Transitional Economics of Energy Markets

* Book: Brett Christophers. The Price Is Wrong: Why Capitalism Won’t Save The Planet

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"a near 400-page deep dive into the economics of electricity markets"

Review

Chris Smaje:

"Here’s my attempt to parse Christophers’ argument:

Throughout most of the world, and increasingly so, the electricity supply chain is divided up (‘unbundled’ in the jargon) into a set of market relationships between the people who generate the electricity, the people who provide the grids to transport it to where it’s needed, the people who buy electricity wholesale to sell on to final consumers, and the final commercial or domestic consumers. If there’s to be an energy transition into renewables and out of fossils that’s driven by the low price of renewables relative to fossils, then it’s essential that this price advantage is captured by the people generating the electricity and exercising choices over how it’s generated. If not, there’s no incentive for them to switch from fossil to renewable generation. The way these markets work is such that as a rule generators don’t capture the price advantage, for reasons that are complex in detail but in broad outline will be familiar to people in the sector I mostly write about, farming. When, say, fuel or fertilizer prices fall, the farmers generating the food don’t usually get richer. The economics behind this is well established – numerous factors intercede between input costs and profits, and decreases in the former needn’t and generally don’t imply increases in the latter.

A good deal of the fanfare about the cheapness of renewables has focused on the falling price of their material components (PV panels, wind turbine mechanisms etc.) but these are just one part of the cost of bringing renewable electricity to the final consumer. Other costs are the price of land to site relatively land-hungry renewables facilities on, the price of connecting the facility to the grid and of building/maintaining grids suitable for a renewables-dominated energy world, and the price of the capital that has to be raised to fund the facility. The apparently low price of renewables manifests in a measure called the ‘levelized cost of energy’ (LCOE) – basically, the amount of electricity the facility will produce in its lifetime divided by the lifetime cost of producing it. But LCOE values often exclude the cost of grids and grid connections, which can be substantial relative to the total cost – particularly because the high land footprint of renewables pushes the facilities to low land cost areas distant from the final consumer. This often stymies the construction of new facilities in practice.

The wholesale price of electricity is extremely volatile, varying hour-to-hour, day-to-day and over longer time periods from potentially negative values when supply exceeds demand, to huge hikes when demand exceeds supply. Renewables generators have little control or certainty about their supply, meaning they have little control or certainty about the price they receive for their electricity. They often have to sell when the price is low. This is one of several reasons why even though LCOE values may be low in theory, the true cost of renewable electricity borne by generating companies is often higher, and the profits lower, than LCOE values suggest – and one of several reasons why fossil-generated electricity can remain competitive. One of my critics suggested that to address such issues all that’s needed is more generating facilities and bigger grids. Okay, but then the LCOE figure loses meaning, and the true cost of renewables is higher. This is more than a theoretical point for the people generating, buying or funding renewable electricity.

On the matter of grids, I haven’t probed the issue in depth, but I note the IEA analysis mentioned above about the need to double existing global grids by 2040 and then increase them by another 25 percent by 2050 to achieve net zero, with investment in excess of $1 trillion, which is about 1 percent of current total global economic activity. The IEA says that grid connection is currently a significant bottleneck in delivering renewable power projects, suggesting the need to add or refurbish about 80 million km of grids worldwide by 20403. Christophers reports that $6 billion was spent on adding just 5,800km of transmission lines in Texas about ten years ago, which perhaps gives a sense of the scale of the challenge. Of course, all that extra grid is going to need a lot of (currently fossil-fuelled) mineral extraction (see Section 6). This macro-scale stuff resonates with me in terms of my own micro-scale situation. It was just too expensive to connect our farm to the grid (plus it would have involved negotiation for wayleave access with an unsympathetic neighbour that was unlikely to bear fruit – transaction costs and bottlenecks is another little-analysed aspect of transition). So the better option for us was to go off-grid, generate our own electricity, limit our use of it and impose upon ourselves what amounts to a permanent if usually minor electricity supply crisis on our farm. It’s been educational.

Anyway, assuming ‘electricity is electricity’ (ie. that renewables smoothly replace existing grid electricity), to get a better sense of the real cost of renewables we need to add grid costs and factor the extra facilities needed to meet demand – and when we do this, renewable prices don’t always compare that well with fossil ones.

A key factor in utility-scale buildout of renewables is securing the considerable upfront loan capital needed for them from the finance sector. Christophers drily notes that this is the sector with the greatest power to make renewable buildout a reality, and also the one with the least interest in the purportedly low LCOE values of renewables as a way of informing their investment decisions. Banks don’t care about the low cost of renewable electricity relative to fossil electricity. They care about its profitability relative to whatever else they might invest in. Which often may not be electricity generation at all – but might sometimes be fossil facilities that for various reasons are more profitable than renewables even though they’re higher cost. If we were building an electricity system from scratch right now, things would look different – but we aren’t. In any case, debt servicing issues loom large in this sector. What’s good for renewable generators usually isn’t good for the organisations financing them, which goes some way to explaining the unimpressive rollout of renewables."

(https://chrissmaje.com/2024/08/off-grid-further-thoughts-on-the-failing-renewables-transition/)