The Productivity Commission of Australia recently published its interim report recommending significant changes to the nation’s approach to renewable energy investment.
At first glance, the recommendations appear logical and practical. The Commission argues for phasing out direct subsidies for renewables, specifically ending schemes like the Renewable Energy Target (RET) and Capacity Investment Scheme (CIS) by 2030.
Instead, the Commission favours market-based incentives intended to allow competition and market forces to drive investment. On paper, this seems sensible. Markets can indeed drive efficiencies and foster competition. But the realities of renewable energy economics suggest caution.
This caution aligns closely with Brett Christophers’ analysis in his recent, deeply researched and densely argued book, The Price Is Wrong. Christophers argues convincingly that renewable energy, despite now frequently having lower production costs than fossil fuels, is fundamentally limited by volatile wholesale prices.
Wind and solar projects have very low operational costs, but when they generate large amounts of energy simultaneously, they create a glut of cheap electricity, which pushes wholesale prices down.
This price drop, known as price cannibalisation, significantly reduces revenue and undermines the economic viability of new renewable projects. Without reliable profits, investors find renewable projects less attractive, leading to uncertainty and a reluctance to invest at the scale necessary for a rapid energy transition.
Christophers illustrates the challenge of renewable energy pricing with clear, real-world examples. One particularly revealing case he describes involves solar energy in California.
As solar installations expanded rapidly over the last decade, sunny days started producing a surplus of cheap solar electricity. Wholesale prices plummeted midday, sometimes even going negative, meaning producers had to pay to offload their electricity onto the grid.
This price cannibalisation devastated solar profitability despite the low operational costs of panels. Investors saw stable revenues disappear, and without government-backed guarantees, many projects stalled or faced refinancing at worse terms.
Christophers contrasts this with the British approach, where the government adopted Contracts for Difference (CfDs) to stabilise revenue for offshore wind farms.
Under these contracts, wind developers receive a fixed price for their electricity regardless of wholesale market fluctuations. When wholesale prices fall below the agreed “strike price,” the government compensates developers for the difference. If prices rise above the strike price, developers pay the surplus back.
This mechanism substantially reduced investor uncertainty and accelerated offshore wind investment across the UK. The rapid and sustained growth of offshore wind there provides strong evidence that robust government intervention can effectively mitigate the inherent price volatility of renewable markets, something Australia’s Productivity Commission overlooks in its push toward pure market-driven mechanisms.
Christophers argues that electricity fundamentally resists treatment as a conventional market-based commodity. Unlike tangible products easily stored or transported, electricity must be balanced instantaneously at all times across the grid. Its demand and supply fluctuate constantly, and when supply outstrips demand, even briefly, prices collapse quickly. Conversely, shortages cause rapid price spikes. These characteristics create inherent volatility.
Christophers points out that markets traditionally function best with commodities that can be stockpiled or delayed until favourable pricing emerges.
Electricity lacks this flexibility, although storage helps. As a result, renewable generators reliant solely on market revenues face chronic instability and unpredictable returns, underscoring Christophers’ insistence that robust governmental support, not market forces alone, must underpin renewable energy deployment.
Christophers warns that storage is not enough to overcome the central weakness of renewables under capitalism: the structural inability of wind and solar projects to deliver reliable, long‑term profits. Storage may smooth intraday price swings, but it does not resolve the broader issue that wholesale electricity prices collapse during periods of high renewable generation and spike unpredictably when supply tightens.
The Productivity Commission’s faith in pure market incentives appears overly optimistic in this light. It assumes that removing subsidies will somehow motivate the private sector to invest confidently in renewables despite continuing profit uncertainties.
Christophers makes it clear that this scenario is unlikely. Private investors prefer certainty. They require clear, predictable returns. The existing volatility in wholesale markets, compounded by increasing shares of renewable generation, prevents stable investment signals.
Without explicit government-backed mechanisms such as Contracts for Difference (CfDs) or guaranteed Power Purchase Agreements (PPAs), renewable developers face greater risks. Christophers suggests that these revenue guarantees are precisely the tools governments must provide if the goal is to rapidly scale renewables and meet ambitious climate targets.
Another recommendation from the Productivity Commission involves broadening the Safeguard Mechanism. Currently, Australia’s Safeguard Mechanism targets only large industrial emitters, setting emission thresholds at 100,000 tonnes of carbon dioxide per year. The Commission suggests lowering this threshold significantly, down to 25,000 tons annually.
Expanding the number of facilities subject to this regulation does have merit. It ensures more industrial operators contribute directly to national emissions reductions. However, Christophers emphasises that expanding regulatory oversight alone cannot replace direct subsidies or guaranteed revenues for renewables.
While regulation and market-driven carbon pricing help level the playing field, they do not solve the underlying problem of price volatility for renewable generators.
The Commission also cautiously endorses a light-touch carbon pricing approach, avoiding the introduction of a comprehensive carbon tax. Christophers strongly disagrees with this incremental and indirect strategy.
Weak carbon pricing signals do little to dislodge the entrenched advantages enjoyed by fossil fuel-based power plants. These plants often have guaranteed revenues, either explicitly through subsidies or implicitly through price stability linked to fuel costs.
Natural gas power plants, for example, often have predictable operating costs due to stable fuel contracts. By contrast, renewables rely purely on market electricity pricing.
If carbon pricing remains weak and indirect, renewables cannot effectively compete, resulting in slower adoption and continued reliance on fossil fuels. Christophers insists that only robust, clear carbon pricing or strong governmental revenue guarantees can overcome these distortions.
One area of genuine alignment between the Productivity Commission and Christophers involves project approvals. The Commission highlights the need for improved environmental permitting processes, suggesting the creation of a Coordinator-General supported by specialised teams.
Rapid approvals and streamlined permitting significantly reduce investment risks and delays, making renewable projects more attractive. Christophers supports precisely this type of intervention. Poorly implemented permitting processes and bureaucratic delays historically have created investment bottlenecks. Removing these delays improves the stability and predictability of renewable energy investments.
When viewed holistically, the Productivity Commission’s interim recommendations represent a mixed approach. On the positive side, faster permitting and stronger regulatory oversight align with what is needed for stable renewable energy investment.
However, the Commission’s insistence on prematurely removing direct subsidies and shifting entirely toward market-driven incentives risks undermining investment confidence. Investors simply will not commit significant capital in environments where revenue is uncertain.
Price volatility in renewable-heavy grids remains an unsolved challenge. Market incentives alone cannot provide sufficient stability, as demonstrated repeatedly in global experience.
Ultimately, the Productivity Commission is correct in identifying problems with prolonged reliance on poorly structured subsidies. Subsidies, if badly designed, can lead to boom-and-bust cycles and inefficient investment.
But the Commission’s solution – to move swiftly to pure market forces without sufficient transitional protections – may lead to even greater volatility and slower progress toward national climate targets.
Christophers’ analysis is clear. Renewable energy investments require predictable profits, either through long-term PPAs or contracts guaranteed by governments. These measures protect projects from inevitable wholesale price volatility and investor risk perceptions.
The Productivity Commission’s approach is well-intentioned but flawed. Australia faces an energy transition that demands not merely lower renewable costs, but predictable, stable investments at massive scale.
Market incentives alone, without well-designed governmental support, will struggle to provide this certainty. Policymakers should reflect carefully on these risks. Achieving Australia’s climate ambitions requires realism about the economic challenges renewable energy faces, rather than idealistic reliance on pure market efficiency.
Michael Barnard is a climate futurist, company director, advisor, and author. He publishes regularly in multiple outlets on innovation, business, technology and policy.