The energy transition can't depend on private investment

It’s hard not to feel fury at the climate deniers, anti-net zero activists, fossil fuel company executives and assorted others who are prepared to risk the lives of millions of people – indeed, prepared to jeopardise the possibility of civilised human life on earth – because they are too stupid, selfish, corrupt or ignorant to work collaboratively to reduce the greatest risk that humanity has ever faced.

But then there are those who accept the science, realise the risks and pledge commitment to reduce emissions, all the while advocating a strategy for action that prioritises private profit over emission reductions and virtually guarantees that the energy transition won’t take place at the scale and pace needed to avoid climate disaster.

It’s hard to know who to be more angry with – the honestly malignant or the duplicitously virtuous.

In this article I’m going to focus on the latter. But in truth it’s no good pointing the finger at individuals in either category. Both are driven by the same force that is driving the climate disaster itself: capitalism. Climate deniers know that taking action at the scale and pace needed to avert climate disaster means abandoning the precepts of free-market capitalism. Those advocating “green growth” or investor-driven responses think that mobilising “markets” and private capital is what is needed. Both find it easier to imagine the end of the world than an alternative to capitalism.

It is important to understand the concept of rationality when talking about capitalism and the climate crisis. As we will see in the discussion below, it is entirely rational for individuals or companies to engage in behaviour that is “rational” according to the rules established in capitalist societies to protect the interests of capitalists, even if that behaviour appears to be immoral or destructive to the broader social good. But as a political-economic system in its entirety, capitalism is deeply irrational.

OK. Now, to the matter at hand: an exploration of how private investor-led “green capitalism” is hindering the energy transition rather than helping it. In what follows I’m drawing heavily on an important new report on privatisation in Pakistan’s electricity sector by Ed Miller, who conducts research into corporate power and tax justice. I encourage you to read his work in detail here. I also draw on work I’ve conducted in Indonesia with power sector trade unions.

Most of the energy sector decarbonisation efforts in developing countries outside China involve international donors, multilateral agencies and financial institutions advocating for private investor-led models. This can be characterised, following Trade Unions for Energy Democracy, as “privatise to decarbonise”, since it involves the undermining or outright privatisation of publicly-owned energy utilities under the guise of introducing renewable energy.

The privatisation path followed in many countries involves the IMF-designed Power Purchase Agreement (PPA) model. This provides for two tariffs: one for the delivery of electricity to customers on a cost-plus basis (all generation costs are met plus an agreed margin); and a capacity payment, which provides payments to generators even if they aren’t supplying electricity to the grid, on the basis that their capacity is available if needed. Payments are made in US dollars to protect investors from currency devaluation. In Indonesia, the system is commonly called “take or pay”, whereby the state-owned electricity company, PLN, must take the electricity generated by Independent Power Producers (private companies) or pay them anyway. It, too, must make payments to the private investors in US dollars, even though it can only charge its customers in Indonesian rupiah (readers of my work will well understand how this undermines the monetary sovereignty of the Indonesian state).

After the PPA model was introduced, Pakistan’s generation capacity increased substantially – by 86% in the decade to 2024, mostly due to the addition of new, privately-owned power plants, many powered by gas and coal. However, over the same period the amount of electricity delivered to the grid increased by only 31%. In fact, per capita, electricity consumption actually declined. Ed Miller concludes:

Despite trillions of rupees of new investment, electricity delivered to the grid from the private sector hardly moved in the decade to June 2024. In the last two years, public sector generation - largely hydro and nuclear - has delivered roughly two-thirds of total electricity to the grid.

In the last two years, capacity payments have made up 60% of payments to generators and half of the bills consumers pay.

It is important to clearly state what this system entails: private electricity generation companies “earn” huge amounts of money to not generate electricity, and the cost of this non-existent electricity is paid for by ordinary consumers. This is simply a form of legalised corporate theft of national wealth from countries that are already poor. Very often the thieves are foreign investors, but not always. In both Pakistan and Indonesia, members of the political-economic elite are engaged in privatised energy investments. In this case, local business elites are able to influence political decisions to allow the IMF, banks and investors to peddle their wealth extraction models, with local and international investors both taking advantage of them. If you think I’m being a bit hyperbolic here, consider Ed Miller’s analysis of the financial results of a number of companies involved in the Pakistan market:

· Hubco, which is listed on the PSX and has interests across six different projects, enjoyed a 546% increase in net profit in the six years to 2024. In 2023 alone the amount of electricity that Hubco projects delivered to the grid halved (weighted for shareholdings), while its profits doubled.

· Sahiwal IPP saw their net profit increase by 445% over five years, [with the] amount of electricity they delivered to the grid declining by 70% over that period. They faced tax rates of 1-5% over this period.

· Port Qasim IPP saw a 91% drop in electricity delivered to the grid, resulting in an average real cost per unit increase of more than 1000%.

As Miller points out, there is a silver lining to this very dark cloud: in response to the rising cost of electricity, many Pakistanis have installed rooftop solar panels – 50GW in the last couple of years. But even this is not an unalloyed positive story. For the large numbers of poor Pakistanis, rooftop solar is simply unaffordable. This leaves them paying the cost of a system that the well-off are increasingly able to isolate themselves from. And the more rooftop solar coming into the system, the less electricity is needed from the big generators. That doesn’t trouble the generators because they just get higher capacity payments.

Now, just to emphasise how bad this system is for developing countries like Pakistan, and how international energy markets punish poor countries, consider the following. Ed Miller points out that in countries like Pakistan that are highly reliant on imported fossil fuels, which they pay for in US dollars, declines in the value of the local currency, the rupee, have multiple flow-on effects. When the rupee’s value declines, the cost of generated electricity increases in privately-owned coal-fired power plants that buy coal from overseas. This drives them lower in the merit order for dispatch behind cheaper generators like hydro or solar (to understand what this means, check out an earlier post of mine), making them less likely to be called on to generate electricity. However, as we have seen, they still receive – in US dollars – their capacity payments.

And remember, forcing public companies like PLN in Indonesia and its Pakistani equivalents to pay private investors in US dollars while they can only charge their customers in their national currencies places a heavy burden on the state to get those US dollars in the first place. This means pressuring the Indonesian and Pakistani states to favour export industries that earn hard currency, potentially skewing development priorities towards, for instance, cash crops that can be traded on international markets rather than concentrating on using the national currency to improve food self-sufficiency, and health and education outcomes that would provide long-term benefits. US dollar PPAs place an almost-impossible burden on the public energy utilities and undermine national monetary sovereignty.

I’m going to turn to Australia now to make one final point. An article in The Energy during the week reported on the CSIRO’s latest assessment of generation costs. It read:

The cost of electricity will have to rise to justify the investment in new generation capacity needed to deliver a reliable net-zero power system, CSIRO’s final GenCost 2025-26 report finds.

The annual report from the nation’s premier science agency finds that wholesale prices in the eastern states National Electricity Market are expected to be too low to justify investment in most new generation technologies – bar solar and batteries – over the four years to 2030.

As I have said before, the more renewable energy that enters the grid – from behind or in front of the meter – the harder it will be to make profit from electricity generation. Renewable energy drives down the wholesale price of electricity, especially because the amount of rooftop solar is driving grid demand in the middle of the day to new lows every year (this trend might be interrupted by AI data centres). You would think that cheap, clean energy would be a great thing. But if it doesn’t allow for profit for private investors, the logic of the system requires that we increase the price of electricity so that private investors can extract more wealth from Australian households and businesses.

The logic of the privatised electricity market, whether in Indonesia, Pakistan or Australia, demands a rationality that prioritises private profit over the public interest in clean, cheap power. It is entirely rational for private investors to demand US dollars from the Indonesian and Pakistani governments to not generate electricity, while those same governments struggle to provide their populations with power. It is entirely rational for investors to demand higher prices – and thus bigger profits – before they will invest in Australia’s energy transition. It’s rational if the goal is to provide investment opportunities and profits for private investors. But the whole privatised, investor-driven model is completely irrational if what we are trying to achieve is the decarbonisation of our electricity systems at the pace and scale needed to avoid catastrophic climate change.

Jose Marti, Havana, Cuba