Odd Lots - Are We Doing Decarbonization Totally the Wrong Way?

Episode Date: May 29, 2024

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.See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, here's something that really frustrates me. 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. 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 90%? Why is electricity not gotten a new cheaper? Yes. So, you know, I have that house in Connecticut, which means that I follow Eversource 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, it's like, oh, we have to raise prices because we'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 Unify, 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 market, 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, I, 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, 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 as energy comes down, it gets cheaper. Where's the paradox cracks in? That's what we need, the air horn to go off. So obviously, especially in the U.S. right now, but I think globally, and they're probably doing some similar things in Europe, but certainly in the U.S., 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 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 Christopher's.

He's a professor of geography at Uppsalo University in Sweden. And he's 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, Oddlats. 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 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 this 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 decarbonization 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, except in 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 in the book is that insofar as we're relying on a private sector, And insofar 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 insofar 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 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 10 to 15 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'm making 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 U.S. There's more and more installation happening all the time. And at a pace that many people would not have guessed. So a solar installation, even prior to the IRA, was deployed at a rate faster than excessive. expected. There's still more, the IRA maybe accelerating that 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 or 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? you need, in the case of wind, you need the turbines. In the case of solar, you need the solar cells 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 onshore, 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 oceanic seafloor, 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 electricity that you produce can be delivered to the entities that consume that electricity, households and businesses. There are some exceptions to that. So you get some off-grid developments that are literally connected direct. to whoever it is might be a big corporation, like a Google or something that's going to consume that electricity. But 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 not 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, but 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 60 and 90% 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 is this. And again, it's really, really important to understand this. So with a solar and wind power plant rather than a conventional power plant, the key economic characteristic of it is that essentially all the costs get incurred 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, it's kind of free. Yeah. You know, occasionally a rotor will stop turning. You need to get an engineer to come out with a screwdriver and get the rotor turning again. But basically, it's free. So well over 90% of the costs are incurred up front. That's very different from a conventional power plant where you're buying the gas or coal 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 $200 million to at 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 10 to 12 years. The kit will last for 30, but hopefully within 10 to 12, I'll be 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 electricity. 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're you have no idea is electricity prices are 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 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 you will be able to pay that debt 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 Jigger Shaw from the Department of Energy, the loan programs 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 what bank managers say specifically about underwriting this kind of risk? Are there any 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 talked to people in this business is that they want to invest in this space. And so I often hear people, you know, colleagues of mine on the left, who are like, you know, ESG, it's 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 deer are 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 $200 million, there's not going to be paid back over to 10 to 12 years. You want to be very, very sure that you're going to get that money paid back. And so they will emphasize relentlessly and repeatedly that having some form of certainty over the price of 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 under the Inflation Reduction Act, they subsidise electricity investment and generally. generation, but they don't stabilize it. 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 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-backed entity will provide a long-term contract of, say, 12 years to buy the electricity produced by a renewable developer at a fixed price. And the IRA doesn't do that. So what's really interesting about

the US is that tax credits aren't 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 kilowatt hour. So that's, 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 they're a 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, is what's called corporate power purchase agreements, where instead of the generate, having to sell their electricity into the volatile spot market, but Google or an Amazon or 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 important thing for them. And so they will enter a direct agreement, a power purchase contract, with the renewable developer and say, look, if you build this facility, we commit to buying often all your electricity, sometimes 50% of the electricity you generate, and we'll do that at a fixed price for the next 12 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 get 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 with the way we deploy solar and wind. And on the other hand, in practice, we are deploying a lot of solar. Yeah, we are. So for all these things, whether it's the uncertainty about the ultimate price you get, the cost of land, the cost 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 storage 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 anywhere 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 sector 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 liken 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 20 or 30 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 to,

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 underwrite, 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 it's, and now you've asked that question, I think it's actually useful to kind of lay out what the possible kind of route to out of this are, as they are seen by those who acknowledge that we have a problem. And so the first of, and not surprisingly those different answers are kind of associated with different constituencies. So 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. 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 problem is not markets. The problem is that we haven't got the markets right. And we need more markets or better markets or optimise markets. And actually, I have some sympathy to that argument, because what they say and they're right is that, look, the type of, of markets that we have now for the trading of electricity, whether 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 and markets. But what they say is the existing market design is 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 costs and you had increases in financing costs. So there's a very open question as to whether the IRA 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 the returns go up from, say, to 8%, which is where they're typically at now, to 10 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 15 plus percent that they're used to in their upstream oil and gas business. But right now, of course they're not interested, it's a 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 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 for doing for 2025 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 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 the bond 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 things is very, very far-fetched. And this is where all the demands coming from for electricity, these non-rich ways. And this is the, 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 trajectories. And there are two reasons 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 decarbonisation path of the power sector already.

where I am in Sweden, 90% of electricity is generated carbon-free. But there are other parts of the world where power generation remains hugely dependent on fossil fuels. South Africa, 90% is coal. India, 75% coal. China, 65% coal. A, those are the parts of the world where future growth in energy consumption is expected to be concentrated. As you get further urbanisation and industrialisation and modernisation, And B, China arguably accepted, but those are the parts of the world with the financial challenges are greatest.

So Tracy asked you the question of, okay, why not nationalize? But there's another solution, 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, 80% decarbonized grid there with nuclear. So if we're going to spend all the money, why not 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 on renewables. The reason I focus on renewables in the book, it's worth spelling that out, is that that's what the world is doing. So, yes, I think there's been a kind 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 nuclear is currently at about 10% overall of global 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, well, the cost of generating electricity from renewables is now comparable to it. And in some places, lower than from coal and

natural gas, nuke is a lot more expensive. And a lot of that's due to regulatory costs. So partly its cost. I think the second thing is time scale. So once you've got the grid permits and so on, all sorted out and the financing, you can put up a solar farmer or an onshore wind farm in six to 12 months. It's really quick. Nuclear is not quick. Nuclear is like five to 10 years at best. And everything is kind of urgent now. So I think that's the second reason for the focus on renewables. And then the third one is just public perception, despite the fact that nuclear is very, very safe statistically, it 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 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 that, 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 purchases. 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 12 years,

the bank behind the renewable developer will be like, fine, we're pretty confident Amazon's going to still be in business in 12 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 Amazon's and the Googles and code, because there aren't that many of them, when they negotiate with renewables developers, the price at which they will buy that electricity for the next 12 years, they have all the leverage. There's thousands of developers scurrying around to get this sought-after contract from an Amazon.

and Amazon says, okay, 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 7th, just six days ago, May 1st, Microsoft and Brookfield signing the biggest ever clean power deal. It's going to be like a $10.5 billion 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 offtake price. 100%. 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 logic of the government needing to be either the buyer or the price center. Yeah, 100%. 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 tweet. 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 Jigger Shaw and the DOE earlier in their loan programs 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 effective are those types of policies, like attacking it from the financing side? I mean, I think that that has been and almost certainly will continue to be a really important way of attacking it, you know, to use your word. And I think, you know, 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 feed-in tariffs, at least the feed-in tariffs 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 subsidising 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. 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 12 to 15%, which means the 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 subsidise that finance in some way. 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. 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 much more effectively and aggressively than the rest of the world. You mentioned Sweden where you live now. I see, according to various websites, I'm clicking on somewhere between 70 and 95. percent, depending on how you measure renewables. How did they get there? Two main answers to that. So it's not primarily a solar and wind story.

Sony not as it's only a primary a solar story, not surprisingly. Hydro. Very good hydro resources. However, also nuclear. So hydro is about 30% of electricity production in Sweden, much higher in Norway. And nuclear is about 30%. Why aren't dams? I love dams. I love dams. And there used to be a, no, seriously, there used to be a time in this country in which I was reading one of those books, you know, or like the Bureau of Land Management and the Army Corps of Engineers were, like, competing against each other to see who 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 so many nuclear, the reason I think that the world is not expecting massive growth in hydro in the future, and is instead

is kind of betting the house on solar and win, primarily twofold or threefold. One is the time thing. Yeah. 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 dam 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 thing, I think. And the third thing is that, as I understand it, 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, 20 or 30 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?

And don't you like come up with two books a year? Yeah. Well, yeah, 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 Upsody 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 housing, you know, another area where the world is nothing, if not in crisis,

this is probably going to be what I'm focusing on going forward. Maybe you could do a history of nimbism and nuclear power plants at once. No, I think that would 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. I have one last question. 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 D. decarbonization. But it raises the question of like why there's a nuclear isn't 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, etc. 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 energy from sun and the wind. 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. I'm asking you to read 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 for the renewables complex. And the whales to go back to 90s environmentalism and the wind power generators. 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. Brett Christopher's, thank you so much for coming on an obloat. 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 offtake and having a reliable source of demand because this seems to be a key difference between the U.S. 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

Jigger Sean. Jigger Shaw talks a lot about offtake. 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 it sort of validates this underlying logic, which is if you want to not just add 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 across the space. The other thing that was interesting, I think we're going to do another episode on the electricity

market soon is, you know, Brett described why the volatility of electricity markets hamper renewables because 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 history on the history of unbundling of energy markets. I think we may have one into work. Oh, okay. Excellent. Because I still don't understand how it happened. I think we may

even be recording one tomorrow. Oh. Or Thursday. Okay. There's an insight into the odd lots 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 All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allo Way. And I'm Joe Wazenthal. You can follow me at the stalwart. Check out the book of our guest, Brett Christophers. 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 Carmen Erman,

Dashel Bennett at Dashbot, and Kel Brooks at Kalbrooks. Thank you to our producer, Moses, On Dom. For more Oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24-7 in the Discord where we have an energy room and a climate room. Discord.g.g. slash oddlots.

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