Are We Doing Decarbonization Totally the Wrong Way?

25:53So 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 problem is not markets. The problem is that we haven't got the markets right. And we need more markets or better markets or optimized markets. And actually, I have some sympathy 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 wholesale and or retail, are ones that were designed in and for a fossil fuel world.

26:35And 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'm 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.

27:14We 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 has 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.

27:43So 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 that returns go up from, say, 5 % 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.

28:21So 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 doing for 20, 25 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.

29:00And 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 on 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 the bond market.

29:50But now, if you are a government in a very, very poor country with 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 is very, very far-fetched. And this is where all the demand's coming from for electricity, the non-rich way. And this is the thing, 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.

30:32And 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 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 urbanization and industrialization and modernization.

31:13And B, China arguably accepted, but those are the parts of the world where the financial challenges are greatest.

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32:13It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process. So you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. This is LeVar Arrington from Two Pros and a Cup of Joe. The Toyota Tundra and Tacoma are designed to outlast and outlive, backed by Toyota's legendary reputation for reliability. So get in a Tundra with the available iForce Max Hybrid engine, delivering exceptional torque and towing capacity.

32:57Or check out a Tacoma with available off-road features like crawl control. It can take you beyond the trails. Toyota trucks are built to last year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. Hey, Ryan Reynolds here for Mint Mobile. You know, one of the perks about having four kids that you know about is actually getting a direct line to the big man up north. And this year, he wants you to know the best gift that you can give someone is the gift of Mint Mobile's unlimited wireless for$15 a month. Now, you don't even need to wrap it.

33:36Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three-month plan equivalent to$15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. See mintmobile.com. 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?

34:12And it's like maybe the French nuclear plants 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 of 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.

34:41And 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, just it's worth spelling that out, is that that's what the world is doing. Yeah. 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. And but, you know, I think the likelihood, if you look at what governments are doing around the world, is that nuclear is so nuclear is currently at about 10 percent overall of global electricity generation.

35:11That 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 to it and in some places lower than from coal and natural gas, NUCA 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 solar farm or an onshore wind farm in six to 12 months.

35:53It'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 in AI teaming up in one way or another with energy companies to secure power and make those big offtake agreements.

36:40Is 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 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.

37:26and 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.

38:03So 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 is going to still be in business in 12 years and is 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 a limited market out there.

38:42The 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 co, 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.

39:14You 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. 100%. 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.

39:52So 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 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 Jigar Shah and the DOE earlier and their loan programs office. A lot of what they're doing is extending financing in lieu of the banks.

40:32So 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, to use your word. And I think 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 were feed-in tariffs, at least the feed-in tariffs provided Beijing.

41:27And there was lots of concern at that time that renewables investment would collapse in China. Obviously, it 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. 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 on a really big scale, but on a scale which is not remotely big enough is the big development finance institutions.

42:09Because, 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, 4 % or 5%, which they might have been doing in recent years in the global north, they will be lending at 12 % to 15%, 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.

42:47And that's what 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 much more effectively and aggressively than the rest of the world. You mentioned Sweden, where you live now.

43:26I see, according to various websites, I'm clicking on somewhere between 70 % and 95%, 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. It's certainly not primarily 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. And there used to be a time in this country in which I was reading one of those books where the Bureau of Land Management and the Army Corps of Engineers were competing against each other to see who could build more dams.

44:13Is there more room for hydro? Yes. I mean, that's – so the reason – I mean, this goes back to what we were talking about 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 wind are 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 dam development, you know, displacing hundreds of thousands of people have become more obvious and more problematic in large parts of the world.

44:53That'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.

45:28What's your next book? Is it a continuation? And don't you 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 Upsod 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, is probably going to be what I'm focusing on going forward. Maybe you could do a history of NIMBYism and nuclear power plants at once.

46:08No, 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. All right, I have one last question. Sure. 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 bet on solar and wind, that these are the two workhorses that we expect for decarbonization. But it raises the question of like, why 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, et cetera.

46:45And today, the environmental movement is almost synonymous with climate, although there are still other issues. Is it like a solar and wind are 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 there's this kind of free resource that you can capture cleanly in a way that doesn't have at least any downstream environmental implications.

47:30There are certainly upstream implications in terms of the copper and the lithium and everything that is needed. 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 Christophers, thank you so much for coming on Oddlot. Fascinating conversation. Thanks for having me.

48:06Tracy, 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.

48:43So 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.

49:22I agree. And I think that was like a light bulb moment for me because, you know, we've talked to Jigar Shah and Jigar Shah talks a lot about offtake 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 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 offtake has to be part of it across the space.

50:05The other thing that was interesting, I think we're going to do another episode on electricity markets 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.

50:45Yeah. You know, we should do an episode on the history of unbundling of energy markets. I think we may have one in the work. Oh, okay. Excellent. Because I still don't understand how it happened. I think we may even be recording one tomorrow or Thursday. Okay. There's an insight into the All Thoughts 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 Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart.

51:21Check 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 Carmen Ehrman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. 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.gg slash oddlots. You can talk about it with fellow listeners.

51:53And if you enjoy all lots, if you want us to do that history of energy market unbundling, which it sounds like we're going to do anyway, but please leave us a positive review, nevertheless, on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is connect your Bloomberg account with Apple Podcasts. Thanks for listening.

52:48This is LeVar Arrington from Two Pros and a Cup of Joe. The Toyota Tundra and Tacoma are designed to outlast and outlive, backed by Toyota's legendary reputation for reliability. So get in a Tundra with the available iForce Max Hybrid engine, delivering exceptional torque and towing capacity. Or check out a Tacoma with available off-road features like crawl control. It can take you beyond the trails. Toyota trucks are built to last year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. This podcast is brought to you by FedEx, the new power move.

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