By S. Argun, Red Phoenix correspondent, Seattle.

The critical transition to renewable energy sources has been set up to fail by the economic restructuring of the electricity sector, which prioritizes market profits over anything else. The plummeting costs and rising profits of renewable sources have led much of the media to believe that the long awaited market solution to climate change is just around the corner. The various multinational firms such as BP, Exxon, and Shell all announced their new commitments to investment in green energy and capital. However, those promises are either outright falsehoods or undelivered promises as the oil giants recede from these pledges in the face of changing market conditions. Concessions like these in the face of pressure from the market is by now a regular habit of the energy firms. While the market’s quarterly and yearly movements disincentivize socially and environmentally necessary actions, the market structure itself prevents full renewable adoption, particularly in the sub-field of the electricity market. Here the market is not merely a weak incentive, but an active impediment to the complete adoption of renewables.

To briefly explain how most markets function in the United States, we must first understand the concept of marginal cost and merit order. While there are many different market mechanisms for trading electricity, a recurring structure is through the merit order of each generator’s marginal costs. In a centralized market (the structure implemented in most of the US), the owners calculate their bids based on their generator’s marginal cost, which is defined as the cost to produce another unit of energy given some existing production in the unit. This can more simply be thought of as the cost of running the generator without the cost of building the plant, starting it, or running it without any demand. These bids are sent to a system operator, a regulatory organ that then organizes the bids from lowest to highest cost and dispatches them to produce power until the demand is met. The cost of electricity is set at the price of the most expensive unit required to supply demand, which in theory incentivizes each owner to make their production as cheap as possible to ensure they bid in and to ensure that they are maximizing profits. 

This is a massive simplification of electricity markets, which in reality are frequently subject to external conditions like fluctuations in predicted demand and failures of generating units, as well as a great deal of variance in the specific structure of the market, some of which allow bilateral trading between two private parties, or allow the generators to self-dispatch. Nonetheless, the basic “logic” of the market persists between them all: the cost of electricity is set by the most expensive unit required to supply demand.

How does this affect renewables? The key feature of renewables — as far as the market is concerned — is their near-zero marginal cost. This means that a seller can potentially enter a market serviced by non-renewables and make out like bandits, producing the energy for next to no cost once the renewable plant is built, but get paid the cost of producing with coal or natural gas. This hasn’t been lost on the energy firms of the world, hence the continuing pledges and occasional actual investment in renewable resources. So why have our brave entrepreneurs not led us yet into the green future? Again, this relates to the market’s structure. As renewables enter the market, they will slowly “outbid” the natural gas and coal plants and drive them out of the market, driving down the price of electricity. The profits of the renewable plants will decline in proportion to their share of the electricity production, until the approximately zero marginal cost of renewables is reflected in the price and any opportunities for profit is fully destroyed. In reality, the market will never reach this point as the projected return on investment of building a renewable plant will likewise decline and put a stop to further integration. This is the essence of the self-cannibalization problem. As Marx said in the Manifesto:

“The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connexions everywhere.” 

Can we honestly then expect the owners of power plants to sabotage their own market, even for the sake of the planet? They will make enough solar farms and wind turbines to collect their pay, and pump out carbon dioxide and methane to produce all the rest.

The extent of this problem is a matter of some debate amongst economists. The maximal power production share that could be assigned to renewables without the investments keeling into the negative is modeled at 80%. This relies first on the economic absurdity that any capitalist would invest in a “zero-profit” project, and furthermore relies on the political absurdity of a carbon tax, which has been exposed by former Exxon lobbyist Keith McCoy as a red herring set loose by the gas companies (in addition to a litany of other crimes, lies, and bribes committed and dispensed) to slow the climate response. As is typical of political discourse, all potential solutions are “incentives” a la the aforementioned carbon tax, but even other “incentives” seem unlikely, as they would at the outset require a governing body committed to combating climate change. Recent developments such as the approval of the extraction of the Willow oil reserves in Alaska’s North Slope and the ousting of former Federal Energy Regulatory Commission Chairman Richard Glick over his desire to more thoroughly review the necessity and environmental effect of natural gas projects all took place under the Democratic Party, widely aggrandized as the “greener” of the two American blocs. Whatever the Democrats may believe of themselves or want others to believe of them, their actions demonstrate that they intend to carry on much as they have been, and are not interested in making any proactive, drastic, or indeed necessary moves to combat climate change. Even if they were, any of their proposed measures would be fought tooth and nail, first by the sellers of all forms of electric power to either keep themselves in the market or to ensure their profits remain as high as possible, and then by the gas and oil lobby to prevent one of the largest markets for their product from drying up. 

What then is the solution? If the market poses a problem, then the simplest solution is to remove the market. This is not as drastic or artificial a measure as it might seem, as monopoly (either private or public) was the most prominent form of electricity distribution in the entire world. Mexico, the US, and much of continental Europe used vertically integrated, closely regulated municipal monopolies and utilities, and the UK, Australia, and Chile along with most of South America had nationalized grids. Chile is a country of special interest, because the waves of marketization and privatization that overtook all the previously mentioned countries began there. After Augusto Pinochet overthrew the social democratic Allende government in 1973, with the aid of the UK and the US, Chile embarked on a project of mass privatization of previously government-owned enterprises under the advisement of the “Chicago Boys,” a group of neoliberal economists trained at the University of Chicago under Milton Friedman. Among those industries was the nation’s electricity generation and transmission, which was promptly marketized via the 1982 Electricity Act. The market quickly devolved into oligarchic monopoly, in effect creating very large private firms that stood in the way of changing any regulations to their detriment, to say nothing of outages and wild price swings. However, to the rest of the world and the economists in charge of the project, the key goal of making money off power generation had been achieved, and other countries soon followed suit. The United Kingdom and Australia fully privatized their generation over the course of the 90s, along with much of the US, though this process was and is incomplete given the decentralized management of utilities in this country. 

Despite the lessons learned during the Chilean experiment, these market measures were by no means clean or gentle, then or now. The placement of the electrical grid in the hands of private corporations is a risky business, as these corporations don’t see electricity as a common good necessary for the functioning of modern society, but as a source of profit to be exploited. A recurring theme is the emergence of “market power” wherein private firms with large shares of the market can influence supply and demand and create huge price spikes and rake in massive profits. Despite nearly twenty years of market creation and regulation, one such exercise in market power unfolded in the California energy crisis, in which Enron coordinated their plants to shut down during peak demand, causing outages while nonetheless allowing them to “rake in” premiums for the power they continued to provide. Enron had carried out the same activities in Canada, though with less disastrous results.

In the present, the price of electricity in the UK and Texas has skyrocketed in response to various political and environmental conditions. Over the winter of 2022–2023 the price of electricity in the UK soared into the price caps, as it did in Texas in 2021–2022, and the companies providing power were only too happy to charge these prices that in no way reflected the capabilities of people, or indeed most businesses, to pay. This necessitated either a lowering of the price cap in the UK’s case or a wave of loans for firms to cover the costs of electricity in the case of Texas. Nor has the fun stopped: this summer, Texas’ energy prices doubled over a projected heatwave, and investors were helpfully directed to the stocks through which they may best profit from this reversal of fortune. This will likely be a recurring theme through the next decade — the energy marketeers profiting off the climate crisis they had a pivotal role in creating. 

Why did most of the capitalist world elect to pursue this market form, given how easy it is to abuse? While much of the process unfolded out of view of the public eye, a typical claim is that markets will tend to increase efficiency and lower costs overall, minus a few incidences of obvious price gouging, of course. In the US, this has been proven false, with consumer prices rising and customer welfare declining, and any efficiency gains going directly into the pockets of generation owners. This is topically demonstrated in the occupied territory of Puerto Rico, which recently had their grid transferred into private hands. Instead of taking seriously their mandate to update and maintain the (admittedly aged and nonfunctional) grid, the company has elected to continue reaping the profits while the outages worsen. The real reason for the adoption of markets and deregulation is the ability to make money. This comes to us from a leading analyst of the United States electricity market, Paul Joskow, speaking on the eve of widespread deregulation and marketization about the concerned parties pushing for markets:

“[The reform efforts] have been led by large industrial customers interested in lower electricity prices and by the independent power providers and new electricity marketers who can profit if reforms allow them to sell directly to end-use customers at prevailing wholesale market prices…”

The goal of all this was not efficiency or price reduction. It was to free up the billions of dollars of revenue to go out and seek profits, which were found at a greater human and environmental cost than we can afford. The market can not save us. We will not “naturally” uncover a market solution to the climate crisis, in the energy sector or anywhere else. This infrastructure is a social good, a product that serves the whole of society, not the piggy bank of a select few companies. As Stalin writes in Dialectical and Historical Materialism: 

“An instance in which the relations of production do not correspond to the character of the productive forces, conflict with them, is the economic crises in capitalist countries, where private capitalist ownership of the means of production is in glaring incongruity with the social character of the process of production, with the character of the productive forces. This results in economic crises, which lead to the destruction of productive forces. Furthermore, this incongruity itself constitutes the economic basis of social revolution, the purpose of which IS to destroy the existing relations of production and to create new relations of production corresponding to the character of the productive forces.”

The generation, transmission, and distribution of electricity must be taken from private enterprise and placed into the hands of the working class and a socialist state. Nationalization, under capitalist social relations, will still see electrical systems operated on the law of value and will only serve as a minor band-aid to the overall contradictions inherent to capitalism. To truly solve the issue, a new economic model that puts human needs at its center must be built. 

Categories: Economy, Environment, U.S. News