Why renewables may be cheaper but don't dominate new power generation

(c) by Mark Dempsey

The quotes below are from The Price is Wrong: Why Capitalism Won't Save the Planet by Brett Christophers. The short version of his detailed examination of why renewables are remain in disfavor, despite producing electricity more inexpensively than conventional sources, is that renewables are not as profitable, even for large-scale utilities generating electricity. And profit guides business decisions....decisively.

Part of the reason renewables have higher costs and lower profits is that they consume more land--whether solar PV or wind, the footprint of a renewables installation is far larger than a conventional power plant or an oil well, at least above ground. Another partial explanation is that the cheapest land for these installations is often far from the eventual consumers of the electricity. Extending grid connections to remote locations is not cheap. So even though a solar panel may cost less than drilling for oil, connecting that panel to the grid may boost the cost of delivered electricity to the point it becomes less profitable. The pipeline and refinery infrastructure for conventional energy sources is already built.

The costs for renewables are primarily at their initial installation, too, requiring financing, or massive injections of equity upfront. "Market-izing" electrical generation with spot markets makes financiers nervous since prices can fall below zero for that electricity if markets have their way.

Incidentally, it's worth mentioning that hydrocarbons remain heavily subsidized to achieve their lower costs / higher profitability. For example, in the US, those with oil income can claim the depletion allowance, and write off a portion of their income as not taxable. The IMF says "Globally, fossil fuel subsidies were $7 trillion or 7.1 percent of GDP in 2022, reflecting a $2 trillion increase since 2020 due to government support from surging energy prices." Subsidies for renewables are not insignificant, but faced with the enormous multi-trillion-dollar subsidies for petroleum, the renewables struggle to compete.

You may notice in the examples below that low oil prices make petroleum projects less profitable, and encourage renewable development. The key to understanding this is that any such project must be "bankable" - and lenders carefully calculate projected profits based on the price the product will receive. Higher initial costs and lower or uncertain returns, make renewables something bankers view with skepticism.

From the book [p.215]: Consider, for instance, the recent experience of Equinor, the Norwegian state-controlled oil and gas giant. All the while [French oil company] Total was finalizing its plans for its money-spinning hydrocarbon projects in Africa and South America, Equinor, alongside partners Eni and SSE, was itself finalizing plans for the development of the first phase of Dogger Bank in the North Sea, in which it owns a 40 percent stake and which will be one of the world's largest offshore wind farms when operational. In June 2021, Equinor revised downwards its expected rate of return on offshore wind projects - from between 6 and 10 percent to between just 4 and 8 percent. But a study carried out by experts suggested that even this was too optimistic in the case specifically of the Dogger Bank project, calculating the expected IRR to be just 3.6 percent and equating to a payback period of a minimum of seventeen years.

No wonder that when, the following year, Equinor approached BP - another European oil company that had said in the recent past that it would move into lower-emissions activities but which has found such ambition to be fundamentally incompatible with the profit motive - about joining it in competing for new wind power rights off the coast of California, the response was negative. BP, reported Jenny Strasburg in early 2023, had increasingly become 'disappointed in the returns from some of [its own] renewable investments,' and was therefore planning to 'dial back elements of [its] high-profile push into renewable energy.' Offshore wind returns of 4 to 8 percent? No thank you.....

[p.216]...In a world awash in hydrocarbon profits, what chance for renewables and their wafer-thin profit margins?

For a brief window of time during the early part of the COVID-19 pandemic, expected returns on oil and gas declined to the extent they became comparable to expected returns on renewables. As environmentalists saw it, at least, it appeared to be one of the few silver linings to the spread of the virus. With oil prices languishing at under $25 per barrel in March 2020, the expected IRR on oil projects dipped to below 10 percent, making wind and solar projects newly competitive with such projects on paper - which they would remain, analysts suggested, even at an oil price of $35 per barrel. But, of course, hydrocarbon prices did not remain in the doldrums for long. As soon as they recovered, the window of opportunity for renewables seemingly slammed shut.

That the profitability of oil and gas has generally been far higher than that of renewables explains why, in the 1980s and 1990s, the oil and gas majors unceremoniously shuttered their first ventures in the renewables space--piecemeal, exploratory, and never more than tentative- almost as soon as they had launched them: these were business decisions, first and foremost. The same comparative calculus equally explains why the same companies are shifting to clean energy at no more than a snail's pace today, and why such 'climate-friendly' investments as they are in fact making - BP, for its part, has mentioned hydrogen, biogas, and electric vehicle charging networks, in each of which returns are expected to be above 10 percent- increasingly are not in renewable power generation at all.

If anyone were still under the impression at this stage of the climate crisis that the oil majors would ever sacrifice profitability at the altar of climate, then the following recent statement by Shell's CEO Wael Sawan in response to a question about whether he considered renewables' lower returns acceptable for his company, will have rudely disabused them of such a notion:

I think on low carbon, let me be, I think, categorical in this. We will drive for strong returns in any business we go into. We cannot justfy [p217] going for a low return. Our shareholders deserve to see us going after strong returns. If we cannot achieve the double-digit returns in a business, we need to question very hard whether we should continue in that business. Absolutely, we want to continue to go for lower and lower and lower carbon, but it has to be profitable.

Sawan's predecessor as CEO had staked his reputation on transforming Shell from an oil and gas company into a climate-friendlier power-generation company, all the while the US hydrocarbon majors stuck defiantly with hydrocarbons. Sawan was now responding to the market's unambiguous assessment of the two divergent strategies.'Five years ago, when Shell embarked on a low-carbon push, its market capitalization was about $40 billion less than that of Exxon Mobil Corp. Now', noted one journalist, 'the difference is more than $200 billion.'

....
[from me, not the book]:
The subsidies for renewables are peanuts when compared to the subsidies petroleum receives. Governments are often criticized for "picking winners," but the picking has already happened. The problems that remain in converting to renewables are daunting because of the sunk costs and political inertia reinforced by those who might lose out if a different winner were picked.

Mention how governments' superstructure for the economy remains biased toward what are ultimately more expensive solutions--after all, what's more expensive than an uninhabitable planet?--some say "But if we take that advice, the stock market would suffer, and my 401K would be in the tank."

This is an indication of "Midas disease"--something far more widespread than COVID. It's mistaking the symbols of wealth for actual wealth. Alfred North Whitehead calls it the fallacy of misplaced concreteness. It's like going to a restaurant and devouring the paper menu. Neither sensible nor nourishing.

What good would all those symbols of wealth do, whether dollars or stocks and bonds, if there's nothing to purchase?