Can the “free market” solve the climate crisis?

DAN RICHARDS: From the Watson Institute for International and Public Affairs at Brown University, this is Trending Globally. I'm Dan Richards. This episode, we're actually sharing a conversation from one of the Watson Institute's other podcasts, the Rhodes Center Podcast, hosted by political economist Mark Blyth. In this episode, he talks with Brett Christophers, a professor at the Institute for housing and urban research at Uppsala University and author of the new book The Price is Wrong, Why Capitalism Won't Save The Planet.

You see, while there are still many hurdles to addressing the climate crisis, there's actually been one relatively constant bright spot over the last decade, the price of renewable energy, particularly solar and wind power, has dropped dramatically. By many measures, they're now cheaper to produce than fossil fuels. So does that mean that when it comes to a green transition, the hardest part is behind us? With wind and solar now cheaper than fossil fuel, can we just let the, quote, unquote, "market" take care of the rest? As Brett explains on this episode and in his book, absolutely not.

On this episode, Brett and Mark discuss why cheap renewable energy production won't lead to renewables dominating the energy market. But Brett's work goes further than that. In explaining this paradox, he puts the entire energy economy under a microscope and challenges the notion that the private sector will ever be able to meaningfully address climate change.

Mark and Brett dive a little deeper into the nuts and bolts of the energy economy than we might typically do on an episode of Trending Globally. But they are incredibly clear and entertaining guides for this topic, and I think you'll really enjoy it. This is a slightly shorter, edited version of the full Rhodes Center Podcast episode. If you want to listen to that, subscribe to the Rhodes Center Podcast wherever you listen to podcasts. We'll put a link for that in the show notes. All right. On with the show. Here are Mark and Brett.

[MUSIC PLAYING]

MARK BLYTH: Hi, Brett. Welcome to the pod.

BRETT CHRISTOFOROUS: Thank you for having me.

MARK BLYTH: So let me get started with this new book of yours, The Price is Wrong. How can you possibly say that? Prices are right all the time. That's what we learned in econ 101 and everywhere else. But you actually are pretty skeptical of this for two reasons. The first one is, there's a kind of assumption going around just now, and we see this in all these graphs that we see all the time, about the falling costs of renewables. That when the cost falls, people switch. You don't really think that's what actually happens in energy transitions, do you?

BRETT CHRISTOFOROUS: No, and there's a huge amount to say about that. But I'll lay out just a couple of my concerns about that way of framing things. One is like, is transitions even the way we should be thinking about the development of energy sources in society? So there's a new book just out by-- I think he's a French energy historian, and it's called More and More and More.

And his basic argument is that actually energy transitions is not what happen. We have energy additions. So we have one source of energy, and we don't replace it. We simply add new sources of energy. So oil did not displace coal. We're using as much coal globally as we ever have, so we just add it on top. And actually, when you think of it that way, it's a worrying fact that renewables are not displacing fossil fuels. They are adding. So that's the first thing to say, is, should we even be thinking in terms of stages, as he calls it?

Second one is to say, to the extent that we do have those stages, there's lots of reasons to think that it's not relative prices that have been the determining forces historically. Actually, it's a question of profitability rather than prices. If we are capitalist businesses, we don't just have costs. We have revenues as well. And what I mean by that is like, well, the idea is that you will switch from one technology to another if the costs are low. But that presupposes that you're producing the same thing.

And now in the case of electricity, people might say, well, you are. You're just producing electrons. But actually, one of the really interesting things about electricity is that different types of electricity source-- solar, wind, nuclear, gas, coal-- actually produce different types of electricity. They produce it with different degrees of regularity, with different degrees of reliability, on different production action profiles, and all of that matters intensely to revenues. So even if you do have lower costs, you might have lower revenue. And so that's another reason to actually throw this into question and say, actually, what we need to be thinking about is revenue and cost together, which is profitability.

MARK BLYTH: So expected profitability, and that's always the key. So why is that, in renewables, much more dodgy and hard to do than it is if you're knocking up, let's say, a gas plant?

BRETT CHRISTOFOROUS: Yeah. So I worked for seven years in the consulting world. And if you're looking at new investments, you forecast cash flows, and you look at the interest rate, and you look at the cash flow, and does it exceed a hurdle rate? And if it does, you go ahead with the investment. So in the renewables space, there are two different aspects of expected profitability that are problematic here for renewables developers.

So one of these is about the volatility of profitability and the way in which that volatility represents a significant hurdle to getting new renewables projects off the ground, specifically from the perspective of financing. And so to put this in very layman terms, you might be a renewables developer who is totally comfortable with the idea that electricity pricing is increasingly-- is very difficult to predict, and you'd might be totally willing to accept that.

But you're very unlikely to find a financial institution willing you to lend the money to get that project off the ground. They simply will not lend significant amounts of money to a new renewables development in view of that volatility of pricing and the unpredictability of pricing. That's the volatility angle. One thing. The other thing is simply about the level of profitability in this business. And by business, I'm talking about setting up, developing a new wind or solar farm, owning and operating it over its useful life, and selling the power that it generates.

For all sorts of interesting, wonky reasons, it's not a very high returns business, never has been. That level of profitability is itself volatile. But on average, and over time, you are looking at relatively low levels of returns. It's something in the order of, say, 5% to 7%, 5% to 8% on average in terms of an internal rate of return. And in certain contexts, that might look attractive. But in other contexts, and to different types of capitalist actor that might be interested in investing in renewables, that actually doesn't look particularly attractive. So those are the two obstacles.

MARK BLYTH: So let's take an example of that you often hear that pension funds love wind farms, or solar farms. They can afford the high upfront costs, because they've got a 20-year horizon, and their liabilities are 4% of their making 6%. They're quids in. But the vast majority of investors are not like this. And also, if you have to raise all your capital upfront and then you've got price volatility, you don't know if you're going to get money back, right?

BRETT CHRISTOFOROUS: Exactly. So that's exactly right. A, there's only a certain subset of actors that are attracted to that type of investment, and B, they're only attracted to it under certain sets of conditions, the most important of which is the ability to stabilize the volatility that otherwise exists. They then sell it on to another owner, such as a pension fund.

And what you tend to find is that it's impossible for those developers to find a pension fund or an asset manager, or whoever it might be that's willing to buy it, until the debt has been raised that will enable the project to go ahead. So the pension fund is never going to fund it entirely out of equity. They'll say, OK, we'll fund 15% of it, but you need to raise 85% of it through debt. Until you've got that financing lined up, we're not interested.

MARK BLYTH: Let's go back to the notion, which is so intuitive that you have to fight against that just simply falling costs equal higher profits.

BRETT CHRISTOFOROUS: Yeah.

MARK BLYTH: The bete noire in one of your chapters is this measurement called the levelized cost of electricity. Tell us what it is and tell us why it misleads us.

BRETT CHRISTOFOROUS: Essentially, what that measure does, or at least tries to do, is show the average cost of generating a unit of electricity. And the two key technical things about this measure are firstly, it's a measure over the lifetime of that asset. So it's saying, what's the average cost of producing a unit of electricity over the, say, 25 or 30-year period of life of this asset, a solar farm or a wind farm? It's the current average cost of lifetime production of that energy.

And people pay all sorts of attention to this metric. Now, why is it problematic? There are lots of reasons for that. And I think it's useful to think about it in terms of a hypothetical if you're, say a wind farm developer. And if 20 years ago you were facing a levelized cost of electricity of, say, $100 per megawatt hour on average over the life of your wind farm, and then thanks to technological developments and so on, 20 years later, your levelized cost has come down to $15 per megawatt hour, so they come down 85%. You would think, well, I'm quids in now because my costs have come down, so my profits have gone up. But of course, that depends on lots of things.

And in my view, the most important thing it depends upon is your ability as an electricity generator to capture and essentially privatize the benefits of those cost reductions. But of course, there's a simple thing called competition that exists in capitalist economies, or at least in parts of capitalist economies.

MARK BLYTH: Strangely, in the electricity market to the n-th degree.

BRETT CHRISTOFOROUS: Particularly in electricity markets, and particularly amongst renewable energy developers, it's an incredibly competitive space in most countries. You have thousands of owners of generators generating a product which is an undifferentiated commodity that they are selling into incredibly competitive markets. And now, what happens when those cost reductions occur? Competition effectively sees those excess profits, if you want to put it that way, get rapidly competed away. And pass downstream in large part ultimately to the very constituency that politicians want to see benefit from those cost reductions, which is, of course, US.

MARK BLYTH: US.

BRETT CHRISTOFOROUS: Consumers, household consumers of electricity. If those costs come down, they don't want to see them privatized. They want to see that benefit households in terms of their energy bills.

MARK BLYTH: So that's kind of ironic, because let's do a time machine experiment. Let's go back 100 years. And at that time when we're putting out electricity grids for the first time, the idea was, these are, quote, unquote, "natural monopolies." And what you want is a vertically integrated firm that does power generation right through to the consumer with all the intervening steps, and then you regulate the hell out of them to make sure that they've got just enough profit to keep going and to keep the capital stock alive.

BRETT CHRISTOFOROUS: Yep.

MARK BLYTH: And then that was it. That was the gig. And then particularly in the EU, which is the case I know the most about, but also the United Kingdom and others, then came the deregulatory fervor, which was essentially, well, this is ridiculous. We could lower the cost here through competition. So you unbundle this thing. And you have the generators on their own, and then you have all the different parts of the supply chain, so to speak, and then you end up with ruthless competition to the point that nobody actually can make any money out of it unless you've got a certain degree of monopoly, which is what the fossil guys have.

BRETT CHRISTOFOROUS: Yes.

MARK BLYTH: But you don't have that on the green side, right?

BRETT CHRISTOFOROUS: Yeah. Well, you have it on the fossil side upstream, I would say. Not necessarily in processing or wherever else it might be. You definitely have upstream, but you certainly don't have it in electricity generation, and you certainly don't have it in renewable electricity generation. So one of the of the questions here is like, well, have we actually historically migrated away from an industry model-- a structural model of vertical integration that actually, we would have been better off still having.

MARK BLYTH: It would have been far easier to do a transition if you already had natural monopolies that you could tell them what to do.

BRETT CHRISTOFOROUS: A, that's true. And B also, it's like, well, if you are a vertically integrated entity, think about it in these terms. And you're thinking, well, I need to supply my customer base with a certain amount of electricity, and I have two different potential sources of that electricity. I'll go for the cheaper one. But if you have separate entities distributed through the supply, you have a separate generating sector, then that kind of-- the possibility for that joined up, coordinated thinking doesn't really exist anymore. So I think we've migrated away from a system that actually would have been much more conducive to a rapid transition.

MARK BLYTH: So in a way, liberalization, once again, is a fantastic unintended consequence. The intended consequence is stuff got cheaper, but what it also meant was, and therefore, there's far less profits. And if you have all these upfront costs, et cetera, and the financing constraints we talked about, that creates a big problem. One of the other things I picked-- there's so much in the book, and I want to go through the particulars of this argument. Because I think it's intuitive that people go, OK, it's not cost. It's just profits. Yeah, that makes sense. Why does geography matter for profits?

BRETT CHRISTOFOROUS: Yeah, matters enormously for profits. So the levelized cost of energy metric, it is a generating cost. It's the cost of producing something, in this case, electricity. So one of the things that you see, wherever you look in the world, like electricity sectors and renewable and renewables look different in different parts of the world, but there's one incredibly consistent feature that you see, whether you're looking at India or China or the US or the UK or Germany or Sweden where I live. Is that there's a very prevalent geographic clustering of renewables facilities, so solar and wind farms, precisely in those parts of countries where people don't live.

And the reason for this comes down predominantly to land costs. So one of the things that's very distinctive about solar and wind that people often don't like to talk about is that in general, solar and wind farms take an enormous amount of land, and land, in some parts of some countries, costs a lot of money. You either have to lease the land or you have to buy the land.

So all other things being equal-- and they're not always equal, but all other things being equal, any renewables developer, to minimize its costs, will always want to locate where land is cheapest. So take the US. The cost of land in Montana or Wyoming is like 1% on average of the cost of land in New Jersey, OK? It's a huge difference, and so that's what they do. And so in the UK, they're all up in Scotland. In Sweden, they're all up in the North of Sweden. They're precisely where the demand for electricity is not located.

That's different for conventional power plants. Many people will know from the smokestacks and so on that actually, historically, conventional power plants have often been located very, very close to centers of demand. Now, the thing is, the cost of running the grid, maintaining it, investing in it, and so on, are shared across all participants in the electricity industry, both on the generator side and on the consumer side. So household electricity bill, you pay for power being produced, you pay for it being transported.

Generators also pay costs to have their electricity transported to where it's consumed. That cost is not included in the levelized cost of electricity. But actually, for many of them, it's a bigger cost than the generating cost. If you locate yourself a long way away from where people and industry are located, you will have, on the one hand, a pretty low generating cost because you have very low land costs. But on the other hand, if the grid operator requires you to bear the cost of your locational decision, you will have a very high transportation cost.

So here's the thing. As a renewables generator, you either locate where land is cheap, and therefore you have a wonderful look at my low levelized cost. Isn't my electricity cheap? But hang on a second, I have this really expensive transportation cost to get the electricity to where it's needed. Or you locate very close to where people are located, and the grid operator rewards you for that with very low transmission charges. But oh, look, my levelized cost is very, very high. In and of itself, the levelized cost of electricity doesn't show you anything, really.

MARK BLYTH: Here's another one that stuck out for me in the book. How can an old coal plant, near the end of its life, be more profitable than a new solar farm given the fact that relative costs dictate that coal is now more expensive than solar?

BRETT CHRISTOFOROUS: The reason for that is that what you typically don't have is developers that are sitting down thinking, I'm going to build a new power plant. And I'm choosing between coal and renewables. That's just not what happens. In the case of renewables, for example, you have renewables developers. And the decision is not coal or wind. It's renewable plant or no renewables plant.

But the second point is this, which is to think about when in the lifetime costs are incurred. And the reality, of course, is that for the most part, renewables plants, in terms of their competitiveness, are not competing with new fossil fuel power plants. They are competing, when they're selling their electricity, with power plants that in many cases have been around for decades, the costs of which have already, for the most part, been incurred.

And so there's very different levels of costs that are involved here at different parts of the lifetimes. And it's that simple point that you are competing with a plant where the costs have already been sunk, they've already been incurred. Which, again, means that those levelized cost metrics, which do look at lifetime costs, are actually not that relevant again when we're looking at point in time comparisons.

MARK BLYTH: Specifically when I'm the renewables sector and I've got all those upfront costs that we spoke about already.

BRETT CHRISTOFOROUS: Yes.

[MUSIC PLAYING]

MARK BLYTH: So let's finish up with a couple of macro questions. So can we just work around this profit problem by just saying, look, we need to do this?

BRETT CHRISTOFOROUS: Yep.

MARK BLYTH: We do this all the time. Healthcare in America, I mean, there's not a market. It's just subsidies. Right?

BRETT CHRISTOFOROUS: Yeah.

MARK BLYTH: Defense industrial complex. These things are massively subsidized. We subsidize everything. Why not just admit this is what's going on and just subsidize the hell out of it and get it done?

BRETT CHRISTOFOROUS: There are lots of different reasons for that. Many parts of the world, governments don't have the capacity to provide that level of support. I mean, the US government can do it, fine. But if you're in Vietnam or Senegal or Namibia--

MARK BLYTH: Anybody--

BRETT CHRISTOFOROUS: --different bloody challenge.

MARK BLYTH: Anybody with a real current account constraint, yeah, not really easy to do this.

BRETT CHRISTOFOROUS: So that's one thing. Second thing, I think, is that not least because of the kind of hegemony of the narrative of levelized costs. Governments have been led to believe, in fact, told by many economists, that they won't need to provide subsidies indefinitely. That as those costs come down, they will be able to essentially attenuate those subsidies and even remove them, and that renewables will stand on their own two feet. Now, when they've tried to do that, they found it doesn't work. Investment collapses. But there's still this lingering belief that you shouldn't have to subsidize them.

MARK BLYTH: Right. And just to tie a bow on that, this brings together everything we've been talking about. Because of everything from volatility to geography to latency, the whole lot, you have a thing that isn't like the other things. They're all moving electrons, but one of them's kind of got a lot of upfront costs and has a lot of fragilities--

BRETT CHRISTOFOROUS: Yes.

MARK BLYTH: --if you want to put it that way, right?

BRETT CHRISTOFOROUS: Exactly.

MARK BLYTH: And even if that gets really cheap, you still have all those problems and you still have all those fragilities. So when you pull out the subsidy, you've got even less chance of it being financed.

BRETT CHRISTOFOROUS: Yes. So in answer to your question, shouldn't we just admit that? Well, A, we already are in some parts of the world. But B, not everywhere can do it. And C, it depends what your range of alternatives that you think are politically and economically viable come down to, is the way I would put it.

So if, for example, you were to say to me, look, here's the choice. On the one hand, we continue to subsidize BlackRock and co in perpetuity to build the renewables we need to help win the world off fossil fuels. And that means nice, fat profits for BlackRock. A, that's the one choice. The other one is, we take what you might think of as a kind of a leftist, politically pure position.

We say, no, we can't swallow that.

MARK BLYTH: Yes.

BRETT CHRISTOFOROUS: We don't want to do that. Let's not provide that de-risking because we don't find that politically tolerable. and then what happens is the investment doesn't play? I will take option A every day of the week, right?

MARK BLYTH: But there's an option C, which is to bring it home. Why don't we just own it ourselves?

BRETT CHRISTOFOROUS: Well, that's the thing.

MARK BLYTH: These are not difficult technologies. These are known technologies.

BRETT CHRISTOFOROUS: And that's the argument, which is that, that shouldn't be the range of potential opportunities there. There is another way to do this. And of course, if BlackRock doesn't think that 5% to 7% internal rate of return is sufficient to justify betting the house on renewables, well, it should be more than sufficient for the public sector. It's not like you would-- as the public sector, you would be borrowing to finance assets that don't generate a return. This is revenue-generating assets--

MARK BLYTH: Exactly.

BRETT CHRISTOFOROUS: --that wash their face, which that should be sufficient for the public sector.

MARK BLYTH: So if the public sector is borrowing 3% real and is earning 6%, you can make the argument that you're putting assets on the balance sheet that reduce the debt stock?

BRETT CHRISTOFOROUS: Yes, exactly.

MARK BLYTH: Now, I've been making this argument for years. And yet we now have a chancellor in the UK who some of us thought at least might take some of this on board. But governments seem to be just unable to take that on board the notion that they can own the assets that earn a return, which would then be balance sheet positive, which would reduce their debt rather than adding to it, and then would give us security of supply going forward.

BRETT CHRISTOFOROUS: Yeah. And keep household bills relatively low for energy.

MARK BLYTH: Why is it so difficult for them to make that leap?

BRETT CHRISTOFOROUS: Yeah, I have no idea. I honestly don't know the answer to that question. To my mind, for certain parts of the world, that is the obvious logical way to speed things up. Lots of people don't like hearing this, but let's look at China. China is a significant different case from the rest of the world insofar as two things. One, when it comes to renewables, it's not the same political economy.

So 95% or so of wind energy development in China is in the hand of state-owned enterprises who are borrowing from state-owned financial institutions whose debt is subsidized by a state-owned central bank, and all of this is being directed to one extent or another by Beijing and/or provincial authorities. It's a state-led project. And oh, 65% of new renewable capacity investment in Twenty Twenty-Three globally was in China, and 95% of the increment investment in Twenty Twenty-Three on Twenty Twenty-Two was in China.

And to me, that's not a coincidence that the public-led one is the one that's doing it, and the countries that are dependent on private investment, and therefore the profit imperative, are the ones that are disproportionately struggling. It's clearly the case that only some parts of the world and only some sovereigns have the credible capacity for that type of borrowing and investment that we're talking about here. So it's not a universally applicable solution by any stretch of the imagination.

MARK BLYTH: But just as a thought, to go back to the UK as an example of someone that's in between these two situations. That is to say, they're not the United States or China, but they're not someone who's utterly debt dependent or so on and so forth--

BRETT CHRISTOFOROUS: Yeah.

MARK BLYTH: --right? So back to the question of why they don't seem to think this through, I'm persuaded by an argument that's been made by Don Davies. Here's this great idea of when you have a state, for example, and you start to hang out with consultants and they start to do things, or if you privatize things, what you do is you take that thing, whatever it is, and you put it beyond the informational boundary of the state.

And then if you decide later on to take it back, you can't, or at least it's really difficult to do because the people who knew what this thing was have been retasked moved on or retired. And also, the state itself has changed in such a way that it's really hard to interface this back end. So what you think are advisable choices actually become structural logics that are very hard to reverse.

BRETT CHRISTOFOROUS: Yeah.

MARK BLYTH: So perhaps it's the case that not just the neoliberalization of markets has made the transition harder, the neoliberalization of the state has made it harder as well.

BRETT CHRISTOFOROUS: Yeah. I mean, I buy that. I mean, I think that, well, yes, that's true, but public ownership and investment in something like renewable energy, it doesn't demand a huge amount of expertise. You're not saying the public sector needs to build it. You can just contract. And that's the New deal in the US, was publicly-owned infrastructure. But it private contractors that built it, and it would be exactly the same, get the private sector to build it, but not own it and operate it. It doesn't take rocket science to actually do this sort of thing. And of course, you don't necessarily have to get the public sector to do with it, but the public sector has to be able to conceive of the possibility of doing it.

And the limited interaction I've had with people advising policy makers on not least energy is that you're talking about a constituency that, to a significant extent, doesn't really know what it's talking about when it comes to these sorts of things. They're just not informed. And to the extent that they are informed, they're informed by people who are telling them about levelized cost of energy. And so there is this kind of-- even if there was a different attitude within governments like the UK to things like investing in revenue-generating assets, even then, I think you would face a challenge which is related to the limited understanding of what's going on in the energy world.

MARK BLYTH: So we've got a lot of work to do.

BRETT CHRISTOFOROUS: Yeah, we have.

MARK BLYTH: Let's leave it there. Great to talk to you, Brett.

BRETT CHRISTOFOROUS: Thanks, Mark.

[MUSIC PLAYING]

DAN RICHARDS: This episode was produced by me, Dan Richards and Zach Hirsch. Our theme music is by Henry Bloomfield. Additional music by the Blue Dot Sessions. If you liked this episode, be sure to subscribe to the Rhodes Center Podcast wherever you listen to podcasts. And if you haven't subscribed to Trending Globally, make sure to do that too. We'll be back in two weeks with a new episode of Trending Globally. Thanks for listening.

[MUSIC PLAYING]