Are We Doing Decarbonization Totally the Wrong Way?

Published May 29, 2024, 8:00 AM

The cost of solar has been plunging for years. Everyday there's a new headline about growing installation of renewables or batteries, or some other sign of progress when it comes to decarbonization. But there's still a long way to go and, in the meantime, the US continues to add new fossil fuel generation. So is there something wrong with the mechanisms we're using to change our energy mix? On this episode, we're speaking with Brett Christophers. He's a professor at Uppsala University and the author of the new book The Price is Wrong: Why Capitalism Won't Save The Planet. His basic argument is that using market-based mechanisms will conflict with the imperative to clean the grid and that the incentives aren't aligned for both goals. We discuss the economics of clean energy production, and why they don't lend themselves to a rapid buildout.

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Hello and welcome to another episode of the Odd Lots Podcast.

I'm Jolle Wisenthal and I'm Tracy Alaway.

Tracy, here's something that really frustrates me, or I find kind of weird.

You know.

I see these charts a lot of times. They get posted on Twitter and it's like, oh, look at the incredible like plunge in solar production costs or the incredible advance in you know, how much cheaper it is getting to install solar. And then I see these charts where it's like more and more of our energy is coming from solar.

So it's like, why do you hate environmentalism?

No, I don't say something I'm not saying, but if the thing is getting cheaper and the volume of it is growing, why aren't electricity bills like down ninety percent? Why is the electricity not gotten a new chuaber?

Yes, So you know, I have that house in Connecticut, which means that I follow ever source news quite closely. And eversource raised their rates because they said they needed to make more investment into renewable energy, and then just recently they said they're actually pulling back on some of their renewable energy investments. But unsurprisingly, perhaps rates aren't actually going down. But I think it's a frustration that a lot of people share, and one that probably says a lot about the way renewable energy currently works.

By the way, on that thing is like, oh, we have to raise prices because you're making these investments. That was actually a really interesting nugget that I had forgotten about from our recent episode when we went to Mount Airy and we talked to the CEO of Unified, the textile company, and there was a line in there where he said, Yeah, energy is obviously a big component of our costs, and it's gone up because the utility is making all these renewable energy investments. So like, there's something weird about this right for energy, in which here you have this thing that's getting cheaper and cheaper, there's more and more of it. Obviously we know that decarbonization or electrification and decarbonization are major priorities, So it's like, what's happening Why. I just like, like it's hard for me to wrap my head around, Like when are we going to see the fruits of all this?

Yeah, it feels like the natural path of capitalism here, or technological adoption where you would expect, you know, as this particular technology becomes more popular, more efficient, more useful, prices would come down and it would start to proliferate. It doesn't really seem to be happening quite that way.

You know, we need you know, we need that like the kool aid man to jump through the window and bring up Jevin's paradox here. It's like, aha, you made the fallacy of thinking that is energy comes down and gets cheaper.

Where's the where's the paradox collects? And that's what we need the airhorn to go off.

So obviously especially in the US right now, but I think globally and the doing some similar things in Europe, but certainly in the US. We have the Inflation Reduction Act, and you hear a lot about like these, like the public private partnerships, and we're going to unleash the power of capitalism, and we're going to unleash market forces. And because capitalism does something really well, which is like drive for cheapness and efficiency and all this, you know, that's the sort of idea and we're going to nudge it along with subsidies and tax credits et cetera. We're going to sort of have these like powerful capitalist actors come and deliver us this world of cheap, clean electrified energy.

I mean, I do feel like things are changing a little bit on that front. And you mentioned the IRA just then, but yes, you're absolutely right. At least in the States and you know, large parts of the West, a lot of the renewable energy transition is still this like kind of weird half measure where it's like private capital meets for the most part government subsidies.

Right, So the question is like, are we doing it wrong? What is the role of private capital? Do we need private capital to invest in all this? Can the sort of the things that capitalism good at deliver us cheap clean energy? I'm very excited. We have the perfect guest today. We're going to be speaking with Brett Christophers. He's a professor of geography at Uppsalo University in Sweden, and he is the author of a book that came out this year, The Price is Wrong, Why Capitalism Won't Save the Planet, and it's a deep dive into how these energy markets work. So, Brett, thank you so much for coming on.

Odd lots, thanks for having me.

It's great to be with you.

Why don't you just start by telling us the basic thesis of your book, which seems to be, you know, you say why capitalism won't save the planet, or why why market forces won't save the planet, why it won't deliver us that world of abundant, decarbonized energy.

Sure, the basic thesis of the book is as following, but it's important to preface it with two kind of bits of contextual information that are really really important to understand. So the first of those is how the world is approaching the job of electricity sector decalanization in economic terms, And what I mean by that is to say that for the most part, we are relying on the private sector to do this. So governments, accepting certain important places like China, are keeping out of this in terms of the actual role of energy investment and ownership and operation. They're expecting the private sector to drive this forwards, but with the helping hand from government in various different ways, which we can talk about, and the Inflation Reduction Act is obviously a very important example of that. So the private sector is being expected to do it. The second thing it's important to say by context is what the private sector is being expected to do, and for the most part, solar and wind are the key things that the future, i guess is being hung on. So yes, there will continue to be a role for things like nuclear and hydro, and that will vary to different degrees in different countries, but for the most part, we're kind of betting the house on solar and wind. Coming to our aid now, with those two bits of information said, the basic argument of the book is that in so far as we're relying on a private sector, and in so far as we're focusing on solar and wind, that's a problem because solar and wind, and I'm not talking here about the manufacturing side of it, I'm talking about the deployment side. Building the solar and wind farms, owning them, selling the electricity they generate is a pretty uncertain and actually relatively unattractive proposition in investment terms, and specifically in terms of profitability. It's very volatile in profitability terms, and the returns are actually not great in general. And so in so far as that's true, that's a problem because we're relying on the private sector to do this, and obviously the private sector is led by profit motivations, and if it's not a great prospect in profit terms, then we're in trouble.

So I want to get more into why solar and wind might not be the best investment opportunity. But before we do, I feel like we need to define some of your terms. And you make a big distinction between price cost versus profit in the book. Can you maybe explain that a little bit more, because I think a lot of people will hear the word profit and then they'll hear a price cost and they'll be like, well, the difference between price and cost is the profit, and that those two things are interconnected. But you make a very important distinction.

Yeah, So I'm sure almost all your listeners will have heard about one of the things that you guys were talking about earlier, which is the fact that the cost price of renewable energy, which is essentially the cost of generating power through solar or wind, has come down hugely over the past ten to fifteen years. In particular, it has come down a lot, and you would imagine intuitively that if the price of generating it comes down, then the profit that can be obtained from selling it would be going up, so that as the price comes down, it inherently becomes more profitable. But one of the arguments I make in the book, I mean, in a way the central argument is that for all sorts of interesting and important reasons, they are kind of nerdy reasons. You have to get into the thickets to understand them. That's just absolutely not necessarily the case. There are all sorts of reasons why A does not lead inevitably to B. And my argument is that the focus on price, the focus both on the left and right in understanding these things, relentlessly on this what's referred to as the levelized cost of energy, and lots of people will have seen this chart with the declining price. The focus on that has been misleading when it comes to understanding the economics of renewables. And the argument is that we should be thinking on specifically about profit because that's what drives investment decisions.

Great, well, then let's get right into this. So there are a lot of solar firms in the US. There's more and more installation happening all the time, like and at a piece that many people would not have guessed. So a solar installation, even prior to the IRA was deployed at a rate faster than expected there's still more the IRA maybe accelerating it at further before we even get to the whole grander decarbonization thing. Tell us about a business model of a solar farm and why it's not that great of a business.

Yeah, okay, So I think the best way to approach this is to think about what needs to be done to get a solar wind farm development off the ground, and there are basically three or four crucial things you need to do. So the first of those is you need the technology, right, so you need in the case of wind, you need the turbines, in the case of solar, you need the solar sales and the solar modules. You need the stuff that's going to help you to generate the electricity. The second thing, and all of these are really really important. The second thing is you need somewhere to put it. So in the case of solar and onshore wind, you need land, and you need lots of it, which is a really important thing to understand. I would say that as a geographer, but it's actually true that you need lots and lots of land. And in the case of on shore, you can either lease that land or you can buy that land. So land is the second thing you need, or in the case of offshore wind, you need rights to ocean and sea floor. Essentially that gets auctioned off by the state, so that's the second thing you need. Third thing you need typically is a grid connection, So you need to be able to connect your generating facility to the transmission grid in order that that electricity that you produce can be delivered to the entities that consume that electricity, households and businesses. There are some exceptions to that, so some you get some off grid developments that are literally connected directly to whoever it is, might be a big corporation like a Google or something that's going to consume that electricity. But in almost always you need a connection to the grid. And then the fourth and final thing, but actually by far the most important thing. And I say that because if a project is not going to proceed, if a project is going to fall down, this is in the vast majority of cases where it falls down, it's in not getting a grid connection. It's not in not getting land, it's in getting finance. And so this is the really important thing to say, which is to say that I thought I was writing a book about electricity and I did write a book about electricity just as much it's a book about finance. And so, whoever you are, whatever type of renewable energy developer you are, you typically will be looking I mean it varies a bit across time and space, but typically you're looking to finance your development in large part with debt. So somewhere between sixty and ninety percent is the typical range that is debt rather than equity financed. And obviously the key thing to understand here is what type of economic business this And again it's really really important to understand this.

So with a sonar and wind.

Power plant rather than a conventional power plant, the key economic characteristic of it is that essentially all the costs getting curred up front, So you have your cost of getting the grid connection, getting the land, buying the technology. But once it's up and running kind of free. You know, occasionally a rotor will stop turning, you need to get an engineer to come out with a screwdriver and get the road to turning again, but basically it's free. So well over ninety percent of the costs are incurd up front that it's very different from a conventional power plant where you're buying the gas or cold to keep the power plant running. So if you let's put it this way, if you are a renewable energy developing and you've done those first three things and now or you've got the kit on order, and you now say, right, I need to raise the finance. If you go to you and you'll basically go to a bank and you'll say I need two hundred million dollars to develop this solar farm, and your bank manager will say, okay, you know I want to invest in green stuff. Green stuff's cool. I definitely want to do that. How are you going to pay that loan back? And how long is it going to take you to pay it back? And you'll say, well, maybe ten to twelve years. The kit will last for thirty but hopefully within ten to twelve I'll be able to pay it back and I'll pay you the interest all the time. And the bank manager will look at you and say, well that sounds great. How are you going to make the money And you say, I'm going to sell the electrics and they say what price you're going to sell the electricity for? And you say, I have absolutely no idea. And the reason you have no idea is electricity price is unbelievably volatile in places where you have deregulated electricity markets, which in the US isn't about two thirds of the country by population, and they're very volatile at all time scales, short, medium, and long time scales.

And here's the thing.

Nobody can reliably predict wholesale electricity market prices a week, two weeks, let alone a month or a year or five years in as the bank manager will say, well, I can't lend you that money because you have no idea what the price you're going to be to sell the electricity at. And so some mechanism has to be found to stabilize those prices so that the bank manager can be confident that you will be able to pay that deep back. So that's the basic way the business works. Once you've raised the finance, you're off to the races.

So low returns, at least initially, coupled with the difficulty of predicting how much you're going to sell the power for or the volatility of electricity prices, yeah, I can understand how that would be a bad mix if you're a bank manager. This is something that has come up before when We've spoken with Jiggershaw from the Department of Energy, the Loan Program's office there, where he talks about the lack of expertise in banks when it comes to renewables, and also just the reluctance to take on this particular risk even when you have like many mandates both internally and externally that are saying you should throw money at renewables. It's kind of difficult to overcome. One of the reasons we wanted to talk to you is because in your book you do a lot of one on one interviews with people in this industry, So I'm curious, can you tell us, like what bank managers say specifically about underwriting this kind of risk. Are there any like particular stories or anecdotes that stand out to you?

Yeah.

So, I think one of the things that came through very clearly to me when I talk to people in this business is that they want to invest in this space. And so I often hear people, you know, colleagues, a man on the left who, like you know, esg is all just greenwashing. I don't actually believe that. I think there are a lot of people out there in the industry who want to support these types of developments, and there are also lots of renewable energy developers who are actually maybe not the big guys like the Next Era energies and the Black Rocks, but the smaller guys, and there's tens of thousands of them out there, you know what, They're actually prepared to take on the risk. In many cases they're like, well, we will do this even if the profit prospects are not necessarily great. And so it tends not to be them that are making the decisions not to invest if the profits don't look particularly appetizing. It's the financial institutions that are doing that. And of course that makes sense. If you are advancing two hundred million dollars that's not going to be paid back over to ten to twelve years, you want to be very very sure that you're going to get that money paid back, and so that they will emphasize relentlessly and repeatedly that having some form of certainty over the price which the electricity is going to be sold is the key thing. Now here's where it gets really interesting, which is the difference between the US and say Europe, Because the thing about the way the US has approached this, which is through renewables tax credits, both historically and with under the Inflation Reduction Act. They subsidize electricity investment and generation, but they don't stabilize it. And now that's very different from the types of mechanisms that governments have typically used in Europe, which do both. So some people might have heard of what are called feed in tariffs, which has been historically the main way in which this is supported in Europe, and in China historically as well, and in lots of other countries India included, And what they do is essentially the government itself or a government back dentity will provide a long term contract of say twelve years to buy the electricity produced by a renewal developer at a fixed price. And the IRA doesn't do that. So what's really interesting about the US is that tax credits are enough. So you need tax credits plus something else.

There is some guaranteed right in the Inflation Reduction it's some like guaranteed something per kilo or.

So that's a supplement, okay, to the market price. So yes, you get a supplement, but if the market price is in the toilet, you're still in the toilet, but just less in the toilet, so to speak. And so in the US you need something else. And so there have been two main things historically that do that, and that you know, talking to bank bank investors, this is what they look for. So either there are some form of financial hedging instrument so banks will do other parts of the same, or a different bank will provide swap or futures contracts in order to synthetically stabilize the electricity price essentially, or and again lots of listeners will have heard of these, particularly recently because they've been in the news a lot recently. It's what's called corporate power purchase agreements where instead of the generator having to sell their electricity into the volatile spot market, but Google or an Amazon or a Microsoft will come along and say, hey, we're going to build a new data center. Because of everything that's going on with AI, we want to secure as much of that electricity in renewably as we can because it's good for our pr Obviously that's the most the most important thing for them, and so they will enter a direct agreement of our purchase contract with the renewable developer and say, look, if you build this facility, we commit to buying often all your electricity, sometimes fifty percent of the electricity you generate, and we'll do that at a fixed price for the next twelve years. And the renewables developer then takes that commitment, goes back to the bank and says, here's what you're looking for, Now give me the money. And so they've become a really important way of rendering renewables projects bankable.

I want to give back to some of these market structure questions with electricity, but you know, you lay out a very compelling argument that in theory there are some real problems that the way we deploy solar and wind, and on the other hand, in practice we are deploying a lot of stuff.

We are so for all.

These things, whether it's the uncertainty about the ultimate price you get, the cost of land, the coins of interest rates, in practice there is a lot more and there's more solar on the grid in California every day, and there's more battery stores to augment that solar, to deal with some of the variability that naturally comes out of solar. So like, why is that not an undercutting point the fact that, yes, in theory it shouldn't work, but in practice it's getting built.

Yeah, so it is getting built, which is great. But a it's getting built because the renewables industry globally remains fundamentally buttressed by subsidy and support. So any way you look in the world, where governments have tried to remove those support mechanisms or even substantially attenuate them, investment collapses. So that's important to understand. And that's fine in a way. I mean, of course, the fossil fuel sectory is underwritten by subsidy globally as well, so it's not like renewables are alone in this. That's the first thing to say. The second thing to say is that you know, I often like in this to people who look at things through a glass half full or a glass half empty, right, which is, you look at the pace of growth of renewables investment, and you look at the pace of growth of generation from renewables, and it's sharply upwards. Fantastic. However, electricity generation from fossil fuels is also still going up, so greenhouse gas emissions from electricity generation are also going up. So as I see it, it's very hard, it would be very difficult and in my view, not really acceptable. To say we are succeeding while you know, twenty or thirty years into this, in terms of renewables deployment, we are still growing the amount of power we generate from fossil fuels. So the basic point is that, yes, renewables have been growing strongly, but that renewables growth has proven purely supplemental too, rather than substitutive of fossil fuel generated power.

Just to go in sort of the opposite direction to Joe's question, but why not? I mean, if we recognize that this isn't a particularly profitable business model, that private capital is perhaps reluctant to underwrit and at the same time we agree that decarbonization is an important goal for humanity, then why not just nationalize everything?

Yeah, So that's kind of the argument that I'm broadly sympathetic to. But as anyone who's read the book will know, what I don't do is come out with a kind of full throated positing of that argument. And the reason I do that is that I don't feel that I know enough about how that might look to actually go down that road. But it's definitely one argument that's out there. I mean, that was kind of like central to the original Green New Deal as it was articulated on both sides of the Atlantic. So that's one possible argument. I mean, I think you've asked that question. I think it's actually useful to kind of lay out what the possible kind of routs out of this are as they are seen by those who acknowledge that we have a problem. And so the first and not surprising you, those different answers are kind of associated with different constituencies, so that the first of those is the argument that you get from I guess what I would call orthodox energy economists, so economists who are focused on energy and trained in the neoclassical tradition, and their basic argument is that our reliance on the private sector and markets to do this is not the problem. The problem is that we haven't got the market design right. So that's their argument, is that, and it's always their argument, frankly, whatever, whether you're talking about energy or anything else. But the basic argument there is that the problems not markets. The problem is that we haven't got the markets right, and we need more markets or better markets are optimized markets. And actually I have some tympathy to that argument because what they say, and they're right is that, look, the types of markets that we have now for the trading of electricity, whether the wholesale and or retail, are ones that were designed in and for a fossil fuel world, and actually those markets remain largely unreformed, which is true. So they say we need to rethink markets and optimize them for the new mix of electricity sources that we're living. Fair enough, However, you look at any specific design that has been suggested, and all of them have their own drawbacks as well as potential advantages. So I am sympathetic to that argument, but not convinced by it. The second argument is the one you hear from industry, who they agree with the mainstream economists that the problem is not that we're relying on the private sector of markets. But what they say is the existing market design's fine, we just need more subsidy. And so that's kind of how you end up with the Inflation Reduction Act, which is for several years now, the industry's been telling the administration, look, you've been reducing these subsidies over time, which is what had been happening in the US. You can see the results of that investment is beginning to stagnate, the rates of growth are not good enough. You need to bump up those subsidies again, and that's what happened with the Inflation Reduction Act. Now, unfortunately, at the same time as that was happening, you had increases in supply chain and you had increases in financing costs. So there's a very open question as to whether the I array is enough. Maybe it needs to be even more. But that's basically the industry's answer. Everything's fine, but just more subsidy so that returns go up from say five to eight percent, which is where they're typically at now, to ten plus percent, and eventually to a point where and here's the key thing, maybe even the big fossil fuel companies might begin to get interested if returns in renewables get closer to the kind of fifteen plus percent that they're used to in their upstream oil and gas business. But right now, of course, they're not interested to million miles away from the types of returns they're used to. So that's the second answer, more subsidy, more support, and I'm not unsympathetic to that argument either. The third answer is the one where you where you started, Tracy, which is the answer you typically hear from large parts of the left, which is to say, look, we've tried the private sector in markets. That's what we've been doing for twenty twenty five years. It's still not working. And I've explained why. I think that's absolutely true. Even though the industry is completely buttressed by subsidy internationally, and even though the costs of generation have come down as much as they have so something there is telling us that maybe that's not the right approach after all, and therefore we should try the kind of massive public sector financing ownership operation. And again I'm sympathetic to that argument too. However, one thing I would say about this, and I think this is, you know, arguably to my mind, the most important thing I can say, which is that you know, the credibility of that argument depends massively in what part of the world you're talking about. I mean, I know there's lots of kind of concerns about levels of public debt in various rich countries around the world, including the US, UK, Germany and so on and so forth. But at least in those countries, it remains the case that the state could conceivably borrow to invest in revenue generating things, which is what renewable assets are at a reasonable rate, probably even cheaper than the private sector without being massively punished by by the bomb market. But now if you are a government in a very very poor country with you know, crippling levels of debt, servicing obligations as it is, then frankly their idea of a kind of a big green state investing in and owning in those that is is very very far fetched.

And this is where all the demand's coming from for electricity. These un rigual.

And this is that, you know, when we were sitting in New York and where I'm based in Europe, we often think kind of a bit too much about those parts of the world. But frankly, if you think about the power sector and the future of greenhouse gas emissions and the future of the planet, frankly, what happens in North America and Europe is not completely incidental, but it's almost incidental to future emissions tractories. And there are two reasons for that this is really important. First is that actually large parts of the Europe and of the global North in general are actually quite far down the decarbonization path of the power sexual already where I am in Sweden, ninety percent of electricity is generated carbon free. But there are other parts of the world where power generation remains hugely dependent on fossiphyr. South Africa ninety percent is coal, India seventy five percent coal, China sixty five percent coal. A those are the parts of the world where future growth in energy consumption is expected to be concentrated as you get further urbanization and industrialization and modernization and b China arguably accepted. But those are the parts of the world where the financial challenges our greatest.

So Tracy asked you the question of Okay, why not nationalized? But there's another solution, the theoretically or another answer, which is, if we accept the premise that, whether it's through subsidies or direct ownership or whatever, that the government balance sheet should play a much bigger role in this, why not skip solar and wind and just do what France did and build a ton of nuclear. And it's like, maybe the French nuclear plants like didn't end up being that economical and I think they had some excess or whatever, but they have a what eighty percent decarbonized grid. They're the nuclear So if we're going to spend all the money when I just skip the solar and wind and just build more nuclear plants.

Yeah, I mean, you know, I again, that's an argument I'm sympathetic to. France is the great example of that, and certainly there are lots of very compelling voices out there who argue exactly that. I think probably the Breakthrough Institute here in the US would be one of the best examples of that, And I personally don't take a particular position on that. I'm not sitting here saying we should focus exclusively or even larger and renewables. The reason I focus on renewables in the book, just it's worth spelling that out, is that that's what the world is doing. So yes, I think there's been a of a mini nuclear renaissance in the last couple of years.

Certainly a lot of podcasts about it.

Yeah, but you know, I think the likelihood if you look at what governments are doing around the world is that nuclears so nuclear is currently at about ten percent overall of global electric electricity generation. There might go up a bit, but it's not where the focus is. But you're right, it could be where more of the focus is. I mean, I think that the reason. I think there's a bunch of reasons why that's not where the focus is in most countries. So one is cost. It definitely is, and so you look at those levelized cost charts, and yes, while the cost of generating electricity from renewables is now comparable too and in some places lower than from colon elateral gas, nuclear is a lot more expensive, and a lot of that's due to regulatory costs, So partly it's cost. I think the second thing is timescale. So once you've got the grid permits and so on all sorted out and the financing, you can put up a solo farmer or an onshore wind farm in six to twelve months. It's really quick. Nuclear is not quick. Nuclear is like five to ten years at best, and everything's kind of urgent now. So I think that's the second reason for the focus on renews. And then the third one is just is public perception. Despite the fact that nuclear is very very safe statistically, it's still represents something somewhat forbidding in the public consciousness in many parts of the world, and Germany is obviously the best example of that.

Since we're talking about things that could possibly work. You know, you mentioned power purchase contracts earlier, and we've seen so many headlines recently about big tech companies, players and AI teaming up in one way or another with energy companies to secure power and make those big off take agreements. Is that something that like maybe could be helpful here by providing you know, there is a lot of money flowing into AI. I'm not entirely sure whether or not that business is very profitable yet, but there's certainly a lot of enthusiasm for it in the market. Could you maybe borrow from the AI world some of that enthusiasm, the promise of profitability perhaps and use that to funnel more money into renewable energy.

Yeah, I mean, I think it has been and will continue to play a really important role. And as I said, the key thing here is that the agreements from the big AI developers, the big the Amazons and so on are what enable a lot of renewables projects to get off the ground that might not otherwise get off the ground because they're offering long term fixed prices. And actually, if you read what a lot of policymakers have been saying, not just in the last few months, but actually the last few years, they in many cases regard those power purchase agreements as kind of an almost an alternative to government subsidy and government support.

So the argument there is that.

The market will perform the role that governments have historically by rendering projects bankable through those power purchase agreements. And I think all I would say about that is two things. So the first is that it will play a role, and it is play a role, and it will continue to play a role, but it's a limited role. So it will help with bankability to a certain extent, but it will only ever do that in a limited way because there are unfortunately only a kind of limited number of credible off takers out there who can perform that role of providing bankability. So if Amazon comes along and says we'll buy your power for twelve years, the bank behind the renewable developer will be like, fine, we're pretty confident Amazon is going to still be in business in twelve years and it's going to honor that agreement. But most other types of entities that might try to do that then they're not considered credible enough, So there's only limited market out there. The second thing flows from that, which is that because there's only a limited number of players out there, they have a lot of power in this market. So the Amazons and the Googles and code because there aren't that many of them, when they negotiate with renewed boost developers the price at which they will buy that electricity for the next twelve years, they have all the leverage. There's thousands of developers scurrying around to get this sort after contract from an Amazon, and Amazon says, okay, we'll we'll exploit that and we'll push down the agreed power price, limiting renewables developers profits.

You know, it's interesting. So, by the way, we're recording this May seventh, just six days ago May first, Microsoft in Brookfield signing the biggest ever clean power deal. It's going to be like a ten point five billion dollar deal. So one of these massive agreements. But I think actually now thinking about it, it actually speaks to the point that if you want renewables, whether it's the government or a private company, what's important is that guaranteed.

Off take one hundred percent.

Yeah, and so in a way it almost like, yes, technically this is a market arrangement, but as you noted, there's probably a lot of pr or maybe sort of ESG requirements that encourage them, so in a way, it still sort of backstops the basic loge of the government needing to be either the buyer or the price center.

Yeah.

Per So, just going back to the financing side of things, So one thing that we've seen in Europe in particular is an effort to maybe tweak regulatory capital requirements for environmentally friendly or renewable energy related financing. I'd love to get your views on the efficacy of that. And then secondly, my understanding is that as part of the IRA money you know, I mentioned Jiggershaw and the DOE earlier and their loan Program's office, a lot of what they're doing is extending financing in lieu of the banks. So trying to get over that hurdle of if you are a loan officer at a large bank, you do not want to underwrite this particular business because of the combination of low returns and volatility difficult to forecast electricity prices. So how how effective are those types of policies like attacking it from the financing set.

I mean, I think that has been and almost certainly will continue to be a really a really important way of attacking it to you know, to use your word and I think, you know, probably probably the best example of that right now is China. So if you look at what's been happening in China, so about a year or two ago, I can't remember the exact details, China actually withdrew a lot of the legacy mechanisms for subsidizing renewables development in China, which which feed in tariffs. At least it's centric, it's at least the feeding tarifts provided Beijing. And there was lots of concern at that time that renewables investment would collapse in China. Obviously didn't happen, and one of the main reasons that it didn't happen is that the Chinese Central Bank now plays a really really important role in subsidizing the capital cost for renewables development. By I mean it does it indirectly rather than directly, so it basically provides a capital subsidy to the lenders who then lend directly to the renewables developers, and it's doing that on a massive scale. So that's exactly the type of thing you're talking about. And of course the other sorts of entities that are doing this in a really big scale, but on a scale which is not remotely big enough is the big development finance institutions. Because and here's the thing, right, if finance is the big obstacle, or one of the big obstacles, which I think it clearly is that obstacle is far greater in the global South, where the perception of risk among private lenders is so much higher. So instead of lending at say four or five percent, which they might have been doing in recent years, in the global North, they will be lending at twelve to fifteen percent, which means that projects have no chance of getting off the ground unless a development finance institution, a World Bank, or some philanthropic financier comes in and says, we will effectively subsidize that finance in some way, you know, And that's what you know, lots of listeners will have heard about blended finance and all these sorts of thing. That's what's going on there is that essentially, in order to bring private capital to the table, some sort of either public capital or quasi public capital also has to come to the table, essentially to subsidize that private capital and to make things attractive in profitability terms for them. So I think finance has to and will continue to play a huge role in this. And it's interesting that China is doing that, you know, much more effectively and aggressively than the rest of the world.

You mentioned Sweden where you live now, I see coined the various websites and clicking on somewhere between seventy and ninety five percent, depending on how measure renewables. How did they get there?

Two main answers to that. So it's not primarily a solar and wind story, not as it only a primary solar story. Not surprisingly hydro, oh, very good hydro resources, however, also nuclear. So hydro is about thirty percent of electricity production in Sweden, much high in Norway, and nuclear is about thirty percent.

We aren't damns. I love hope, I love dams. And there used to be, seriously, there used to be a time in this country in which I was reading one of those books. You know, we're like the Bureau of Land Management and the Army Corps of Engineer like competing against each other just so you could build more dams. Is there more room for hydro?

Yes?

I mean that's so. The reason I mean This goes back to what we were going about nuclear. The reason I think that the world is not expecting massive growth in hydro in the future, and as instead is kind of betting the house on so and when a primarily twofold or threefold one is the time thing light nuclear takes a heck of a long time. Second thing is that and again I think lots of people will be aware of this, but the negative social in many cases environmental implications of damn development, you know, displacing hundreds of thousands of people have become more obvious and more problematic in large parts of the world. That's the second the second thing I think, and the third thing is that, as I understand, a lot of the kind of low hanging fruit in terms of hydro development has already been kind of plucked, and actually literally the geophysical potential for it is more constrained than it was, you know, twenty or thirsty years ago.

I have just one more question, which is you know, reading your book, you're very explicit about what the goal of it is, and you know it's focused on solar and wind. It's about explaining why the business model doesn't really work. It's not about policy prescriptions, and you make that very clear. What's your next book? Is it a continuation two.

Books a year? Yeah? Well, yeah, I've been I've been quite productive recently. I'm going to give the honest answer to that question. I have no idea. However, I moved recently within Upside University to an Institute of Housing and Urban Research, and I've done a lot of work historically on housing stuff, and I'm pretty sure that moving back towards house, you know, another area where the world is nothing, if not in crisis, is probably going to be what I'm focusing on going forward.

Maybe you could do a history of nimbiism and nuclear power plants on no. I think that'd be interesting, you could tie the two together.

We definitely will have you back for a housing episode because there's never enough demand for housing.

And I have one last question.

So it's just a theory that I have and if you think it's complete nonsense, then feel free to shoot it down. But you mentioned that the world has made this bed on solar and wind, that these are the two war courses that we expect for decarbonization. But it raises the question of why there's it nuclear as a part of the story the environmental movement. In my lifetime, when I was younger, the environmental movement meant like literal green forests and preservation and conservation and clean water, et cetera. And today the environmental movement is almost synonymous with climate, although there's still other issues. Is it like a solar and wind or bucolic and we associate it with just green because get under you from sun and the wind? Like it sounds, Is that like, explain in part why there is so much attachment to these forms of energy.

I don't know a definitive answer to.

That right people's minds, but I would be.

Astonished if that's not at least partly true. I think that for sure that must be partly true, the idea that you can that there's this kind of free resource that you can capture cleanly in a way that doesn't have any at least any downstream environmental implications. There are certainly upstream implications in terms of you know, the copper and the lithium and everything.

That is needed and the whales. To go back to nineties environmentalism and the wind power generations.

Yeah, absolutely, but no, for sure it fits with that kind of bucolic image, which is still part of the environmental movement broadly conceived absolutely.

Bred Christopherus, thank you so much for coming on our block. Fascinating conversation.

Thanks for having me, Tracy.

I really enjoyed that conversation. It was nice to hear like the sort of like yeah, just like a very clear spelling out of what the sort of like financial and just other constraints are to further expansion of the production.

Yeah.

I think that's right. I think intuitively, a lot of people have the sense that the current model isn't necessarily working because of the reason that you mentioned in the intro. You know, like cost of producing renewable energy is going down, but like the rates for people aren't necessarily going down as much, and it still feels like a lot of the burden of investment is on electricity users versus like the investors. So I think intuitively it feels like it kind of encapsulates that tension. I did find it really interesting the emphasis on off take yes and having a reliable source of demand, because this seems to be a key difference between the US model and some European models, and also it seems to be a thing where we are seeing some momentum in terms of the IRA, you know a little bit, not that much, but also in terms of private players, like say a Microsoft who wants to strike a big deal to take renewable energy from an energy company and like underwrite that investment permanently into the future. That's kind of interesting.

I agree, And I think that was like a light bulb moment for me because you know, we've talked to Jiggershawn. Jiggershaw talks a lot about off take and the need for this, but that basically that, yes, if Microsoft and Brookfield do a deal, that is two market players coming to a free market agreement. But it sort of validates the underlying logic. And Microsoft isn't going to pay for more energy than it consumes. It's not going to pay for other people's energy, so that it sort of validates this underlying logic, which is if you want to not just ad solar but actually add renewables to the scale that you can then cut back on fossil fuels based energy that you actually need to like that off take has to be part of it, you know, across the space. The other thing that was interesting, and I think we're gonna do another episode on electricity market soon is you know. Brett described why the volatility of electricity markets hamper renewables because you're the price is so uncertain, et cetera. The nuclear people don't like electricity markets either, and their argument is like, well, we have such big costs and it's so difficult to turn on and turn off nuclear. It's not like other forms like gas that during these periods when everything is cheap, we lose a lot of money. And so it feels like there are a lot of players that find electricity markets to be not conducive to the best energy system.

Yeah, you know, we should do a episode on the history of unbundling of energy.

I think I think we may have one in the work.

Oh okay, excellent, because I still don't underst down how it happens.

I think I think we may even be recording one tomorrow for Thursday.

Okay, there's an insight into the Odlots prep process where I don't know anything about what we're going to talk about until the day of Okay, shall we leave it there.

Let's leave it there.

This has been another episode of the Audlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Joe Wisenthal. You can follow me at the Stalwart. Check out the book of our guest Brett Christopher's The Price Is Wrong Why Capitalism Won't Save the Planet, put out by Verso Books at Verso Books. Follow our producers Carmen Rodriguez at Carman Ermann dash, Ol Bennett at Dashbot and Kilbrooks at Keilbrooks. Thank you to our producer Moses On. For more Oddlots content, go to Bloomberg dot com slash odd Lots. We have transcripts, a blog, and a newsletter, and you can chat about all of these topics twenty four to seven in the discord where we have an energy room and a climate room Discord dot gg slash odd lots. You can talk about it with fellow listeners, and if.

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