, very important story.

David Roberts

It would be easy, I think, for a conservative-minded person hearing all this, to just hear it as a condemnation of renewables, as saying the fact that they need government support is like a scarlet letter somehow. You know what I mean? It's like a bad, embarrassing thing. You're, like, revealing that, you know, some dark secret. So, I just want to know, like, you don't know — Your take on this is, like, "Not that there's anything wrong with that." Right? Like the Elaine from Seinfeld take.

Brett Christophers

Like, exactly. Yeah. I mean, that would be, in my view, entirely the wrong way to interpret it, although I wouldn't be surprised if some, I mean, those folks probably aren't going to read the book anyway. But even if they did, then possibly they might say that. I mean, no, that's obviously not the story to be told. I mean, so first of all, yes, we still seem to need government support to push this and I suspect we're going to need that. We can come back to this, but I suspect we're going to need that for a long time to come.

But hey, let's not kid ourselves that the fossil fuel sector is itself not kind of shot through with government subsidy on both the supply but particularly the demand side as well. So that kind of rubbishes that notion. But also, I would say at the end of the day, my view is that cost is not the main reason we should be doing this anyway. It's an important issue, but it's a subsidiary one. I'm not even sure this is true, but even if it turned out that the decarbonization of the power sector in toto meant that energy bills around the world went up somewhat, and if you were minded to say, "Well, that's a negative on cost ground," well, I would say to that, "Well, you're looking at the question of cost in a very narrow, parochial perspective because what about all the costs in society more generally that you are saving by virtue of that decarbonization?"

You know what I mean? It's like to focus on —

David Roberts

It's a bargain in macro terms.

Brett Christophers

Exactly. And that's just focusing on social and economic costs, rather than in addition to environmental costs and so on. So, to focus just on the cost of the power sector and on energy prices is the wrong way of doing it, I would say.

David Roberts

As I point out very frequently, just the health benefits of reducing particulate pollution alone pay for all of it like ten times over.

Brett Christophers

Exactly.

David Roberts

The health costs of particulate pollution are just mind-blowing. And it's just insane that we're talking about these small differences in cost as though they're hugely significant when — anyway.

Brett Christophers

And I think it behooves governments to be better at those types of communications. I think they get lulled too easily into those kinds of narrow cost conversations, which are unhelpful and misleading.

David Roberts

Right. So, a couple of things about the value of the electricity that renewables are generating. A couple of things that I thought were striking in their absence from your book are two things which seem to me to answer two of those problems that renewables have. One is the time problem, as you say, the timing of generation. Well, now we've got all this storage coming online and now almost all new renewables projects are building alongside storage. Is that not the market solving the timing problem? It was striking to me that you didn't discuss storage in the book, since it seems like it very fundamentally altered the market dynamics of renewables.

Brett Christophers

Yeah. So, I do talk about it a little bit, but I definitely don't talk about the economics of it and the types of markets that are developing around storage. And that was a conscious decision. I mean, when I was working on it, those markets were still in their relative infancy. They're growing rapidly now. And you're right. I mean, almost all, essentially all renewables, new renewables projects, at least in North America, have storage attached to them. And for sure, storage is going to alter the dynamics of the overall system, both in kind of engineering and electricity delivery terms and the economics of it.

But, it's interesting you should say that. So, I had a communication recently from someone, oddly, at one of the big US utilities. I won't name the company, but working at it was a New York state utility, and he runs their storage business. And he wrote to say, "Look, I happen to read your book and I really like your book, and I think that you've basically got it right." And I said, "Well, what about storage? Like, to what extent do you think that the dynamics that I have described, particularly around volatility and the financing challenge that that raises, do they or do they not apply also on the storage side?

And he said, "They apply 100%," he said, in his view, and he runs their storage business. It is and will be exactly the same story there. So again, I'm going from what he said there, but it was interesting for me to hear that. But as I say, I haven't done the specific research myself to validate whether that's true or not. I think we're still in the very early stages of seeing what that looks like, just as I think we're in the very early stages of seeing how distributed energy —

David Roberts

Well, I was going to say, on the timing thing, you've got storage coming and you've got demand response and demand shifting and various ways of moving demand around. And it seems like to me, between those two —

Brett Christophers

That's a big hope, I think.

David Roberts

Yeah, a big hope. You're going to solve the timing problem, or at least take a huge chunk out of it.

Brett Christophers

Yeah, and I think, again, I refer listeners back to an episode you did recently with someone who was talking about this. And it seemed to me that one of the important points he made, I can't recall his name, was that one of the big issues on the distributed energy side is going to be the extent to which all of this happens behind or in front of the meter. And because of concerns that have existed, and I think very understandable concerns for a long time around issues of grid defection. So, keeping people on the grid and kind of amortizing their share of the costs of the grid and then integrating that distributed energy with centralized energy resources in a smart and kind of economically rational way is the challenge and the hope — but again, based on what he was saying, it sounds like that's also at the very early stages.

David Roberts

Yeah, it's at the early stages, but I do think distributed energy, in part, also speaks to the geography question, because you can't get any closer to load than on the roof. And so, maximizing distributed energy seems like —

Brett Christophers

And just to amplify that point, going back to the point about China being responsible for almost all the growth globally in renewables investment last year, I think my memory is that 30% of that growth that occurred in China last year was rooftop solar. It's huge. That's distributed, but it's obviously government-driven to a very, very significant extent.

David Roberts

Yeah, I guess I just want to make the point that some of these things that yield low profits for renewables are not sort of written in stone or intrinsic or permanent. They can be solved with other technologies and are being solved.

Brett Christophers

A) that's absolutely true, and B) this connects back to, I think, one of your earlier questions around, you know, the potential pushback from people of a conservative mind will say, "Well, you know, this is an indictment of renewables." Well, to the extent that it's an indictment of anything, much about what we're seeing in terms of the markets for renewables are less to do with renewables per se, but they're more about the nature of the mechanisms that have been created. That stuff around competition, for example. Well, that's not really a renewables thing, that's a government thing. And so if you're going to indict anything, talk about those regulations and those incentive mechanisms rather than renewables per se.

David Roberts

Right. And so, in large part, it is governments that have created these markets in the first place and constructed how they look and how they operate and what sorts of supports and what sorts of additions and regulations you have on them. They're all constructed. This is where you get into Polanyi at the end of the book. Karl Polanyi called these fictitious commodities, these sort of —

Brett Christophers

That's right.

David Roberts

where there's not a sort of natural market, like, basically, governments have to conjure a market and they always end up being slightly awkward and kludged together.

Brett Christophers

Exactly.

David Roberts

So, let's talk then about what to do about this. What are we to do? Say we read your book and we take it all to heart, what are we to do about this? There's a lot of different ways. I mean, one response, one thing you could say is just, "Yes, it's true that government supports have yielded the growth, the massive growth we've seen so far. And yes, that massive growth is not fast enough. So, let's just amp up the government support." Like, there's nothing wrong with government support, as we discussed, like it's all a bargain relative to the cost of climate change.

So why not just ramp up government support to get things going faster?

Brett Christophers

Yeah, and I think that the way I'd answer that question or that point is to say that I think the broad range of solutions that are kind of in the air, not surprisingly, tend to be associated with different constituencies, different interest groups. And I think that argument is implicitly, or even explicitly, the argument you tend to hear from people in the industry who basically say, "Look, we are going about it the right way, everything's fine, the existing markets are fine, it's fine to rely on the private sector to do this. We just need more subsidy." And in a way, I think that one of the best ways to understand the Inflation Reduction Act is as a response to those kinds of arguments where the government essentially bought that line and said, "Look, we've been attenuating these subsidies over time.

We've been reducing the level of tax credit. Investment is beginning to stagnate. We need to lift it back up, and we need to do it." And obviously, this is the bit that wasn't said, "We need to do that precisely in order to reinflate expected profitability, to get investment to flow back in." And you know what? I'm completely sympathetic to that argument. If the alternatives are, say, on the one hand, big government subsidy and support, more rapid decarbonisation, and nice fat profits for next year at energy and Blackrock and whoever else it might be, or on the other hand, you know, not enough support, slow transition, and limited profits.

I'll take answer A) every time, if that's the range of options. You know what I mean? To me, that's like, that's a non-choice. That's, of course, you take option A) every time. Even if the fact that you are kind of essentially subsidizing capitalist profit might stick in the craw to some extent, I still take it every time. It's like, of course you take it. So that's definitely one answer.

David Roberts

And so, another answer, you know, which I bet if you talk to energy economists, you'll get this answer, which is, "We've built these markets for fossil fuels. These markets were all developed for fossil fuels, and they just don't fit well with the characteristics of renewables. That's not renewables' fault, it's just that we built this market that's not suited to them. So the thing to do is to reform or redesign markets around how renewables work. And then you get market forces aligned the right way and off the market goes." What do you think about that?

Brett Christophers

Yeah, that is exactly what sort of "mainstream" energy economists say. It's one of the things they say. I think they say something else and I'll come back to that, but it's definitely one of the things they say. And again, they're right that the markets we have are ones that were kind of dreamed up in a different world and they remain essentially unreformed. So, the argument that all we need to do is kind of tinker with the market design or optimize the market design has a certain kind of intuitive appeal to it. I'm not convinced by that argument.

I mean, partly because that's always economists' answer, is that the answer is market design, but also partly because the range of alternative designs you see out there, and there are lots of suggestions kind of floating around, they all have certain advantages to them, but they also all have certain drawbacks associated with them as well. And to me, going back to the Polanyi point, that doesn't surprise me. If you're talking about "markets" for fictitious commodities, there is no, you're not going to find a perfect market design because you're dealing with kind of an awkward commodity in the first place. And again, I'm not unsympathetic to that.

I would add that in both Europe and the UK, they have been going through a convoluted process of government consultation on electricity market design reform. And in Europe, they decided just basically to leave things as they are, which I think is instructive. And in the UK, they haven't concluded yet. But my full expectation is that they will do exactly the same thing, which itself tells you quite a lot that they've decided not to reform them.

David Roberts

Yeah, just scared of, you know.

Brett Christophers

Well, yeah, and also, you know, they, I think, one of the arguments for reform, particularly during the energy crisis in Europe, was, "Look, we've got gas prices driving electricity prices, let's uncouple them." And that surely would make much more sense. But then if you do that, renewables companies, developers will say, "Well, hang on, then you might see a kind of cannibalization, price cannibalization, becoming more of a thing because we need those 'high' electricity prices to incentivize investment in the first place." And I think that's why they've pulled away from the precipice, actually.

David Roberts

Right. So, if renewables were competing in the market only with other renewables, you'd get basically spot market prices of zero all the time.

Brett Christophers

Exactly. And who's going to invest?

David Roberts

Nobody would ever make money. Yeah, and there are other more sophisticated market design ideas floating around.

Brett Christophers

But the other thing economists say, and this is important as well, is they say, "Well, hang on a second, how about instead of subsidizing the renewable side, we introduce proper carbon taxes?"

I've heard that floated a couple of times, believe it or not. And this is a really interesting point, right? If we go back 20-25 years to when governments began to get kind of semi-serious about renewables, and at which point, in pure generating cost terms, renewables absolutely were uncompetitive. I mean, at that point in time, governments essentially had two choices, right? They either could "try and make renewables cheaper" by subsidizing them in some way, or — it could be and — they could have made the fossil fuel side more expensive through pricing unpriced externalities. That whole argument. And now we know with the benefit of hindsight that they chose the former option.

And I think that's instructive, right? Which is to say, it's understandable why they chose the former option, because if you begin taxing carbon, well, we in the West live incredibly carbon-intensive lifestyles, so that's going to have huge inflationary impacts and governments don't want to go there.

David Roberts

It turns out that handing out money is more politically tenable than taking money from people as a general matter. But yes, I mean, this is kind of looming behind this entire discussion as this would all be a lot easier to frickin' solve if the fossil fuels had to pay their true costs. I mean, I'm not sure it's any more politically tenable now than it was then, but it's still a good idea.

Brett Christophers

Exactly. So that's the other thing economists say. I mean, it's worth saying that. And again, there's a logic to that argument as well. And it's quite, you know, obviously a very compelling logic. I think, in many ways, if it was done in a way that was kind of compatible with what you might call distributive justice. So, if you're going to introduce those things, you need to do it in such a way that the rich, most carbon-intensive life people, are the ones that suffer the impact of that carbon inflation.

David Roberts

So, someone might look at this and say, "Electricity is what Polanyi called a fictitious commodity, which means any market for it is basically going to be created by government, built by government." And at a certain point, if you built the market and designed all the features of the market, it becomes a little blurry. What's a market and what's regulation? You know what I mean? Just as an ontological matter, where are the lines between those two? It all looks like regulation. The market itself looks like regulation. At which point someone might conclude, "Well, if governments are required to create the markets at all, and then governments are spending all this time and energy tweaking and tweaking and tweaking, layering on more and more regulations, all just so that we can have something we're calling a market that is profiting private parties."

Why don't we just drop the pretense and just have the government own the damn thing? And, you know, the whole thing could be a lot simpler if the government would just step in and own the thing, which is where you come out, sort of like at the very end of the book.

Brett Christophers

I think so. And especially, I mean, it's all of that you just said is true, but there's also the point that not only are governments, you know, doing all that tweaking and regulating and kind of massaging of a market into place, and kind of desperately trying to maintain this kind of facade that it is a real market, but they're also subsidizing renewables development, without getting the kind of financial reward of that. So, yes, the next step is to say, "Well, just do it yourselves," in the way that obviously the vast amount of the infrastructure development in the New Deal in the 1930s was developed. So that was publicly owned, publicly financed infrastructure.

And yes, that doesn't necessarily mean the government has to literally build it itself. You can just contract the construction out to private companies under contract, but it would be government-owned renewables that are returning revenues. And of course, 5% to 8% profits might not be sufficient to call forth massive and necessarily massive private investment, but surely it should be sufficient to call forth government investment. Surely government investment, you would be happy as long as it washes its face, as long as it covers its cost of capital, then you would presumably be happy with that. So, I think the arguments for government ownership are pretty strong.

I mean, there's a couple of things I would say about it. So, the first of those, and probably the most important, is that I think we need to be realistic in terms of where in the world we would kind of have in mind for this. I think it's one thing for governments in "rich countries," which the UK, for example, where I'm from, might not consider itself a rich country these days, but in the global scheme of things, it is. And in places like the UK and the US and Germany or wherever else you might want to talk about in that part of the world, the reality is that governments can still borrow relatively cheaply, often more cheaply than private sector actors.

And certainly, I think they can do that if they are borrowing to invest in revenue-generating assets. We're not talking about borrowing to carry out expenditures that don't provide any kind of return here. We're talking about borrowing to invest in return-generating assets. And I think to do that type of thing, governments can still in rich countries borrow much more cheaply than they sometimes pretend they can. But the thing is, they've persuaded themselves that they can't, that they have to be fiscally conservative and all the rest of it, fine. But I think that they can do more than they think.

But there are definitely large parts of the world where that's not true. There are many parts of the world where governments operate under much more severe fiscal constraints of one type or another, where they're already kind of suffocating under the burden of debt servicing obligations from existing debt, which are crippling to one extent or another. And to suggest that you're going to get kind of a big green state in parts of the global south where the fiscal constraints are very, very profound, I think to me is a bit more far-fetched. And so, I think there's a geographical circumscription to that argument that it's important to be very, very honest about.

And here's the thing, right? And you'll know this as well as anyone else, which is that, and this is kind of the great problem, I think, about all of this, is that precisely those parts of the world I was just talking about where the challenges, the financing challenges, are greatest. And that's true of private sector financing as well.

David Roberts

Yeah, I was going to say it's true. I mean, for many of the same reasons, private and public financing are both difficult in Nigeria or wherever.

Brett Christophers

Exactly. And those are precisely the parts of the world where most investment is required for decarbonization. And that's the — I mean, if we're going to be really honest, what happens going forward in Europe and North America kind of doesn't matter on the big scheme of things. It's what happens in China, where coal is still 65% of electricity generation, India 75%, South Africa 90%, Nigeria, and others in excess of. Where A) not only are those countries much more fossil fuel intensive, still in electricity generation, but that's where we can expect the bulk of future incremental growth in electricity demand to be concentrated.

And so, the need for investment there is much greater, and the challenges are also much greater.

David Roberts

Well, so then, what's the answer to that riddle? Because there's not enough private capital. You know, private capital itself is much more expensive in those. I mean, it's much more expensive to borrow. It's much more expensive. And renewables, as we have said, are all about that upfront capital. That's all, that's their whole thing. So, like, they're just much more expensive down there. So private capital is not going to do as much down there, but also there's not public capital. So if you don't have the one and you don't have the other, what's the, what's — do you have a magic answer here?

Brett Christophers

It's the question. It really is. That's the game right there. And I think that the way that is being done now, to the extent that it's being done, as I understand it, is principally that you get some form of financing that essentially subsidizes the private financing component. So, it enables private financiers to come to the table at a lower cost of capital than they otherwise might, because that financing is in some way being subsidized. And the two main types of parties that do that are kind of philanthropic institutions, I guess, of one type or another, or development finance institutions.

So, the world banks of this world.

David Roberts

Which don't really have a great history or reputation in these matters.

Brett Christophers

And again, they have limited financial capacity as well. So, it's happening, but it's not happening on — it's not even a fraction of the necessary scale. So, what's the answer? I think the best way I can answer that is to say what someone else said, and I think this is really interesting. Last year, I think it was in the autumn, the outgoing energy editor at the Financial Times, I think his name was Derek Brower, who now does something else at the Financial Times. He was leaving that position and he kind of wrote this parting column.

It was almost like, "These are my thoughts, having been the energy editor for these many years." And he basically said much of what we've just said. He basically said, "Look, there's this mind-boggling amount of investment needed in the global south to do all this. And it will have to be done by rich country governments." And he actually said, this was the FT, he actually said, "The idea that that is even still debated is incredible to me."

David Roberts

Right. This illusion that you're going to sort of spark private markets that are going to kind of grow like weeds there and —

Brett Christophers

Absurd.

David Roberts

Yeah, I mean, someday, presumably, but on the timescales we're talking about, certainly not.

Brett Christophers

So, that's my conclusion: I think he's completely right.

David Roberts

That seems like the most, I mean, of all the things you're discussing, that seems the most politically, it's like the heaviest boulder to push up the hill, politically speaking. Like, it's one thing to get governments to plow more money into their own economies, right? But just to like export money flat out is politically unpopular. That's a grim thing. You don't really bring this up in the book as a possible solution, but what about just rebundling, right? What about just going back to vertical integration, which means utilities that own generating resources and plan, plan the generating resources and buy long-term generating resources and don't have the same maybe tight profitability constraints.

Brett Christophers

It's a great question.

David Roberts

What about that?

Brett Christophers

So, if you had large-scale government ownership, that's what it would look like, right? I mean, that's what it looks like in France with EDF. So, it's a great question, and I am a great believer in that model. I think that the reality is that we have transitioned towards a system which, for all the reasons we talked about earlier, is not propitious for rapid decarbonization. And away from a model, the vertically integrated model, where all other things being equal, you have a much better organizational arrangement to affect decarbonization rapidly at scale. Everything's coordinated; you can make decisions.

That means that things are joined up across the supply chain. It just makes much more sense, though.

David Roberts

We should distinguish, like the organizational structure gives them that potential. Actually, existing vertically integrated monopoly utilities are horrible, tend to be horrible, but, you know, maybe they could be good.

Brett Christophers

That's a really important point. So, one of the things people will often say when they hear about my book is, they will say, "Well, look, hang on a second, in the US, what's he talking about? Texas is flying ahead with renewables."

David Roberts

Yes. Right.

Brett Christophers

But then, you get these kinds of regulated utilities in the Southeast which are enabling decarbonization much slower. So, people say, "Surely markets in the private sector and unbundling are the answer." And it's like, "Well, no, you're comparing it with a very particular form of the vertically integrated model, which is not an ideal model, where they're operating under all sorts of kind of ridiculous regulatory mechanisms which are absolutely incentivized to keep them on the carbon trail." And so, to make that your comparator is a kind of an absurd argument as far as I'm concerned.

David Roberts

Yeah, although I mean, you could just as easily respond like, "It's all very well and good to sort of stipulate this perfect vertically integrated utility that does the right thing. But do we have examples even anywhere in the world, of a —?"

Brett Christophers

Well, I think France would be, you certainly wouldn't look to say, South Africa, an Eskom, for example. But I think France, there's lots of lessons, I think, in France. And yes, EDF, which essentially controls, you know, doesn't control the entire French electricity industry, but it definitely controls the lion's share of it across the supply chain. And yes, it's predominantly nuclear, that is, its carbon-free resources rather than renewables. But I think there's some really interesting lessons there about doing things in a much more beneficial, logical, and smart way than in the kind of, not least in the US vertically integrated utility model.

David Roberts

Another thought on the solution front is if financing is the roadblock, here is the eye of the needle through which the camels have to pass, why not just nationalize that part of it? In other words, why not have a big financial institution that is publicly funded and that is content to make 5% to 8% returns on its — why not a big green bank that would? It seems like that would solve the financing thing kind of at a stroke, wouldn't it, if you had, I mean, if it was big enough?

Brett Christophers

I think that doing stuff on the financial side is absolutely something that should be done much more aggressively. You know, there are certain institutions, say for, within Europe, like the European Investment Bank, that do this a little bit and whose financing requirements would, as I understand it, be less onerous, less profit-maximizing in nature than with private banks. But most of the financing in Europe is absolutely through the kind of commercial bank model as it is in the US. And of course, it's done in different ways in the US tends to be tax equity financing rather than straight loans.

But in practice, it's the same thing, even though it takes different forms. It's basically big financial institutions that are coming to the table to do it. And absolutely, much more can and should be done on this front. And again, China is an interesting example of this, so it's not the only one. Japan is another example. But in both of those places, the central banks subsidize the cost of capital that is provided to renewables development by commercial banks. And that's something that in Europe we've been conjecturing about for years now, but it still hasn't happened. But Japan and China are doing it.

And by my understanding, in the China case at least, it's having a massively beneficial impact precisely for the reasons that you point to. So yes, for sure, things can be done on that front. I guess my only point there politically would be if nationalizing the renewables industry sounds politically challenging in a place like North America or Europe, then nationalizing or quasi-nationalizing or effectively nationalizing finance sounds even more politically challenging in those types of places.

David Roberts

Yeah, well, we should at least say that the IRA just handed out, I think, $6 billion or something crazy like that, to establish financial institutions basically to give low-interest loans to renewables projects. I think probably $6 billion is a, you know, whatever —

Brett Christophers

It's not a lot of money.

David Roberts

Drop in the bucket compared to what you would need to do. But at least, like the idea, you know, the idea is out there. The idea exists.

Brett Christophers

It absolutely is. Yep.

David Roberts

I was debating about whether to ask you this question at all because it's kind of obnoxious and it irritates me, but I'm going to get yelled at by a bunch of people if I don't ask you. So, and I bet you've been asked this 100,000 times already, if renewables have all these problems, why not just decarbonize with nuclear? Why not just build a bunch of nuclear plants? Why go through all the trouble of trying to figure out how to make renewables work instead of just building nukes?

Brett Christophers

Fair question, to which I don't have a good answer. But what I mean by that is that the guy from the Breakthrough Institute, Nordhaus, did a review of my book where he basically said, "Christophers is a renewables guy, and ignored —" No, you misread my book. I focus on renewables because that's what the world is focusing on and that's what the world is prioritizing in policy terms and in subsidy terms and the rest of it. I don't have a view on which is better, renewables or nuclear, or on what combination. Which is, I think in most countries, you're gonna have some sort of combination that would be primarily renewables and maybe nuclear as kind of a baseload source.

I don't take a view on that. However, what I would say is that there are reasons that those who do push for a renewables-focused solution make about nuclear that I think helps us explain why the focus is on renewables. And I think those arguments tend to be mainly threefold. So, I think the first of them is a cost argument, which is basically nuclear for all sorts of different reasons, not least the kind of regulatory aspects to it, is now just really, really expensive as a generating source. So, if renewables are now relatively cost-competitive, or simply on generating terms, compared with coal and natural gas, nuclear is not.

Nuclear is really, really expensive. So if finance is a problem, then with nuclear that becomes even more problems. So I think that's the first argument people make. The second argument people make is that the time thing, which is that once you've got the necessary permits and stuff, you can build an onshore wind farm or a solar farm in six months. Even from modular reactors, you're looking at many, many years. And in the case of a traditional nuclear reactor, you're looking at ten to twelve years. And time is the one thing we don't have on our side.

So, I think the time argument is another very important one that people make. And then, I think the third argument that people make is that, like it or not, irrespective of whether nuclear is statistically safe in the round, there are public concerns of greater or lesser extent in different countries around the world that make renewables a more palatable proposition. So, as I read it, those are the three main arguments that are mounted against nuclear. And thus far, those arguments have won. But as I say, I don't have a view on that one way or another. I focus on renewables because that's what the world is doing.

David Roberts

All right, well, I thought we could conclude by asking you to do something that you scrupulously avoid doing in the book, for probably reasons of sanity and propriety. But were you a prognosticating sort —

Brett Christophers

Yes.

David Roberts

having now researched this sector for a few years, talked to a lot of people in it, looked at a lot of different countries, a lot of different policies, seen how things are going, seen the trend lines, seen everything that you've seen, what do you think is going to happen in terms of the line of electricity decarbonization being too slow for the reasons you lay out, what, how is this going to resolve itself?

Brett Christophers

Yeah, it's difficult. I mean, it's obviously —

David Roberts

"Impossible," I think, would be the way to characterize that question.

Brett Christophers

For all sorts of reasons, not least the imponderables around the kind of demand-side response, distributed generation, role of storage. But if I had to make a guess, I would say that we will continue to see pretty robust growth in renewables. I don't think there's any doubt about that. But A), it's going to be significantly slower than any of those kind of scenarios that the IEA or the IPCC puts out there for where it needs to be, and B), but obviously, relatedly, the slowness is going to be concentrated in parts of the world where those kind of economic and financing challenges are.

David Roberts

So, yeah, this is the gnarliest part of your book, honestly, the part that sticks in my craw the worst. It's like you can imagine lots of ways of solving these problems in wealthy markets. Right? In wealthy markets, whereas it's very difficult to even conceive of any solution in the places that matter the most, which are these emerging economies.

Brett Christophers

Precisely true. So, that's my best guess: the rich parts of the world will probably continue pretty fast, get there eventually, but it's going to take a heck of a long time in the other parts of the world.

David Roberts

Yeah, that's grim. Well, we've gone considerably over time.

Brett Christophers

But I think it's important.

David Roberts

Yeah, this is, you know, and I'll just reiterate what I said at the front. The book is — it's really a fantastic synthesis of information. Like, there's just a lot, there's a lot of information in there. It is not a polemic. It is not some table-pounding polemic about capitalism. It's a very close and detailed look at these markets and how they work. So, anyone who's interested in these markets, I think, for any reason, could benefit from getting through it. But, yeah, it's a lot more than you could possibly cover in an hour.

Brett Christophers

Yes, it is. But thank you for covering it in a really kind of clear and coherent way. You did that very well. So, I'm very grateful.

David Roberts

All right. All right. Well, I appreciate you. All right, thanks so much, Brett. Here's hoping things go better than we think they will.

Brett Christophers

Let's hope I'm wrong.

David Roberts

All right. All right. On that note, I'll see you.

Brett Christophers

Thanks, David.

David Roberts

Thank you for listening to the Volts podcast. It is ad-free, powered entirely by listeners like you. If you value conversations like this, please consider becoming a paid Volts subscriber at volts.wtf. Yes, that's volts.wtf, so that I can continue doing this work. Thank you so much, and I'll see you next time.