Why capitalism can’t solve the climate crisis

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MARK BLYTH: From the Rhodes Center for International Economics and Finance at Brown University, this is the Rhodes Center Podcast. I'm the center's director and your host, Mark Blyth. There are still many hurdles to address in the climate crisis, but in case you missed it, there's been one relatively bright spot in 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 when it comes to the green transition, we are set? Obviously, stuff is super cheap now. It's cheaper than coal. You swap out coal, we're good. We can just sit back, and the market is taking care of it, right? According to Brett Christoforous, a professor at the Institute for Housing and Urban Research at Uppsala University in Sweden and author of the new book, The Price is Wrong, Why Capitalism Won't Save The Planet, this is sadly not the case.

You see, the problem with capitalism saving the planet is that capitalism cares about profits, not costs. And as long as that's the case, it will not invest in renewables at the scale needed. Indeed, the paradox of falling prices is that it only results in rising profits if the profits can be captured as rents. But if they are competed away in competitive markets, like the kind of markets we built for electricity over the past 20 years everywhere, then falling prices may mean falling profits. And so the investment goes elsewhere.

In his book, Brett lays out these and many other reasons why cheap, renewable energy production won't necessarily lead to renewables dominating the energy market. In doing so, he puts the entire energy economy under the microscope and challenges the notion that the private sector will ever be able to meaningfully address the climate crisis. Here's our conversation. Hi, Brett, welcome to the pod.

BRETT CHRISTOPHERS: 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 an 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 CHRISTOPHERS: No, 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. There's a real narrative that says, let's look at past energy transitions in order to understand the drivers of the current one and why it's not happening as fast as it should.

There's a number of reasons I worry a bit about this. 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?

The 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, even though the core historiography of these transitions, if we call them that, and I suggests that it is, and I'm thinking in particular, although not only of the work of Andreas Malm, who, in his book, Fossil Capital, he really attacked, I think, pretty persuasively that idea that it was about relative prices. And he thinks there was something else that was going on there.

MARK BLYTH: So what was this something else?

BRETT CHRISTOPHERS: He thinks it's that, 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, it's like, well, the idea is that you will switch from one technology to another if the costs are lower. 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 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. I was reminded, when I was reading the book of Keynes' idea of the marginal efficiency of capital, that, essentially, what an investor does is think about the lifetime income that would accrue from the asset, and then does a discount of that over the future, and then essentially says, is it worth it for me to do it? And that's essentially what you're saying about expected profits. 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 CHRISTOPHERS: Yeah, on the theoretical side, I mean, I think there's Keynes, but you could just as equally go back to Marx. And actually, the classical political economist in general, Anwar Shaikh, has this lovely phrase where he calls them profit side economists rather than supply side or demand side. It's a really nice way of putting it. And it's all about profitability and it's about expected profitability.

And it's right. I worked for seven years in the consulting world. And that way that you say Keynes puts it, that's what happens. If you're looking at new investments, you forecast cash flows, and you discount them back, and you look at the interest rate, and you look at the discounted cash flow, and does it exceed a hurdle rate? And if it does, you go ahead with the investment. So that's what happened. So that's how we should be thinking about it, I think.

So in the renewable space, I mean, I think there's lots of different components to this. And I think the way into it, for me, the way I approach this is by saying, look, this is problematic for getting renewables investments, by which I'm talking about solar and wind farm investments off the ground, for two different reasons. 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. It's a point about the degree to which pricing and profitability in the electricity sector is very, very volatile and very, very difficult to predict. 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 increasingly is very difficult to predict. But you 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.

MARK BLYTH: They basically can't deal with the vol. They will not know if they're going to get their money back, if it could be $5 a kilowatt, or 50, or minus 5.

BRETT CHRISTOPHERS: Exactly. And 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. So there has to be some mechanism to stabilize future pricing and therefore future profitability. 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 the business of renewables deployment, 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. It 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. And the assumption there is that interest rates are low. They're not at the moment, but they are. And therefore, they can afford the high upfront costs because they've got a 20-year horizon and their liabilities are 4% and they're making 6% if their 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 CHRISTOPHERS: Exactly. So that's exactly right. So 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 CHRISTOPHERS: 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 CHRISTOPHERS: What the levelized cost of electricity is is a measure that is-- it's referred to ubiquitously within the energy world and within the energy economics world. And essentially what that measure does, or at least tries to do, is show the average cost of generating a unit of energy, in this case, electricity, and in the case of electricity, the standard metric is a kilowatt hour or a megawatt hour 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. And then it's a discounted levelized current cost. So it takes those future costs and discounts them to the present. So 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 were, 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: And, strangely, in the electricity market to the n-th degree.

BRETT CHRISTOPHERS: 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 a undifferentiated commodity that they are selling into incredibly competitive markets.

And now what happens when those cost reductions occur and generating companies try to capture the benefits of that, they fail to do so because 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, consumers, household consumers of electricity. If those costs won't 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: 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 got just enough profit to keep going and to keep the capital stock alive. 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 CHRISTOPHERS: Yes.

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

BRETT CHRISTOPHERS: 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 it 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 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 CHRISTOPHERS: 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, the possibility for that kind of 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 has had 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, in 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 CHRISTOPHERS: Yeah, it matters enormously for profits. So the levelized cost of energy metric includes some costs, but not other costs. 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 renewables look different in different parts of the world. They get produced by different kinds of companies, and so on and so forth, for different reasons.

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.

Now, of course, A, 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. And, of course, 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.

Now, grid operators very rarely require generators to bear the full cost of their decision, but they require them to bear a significant amount of it. So here's the thing. You can't have your cake and eat it. As a renewables generator, you either locate where land is cheap, and therefore, you have a wonderful look at my lovely, shiny, 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. So 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 CHRISTOPHERS: The very idea that levelized cost comparisons is something that capitalist actors that are looking at investing in energy factor in and think about is actually just simply beyond the point. And 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 happened. 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 CHRISTOPHERS: Yes.

MARK BLYTH: We'll let's talk about the way in which, at least in highly deregulated markets, electricity is actually traded because we started with the generators. We just did a little bit there on the people who shove it around, the transportation network. Let's get to how it's actually traded. I have to say, it's a very brave chapter to write because, god, is this technical.

BRETT CHRISTOPHERS: Yeah, yeah.

MARK BLYTH: But it's really worth getting through it. So there's a couple of terms in here. The spot market, merit order dispatch. Can you just give us a quick overview as like, what is this thing? How does it work? Why do we have it?

BRETT CHRISTOPHERS: Yeah, and if you were a nerd like me, this stuff is awesome. I love this stuff, but I'm not like a particularly normal person. But basically the way it works, and as you say, you made the important point, is we are talking about liberalized markets here, not markets in which you still have regulated vertically integrated monopolies.

We're talking about liberalized markets, where you have competing generators and you have competing resellers of that electricity who meet in the market. So you have generators selling into the so-called spot market, and then you have the companies that we households interact with, the retailers, who are buying that power in that market. Electricity retailers are just glorified traders. They're buying at one price and selling at another. That's what they are.

To somewhat simplify a complicated picture is this. The role of the grid operator is to balance supply and demand. If you don't have a balance of the amount of electricity that's being put onto the grid and that which is being taken off the grid, you're in trouble. You're going to get blackouts. The grid is going to--

MARK BLYTH: Burn outs, the whole lot.

BRETT CHRISTOPHERS: Exactly. So their job is to balance it. And so for any particular half hour or hour slot in time, the grid operator will have a pretty decent sense of how much demand is going to be. And so what happens is the market operates primarily on a day ahead basis. And so what happens is that for every half hour slot it typically is, the next day, the grid operator says, OK, I have this much demand that I know we're going to have pretty much.

And then it says to all the different generators that are out there within the particular relevant geographic region, how much power will you be able to generate and put on the grid for that half hour period? And what price will you sell it for? What price are you willing to sell it for? What's your bid price?

And so all the generators do their bids for each half hour period. With renewables, it's not that clear because the wind might not be as forecast and the sun might not be as forecast. So on the day itself, there's a balancing mechanism, it's called, to iron things out both on the demand and supply side. But let's assume their forecasts are right. So they bid into the market. And basically what the grid operator does is it takes all those bids and it stacks them on top of one another.

At the bottom, it puts the cheapest bid and then it goes up the so-called bid stack, and it goes all the way up that stack in ascending order of bid price, until it has a cumulative amount of supply to match the cumulative amount of demand that it knows it's likely to have for that half hour period. So typically, the cheapest bids in any market will typically be the renewables guys. Then you'll get coal, assuming there is coal. Then you'll get natural gas. And then at the top, you'll normally have nuclear. Nuclear is the most expensive, typically.

And so if you were in a part of the world, where, for example, one day, it's a really windy period and there's not much demand, it might well be the case that the grid operator only has to go so far up in the bid stack that wind suppliers will supply all the electricity, because it's windy and there's not much demand. But if suddenly there's no wind, and there's no sun, and there's a shitload of demand because it's cold or whatever else it might be, or hot, they will have to go all the way up the bid, stack it, potentially, all the way up to nuclear.

Now, here's the thing, is that it goes up to that and it takes the so-called marginal provider, the marginal supplier, which is the last bit it has to take to meet cumulative demand. And it looks at the bid price for that marginal supplier, which, if it's a win supplier, it might be $10 per megawatt hour, if it's nuclear, it might be $100 per megawatt hour. And it says, OK, I will accept all the bids up to that marginal bid, and I'm going to give them all the same price.

MARK BLYTH: Doesn't that make the renewables at the bottom of the stack much more profitable?

BRETT CHRISTOPHERS: Yes and no. Yes.

MARK BLYTH: I thought it was too good to be true. Tell me how.

BRETT CHRISTOPHERS: Well, so, yes, it does, insofar as--

MARK BLYTH: I mean, I'm producing at 10. I'm selling at 100. I got 90. I'm quids in, right?

BRETT CHRISTOPHERS: Absolutely. So, yes, it does. But the point is that the single price that everyone gets is that marginal price. So it's the price of the last bid that is accepted that everyone gets. So, yes, if it's nuclear, it's 100. And irrespective of how much it costs you to produce that, everyone gets the same price. So, yes, in theory, that makes renewables really profitable, at least at those moments when--

MARK BLYTH: That happens.

BRETT CHRISTOPHERS: When that happens, which doesn't always happen. And actually, as many listeners will know, there was a big old energy crisis particularly in Europe, but not only in Europe, in 21, 22, where this was what happened, was that you had-- because of what was going on in Ukraine, shortage of natural gas supplies, you had a real spike in natural gas and other commodity prices. And therefore, at the times of day when natural gas was the marginal unit of supply, suddenly, you had very high gas prices and therefore very high electricity prices.

And everyone said, well, look, these renewables, guys, their costs are really, really low, but suddenly, they're getting these hugely inflated prices for their electricity, which bear no comparison to their costs. They're making enormous windfall profits. Well, yes and no. So, yes, if they were selling at that price. For those moments of the time when that was happening, that was true.

But here's the thing, which is that the number of renewables generators that are actually in practice earning money at that spot price is actually quite limited because the volatility we talked about earlier means they can't get their projects off the ground if it will be the case that they are selling at that spot price. So actually, to get their projects off the ground, they have to find some mechanism of long-term stabilization of the price at which they will sell their power, which means that they're actually often not selling at that electricity price at all.

So what happened, for example, in the UK during the energy crisis was government said, OK, we're going to levy windfall taxes on these renewable variable generators because they must be making windfall profits. But when they actually began to look at it, they found, oh, actually, they're not because they are supported by certain mechanisms which mean that they're actually not selling at that price at all. But that's basically the way the market works.

And what it means, of course, is that you can get these enormous swings in volatility because one minute, the market price, the clearing price is being set by renewables, who might be bidding at most $10 per megawatt hour. But during an energy crisis the next hour, the marginal price can be set by a nuclear plant or a gas fired plant, where the cost is $500 per megawatt hour. So it swings wildly.

MARK BLYTH: So with those swings, you've got a problem, particularly on the renewables side.

BRETT CHRISTOPHERS: Yes.

MARK BLYTH: And we've spoken about the volatility before. But there's also that phenomenon where you get negative prices in these markets. What's that all about?

BRETT CHRISTOPHERS: Yeah, so in exactly these types of markets we're talking about, there has been an increasing frequency in recent years of moments during which the clearing bid price is negative. And that can happen for a variety of different reasons. And let me just throw out two.

The first of those would be that if you are, A, for example, a nuclear facility and you can dispatch a given and predictable amount of power, there is a cost to you, not just in terms of the fuel, for example, but there is a significant cost involved in terms of essentially switching on and switching off your power. And what that means is that you might be willing, say, over a three-hour period, if you want to sell in period 1 and 3 at very positive prices, you might be willing to incur a very low price or even potentially a negative price during the hour in the middle--

MARK BLYTH: Because you can't stop.

BRETT CHRISTOPHERS: --so as to avoid the cost of switching off. This happens even in the fossil fuel world. But it happens happened particularly in the renewables world. In many countries around the world, the types of subsidies that governments have offered to try to incentivize renewables development mean that you're essentially getting a subsidy to the price at which the market clears.

The way to think about it on the renewables side is this. Say you have a cost of $40 to deliver a particular megawatt hour of electricity, but say you are getting a $50 per megawatt hour subsidy from the government. Well, you can successfully sell your electricity at minus $5 per megawatt hour because you're still making a profit from that. So it's a function predominantly of the nature of the subsidies that exist in this market, that you can sell your electricity at a negative price and still make profits because of the subsidy that exists.

MARK BLYTH: But in the aggregate, that must depress prices. So you've got a double whammy with the volatility. So we've got our original financing problem, a big upfront costs, and we don't know how much we're going to get back because it's too volatile.

BRETT CHRISTOPHERS: Exactly.

MARK BLYTH: Then we've got our second step in that one, which is essentially the spot market that we spoke about. And the spot market basically means you've got these very high prices that in theory, you could get, but the chances are you're not going to get it because you're not there at the right time.

BRETT CHRISTOPHERS: Exactly.

MARK BLYTH: It's latency issues. It's geography issues, all those sorts of things, the financing thing. And then we come back to it and basically, well, if we are there and we're in the mix, what we're going to do given our subsidy structure is we're going to drag the price down.

BRETT CHRISTOPHERS: Yes.

MARK BLYTH: And while again that might be good for the end consumer, it's actually crap for the industry if you want to roll it out.

BRETT CHRISTOPHERS: Yeah, that's what's referred to in the industry as price cannibalization. The greater the level of renewables penetration across a grid, and therefore the more of the time that renewables are essentially setting the market price, the less good that is for future renewables investment because it's a lower price. So it's like the success of renewables cannibalizing the future of renewables by virtue, paradoxically, of their own success.

MARK BLYTH: So if you follow that through, it's not just that the issue isn't cost, it is profit. It's that when you're making a profit, you're actually lowering your costs to the point that you're harming the profit even further.

BRETT CHRISTOPHERS: Yes, exactly.

MARK BLYTH: Wow. See, people are not thinking this through, are they, when they just look at that graph of all those--

BRETT CHRISTOPHERS: No, no, no, no, which is why I say you should ignore the levelized cost of energy completely, because it really doesn't tell you anything very significant.

MARK BLYTH: So let's get to come out from this a little bit and just go to finish up with a couple of macro questions. So given this profit volatility and price volatility, if you think about the subsidies, we haven't really spoken about them, but feed in tariffs, et cetera, basically you're bribing people or producers by subsidizing their cost of capital, which is implicitly, if not explicitly, basically a profit guarantee.

BRETT CHRISTOPHERS: Yes.

MARK BLYTH: And this industry cannot live without them.

BRETT CHRISTOPHERS: No.

MARK BLYTH: So can we just admit that's the world that we're in and work around this profit problem by just saying, look, we need to do this? We do this all the time. Healthcare in America, I mean, it's not a market, it's just subsidies. Defense industrial complex. These things are massively subsidized. We subsidize everything. Why not just admit this as what's going on and just subsidize the hell out of it and get it done?

BRETT CHRISTOPHERS: Yeah, I mean--

MARK BLYTH: Isn't that the IRA to a certain extent?

BRETT CHRISTOPHERS: Yeah, that is exactly the IRA. And what I was going to say before you said that is that, I mean, essentially, that's what we are doing. I mean, we are admitting that, I think, implicitly.

MARK BLYTH: But it's still not working then, right?

BRETT CHRISTOPHERS: Well, no. And I think that 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, a different bloody challenge.

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

BRETT CHRISTOPHERS: So that's one thing. The 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: 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, will you have a thing that isn't like the other things? They're all moving electrons, but one of them has got a lot of upfront costs and has a lot of fragilities, if you want to put it that way.

BRETT CHRISTOPHERS: 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 CHRISTOPHERS: 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 it, 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 & Co in perpetuity to build the renewables we need to help wean the world of 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 leftist, politically pure position. We say, no, we can't swallow that.

MARK BLYTH: Yes.

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

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

BRETT CHRISTOPHERS: Well, that's the thing.

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

BRETT CHRISTOPHERS: And that's the argument, which is that that shouldn't be the range of potential opportunities. 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, then, well, it should be more than sufficient for the public sector. It's not like, 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 CHRISTOPHERS: --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 CHRISTOPHERS: Yeah, 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 CHRISTOPHERS: And keep household bills relatively low for energy.

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

BRETT CHRISTOPHERS: 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 financed the two students, 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 renewable capacity investment in Twenty Twenty-Three globally was in China, and 95% of the increment in 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. So back to the question of why they don't seem to think this through.

Persuaded by an argument that's been made by Dan 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 CHRISTOPHERS: Yeah.

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

BRETT CHRISTOPHERS: Yeah, I mean, I'd but 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-- I mean, the new deal in the US was publicly-owned infrastructure, but it was 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 deal 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. Even if there was a different attitude within governments like the UK's 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 CHRISTOPHERS: Yeah, we have.

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

BRETT CHRISTOPHERS: Thanks, Mark.

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MARK BLYTH: This episode was produced by Dan Richards and Zack Hirsch, with production assistance from Sabrina Klimek. If you like this episode, leave us a rating and a review on Apple, Spotify, or wherever you listen, and be sure to subscribe to the show while you're at it. We'll be back soon with another episode of the Rhodes Centric Podcast. Thanks for listening.