An onshore wind farm near Biggleswade in Britain, 06 September 2023. EPA-EFE/NEIL HALL


Profits not prices drive renewable development, new book says


In his new book The Price is Wrong: Why Capitalism Won’t Save the PlanetBrett Christophers argues there’s a widespread misconception about what’s needed to expand deployment of renewables and transition away from fossil fuel generation.

For years, many analysts and commentators promoted the idea that cheap electricity from solar and wind power generation was the key to unlocking an energy revolution that would significantly diminish fossil fuels’ contribution to power generation systems. But what matters far more are profits, argues Christophers, a professor of human geography at the University of Uppsala in Sweden, whose research focuses on the intersection of climate and finance.

Electricity and heating are the biggest sources of greenhouse gas emissions, which is why replacing coal and gas-fired generation with cleaner alternatives remains the main focus of the low-carbon transition. This interview has been condensed and edited.

Bloomberg Green: Why is it important to focus on profits instead of costs when we talk about decarbonizing the grid?

Brett Christophers: There’s this widespread argument that the economics of renewables work and that the only remaining significant obstacles are political and in the planning realm around permissions. The book pushes back quite forcefully against that argument and suggests that that’s a very partial and misleading perspective on the economics of the transition.

The basic argument is simple and it’s something that the world doesn’t want to admit: The business of developing and owning and operating solar and wind farms and selling the electricity is kind of a shitty business. It’s really not a very attractive business. It’s a very competitive business where returns are not just low, but volatile and difficult to predict. All of that has a chilling effect on investment in that sector.

Whether new solar or wind farms get built is ultimately about the expected profitability of those assets. Even though the generating cost aspect has become increasingly beneficial over time, that doesn’t necessarily mean that the expected profits are going to be there.

BG: What’s different about profits for renewables versus fossil fuel generation?

BC: Generating costs are only part of the costs that a company that owns and controls a solar or wind farm, and sells the electricity, incur. There are also costs associated with delivering that power to where it gets consumed.

For renewables the delivery costs tend to be higher than they are for conventional power plants because conventional power plants on average tend to be located closer to centers of demand. That’s because unlike conventional power plants, renewables like solar and wind farms require huge amounts of land to produce significant amounts of power.

If land costs in Wyoming are 1 per cent of the land costs in New Jersey, then of course you’re going to locate in Wyoming. But then that means that you have disproportionately higher delivery costs. The generating cost of electricity for solar and wind farms is now very low. But it’s low in significant part because the delivery costs are high.

BG: Given the barriers for green power generation, what should be the policy path for governments looking to decarbonize their grids?

BC:  Unless governments are willing to either assume the burden of renewables development through public ownership, public financing or essentially compel private firms to build renewables as they do in wartime, they will have to keep subsidies and tax credits in place indefinitely or else renewables investment will collapse because of the unfavourable economics. The Inflation Reduction Act is a testimony to that.

BG: What about all the one-to-one power purchasing agreement deals that have happened without subsidies? Does that negate your thesis?

BC: No. Amazon is far and away the biggest counterparty to those agreements, [which] have become an important alternative source of project bankability in place of government support mechanisms. The argument the book makes, however, is that that is an inherently limited source of alternative bankability. There just aren’t enough Amazons and Googles out there and enough credible counterparties to those power purchase agreements in order for it to represent a significant alternative in the long term.

So it is and will continue to be an important driver of renewables development by providing that bankability but it’s inherently limited. There’s a massive imbalance between the limited number of parties on the purchasing side and the huge number of developers on the other side, which means the developers get a raw deal and so the profitability there tends to be relatively constrained as well. So it’s never going to be the kind of silver bullet that lots of people are hoping it might be.

BG: Fossil fuel companies make big profits because they don’t pay a carbon price. So isn’t the case you’re making that renewables aren’t profitable really a case for a carbon tax on fossil fuels?

BC: In part it absolutely is an argument for larger carbon taxes on fossil fuels. When a company that is considering a development in wind and solar considers making that investment sometimes it’s a fossil fuel company like a BP that is comparing it with the returns available in fossil fuels. But most of the time it’s a company whose business is renewables development, and the question is not fossil fuels or wind farms. It’s wind farm or no wind farm.

Yes, for part of the market that carbon taxes argument comes into the equation. But for part of the market, it comes down to building a wind farm, leaving the money in the bank or putting it in Treasuries.

BG: The book is about a decarbonizing electricity. Would any of the lessons you learned apply to any other sectoral decarbonization?

BC:  Yes, in general terms. If you’re thinking about decarbonization as something that is being led by the private sector and is expected to be led by the private sector, whether you’re talking about electricity or something else, then the question of profitability and expected profitability, and the ability to raise finance that is affordable and will enable profits to be made, is a universal calculus.

To contact the author of this story:
Aaron Clark in Tokyo at [email protected]