In reality, there has never been a free market in renewable energy provision and nor is there ever likely to be. As discussed in Myth #1, governments have had to step in to facilitate energy transition through subsidies such as Feed-in-Tariffs (FiTs). Without these subsidies, renewable energy is simply not profitable enough for investors to act.
Investment in new generating capacity is profitable only when the unit cost of electricity on the wholesale market exceeds the costs invested in generating this electricity. Historically, the high costs of renewable generation have outstripped wholesale electricity prices, rendering renewables investments unprofitable. Now, as renewable generating costs come down, wholesale electricity prices fall, cancelling out the declining costs of investment and, once again, undermining opportunities for profit. As such, without public subsidies, investors simply steer clear of renewable energy.18 This dynamic is illustrated in the move away from Feed-in-Tariff subsidies towards competitive auctions discussed in Myth #1.19
Auctions have driven down renewable power prices as energy producers lowered their rates to compete for contracts.20 This has had a number of consequences. First, well resourced and large incumbent energy producers won contracts based on a very low energy price, outcompeting smaller community-based renewable energy producers that did not have the means to participate, let alone offer such unrealistic rates.21 In fact, prices were set so low that big producers sometimes were not able to follow through on project development because of insufficient returns.22
Second, because these auctions drove down energy prices and, in turn, profit margins, private investors lost interest. This resulted in a dramatic decline in private investment in new renewable energy projects.23 EU investments in renewables dropped precipitously when FiTs were replaced with auctions: across the EU, investment fell from $132 billion in 2011 to $59 billion in 2015. Annual solar capacity installations fell from 22 GW per year to just over 8 GW.24
Finally, falling electricity prices due to competitive auctions have been one of multiple factors contributing to a crisis for incumbent utility business models and what has been termed the ‘utility death spiral’. In 2018, the incomes of the three largest European utility companies (EDF, E.ON, and RWE) fell by 65 per cent, 22 per cent, and 85 per cent respectively.25 Alongside falling renewables prices, the issues here include declining market share due to the entrance of new actors within energy markets, alongside the escalating costs of integrating ‘variable’ renewable energy generation due to necessary grid upgrades and investments (see Myth #3).26
Since incumbent utilities are struggling, some governments have started issuing ‘capacity payments’ to fossil fuel producers for providing a backup supply of ‘baseload’ generation, in order to ensure security of supply.27 This is where we see the ‘liberalise and subsidise’ model in full swing. Governments are compensating for their lack of control over the energy sector by providing subsidies for all.
The utility death spiral we are witnessing mirrors similar dynamics that played out when liberalised markets were first introduced in the energy sector. One common consequence of early energy liberalisations was falling investment. State-owned utilities – where they were not privatised – lost market share and associated revenues, meaning that their capacity to invest in the sector was reduced. Simultaneously, the private investment in the sector that was promised often failed to materialise.
In the case of the Philippines mentioned above, for example, only 2.22 GW of generating capacity was added in the first 12 years of power sector reform, and this was mostly committed before the reforms took effect. A 2014 government report noted: ‘The government may need to involve itself once again in power generation to avoid power shortages in the future and keep hold of the current momentum being enjoyed as an investment attractive economy.’28
A similar experience has played out in India, where liberalisation reforms have seen private companies take on an increasingly bigger share of energy generation since the turn of the century. In India, the energy sector faces mounting debt. This is because poor people are unable to afford energy and are, therefore, forced to ‘steal’ energy through irregular power connections. In this context, the state has stepped in to guarantee the profits of private generator firms, with publicly owned transmission and distribution companies left to take on the debt.29 Consequently, India’s rural electrification programme has been substantially scaled back due to a lack of funds.30 And private investment in the sector has been sparse because of the risky market environment.
Experiences in India are indicative of a broader trend. Energy liberalisation reforms enforced by global institutions such as the World Bank and IMF have placed the imperative of ‘full cost recovery’ at their core. Full cost recovery subjects utility firms to market logics, obliging utilities to ensure that the full costs of service delivery are recouped from consumers. The issue with doing so is that, as with the India case, poor consumers often simply cannot afford to pay for electricity. Time after time, full cost recovery policies have stood in the way of electrification programmes designed to increase energy access.
In short, market logic such as full cost recovery prevent utilities from prioritising social or environmental goals over the financial bottom line. As a result, across the global South, the marketisation of utilities has come into tension with much-needed infrastructural investments that are pivotal to decarbonising the grid.31