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Comment by rlpb | Hacker News Reader

> Doesn't this mean that solar/wind are insanely lucrative?

This is how markets are supposed to work. It provides an economic incentive for production to increase, which is what we want.

Consider what happens if you develop a farming method to produce potatoes for a fraction of the usual cost, but you can only meet 10% of total demand at your local market. What price are you going to sell your potatoes for when you show up to the market? You (like any free market seller) want to maximise your return, so you'll be able to sell for a fraction under the previous market rate, undercutting everyone else. Your farming method would be extremely lucrative.

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Sure, but those same free markets will happily see those expensive producers go out of business. In the electricity scenario, that would mean blackouts.

If you triple the price, you don't have a new gas plant appear out of thin air. And the result won't really be lower consumption either, because most people would have fixed rate contracts (not in the UK so don't know specifically, but this is very common elsewhere)

> Sure, but those same free markets will happily see those expensive producers go out of business.

No, because remember you are only able to meet 10% of market demand. The expensive producers will still get 90% of the business, and the market price for their product will remain basically the same. This is what we observe in the electricity markets today: the price to us is the cost of the most expensive product. The cheaper producers who cannot meet the full market demand still get to sell at the cost of the most expensive product.

> The cheaper producers who cannot meet the full market demand still get to sell at the cost of the most expensive product.

Which would mean it's super lucrative and your same laws of economics will tell you that that means they'll be building like crazy.

My while point was that as soon as you get to a day where no gas is needed you've lost the ability to react quickly because no supplier will just leave a gas plant around just for that

The markets accomodate that though. Market participants buy energy futures because they do need guaranteed future energy. Solar and wind producers cannot sell such futures (or else they can but will be forced to buy from gas plants to fulfil them when they can't). So in practice, wholesale buyers continue to buy a mix.

Yes, but here’s the thing: you don’t have a monopoly over your potato farming method. Lots of new farms are built, and the more that do, the more the average price of a potato drops. Your expected return starts to drop. Yours - and everyone else’s - profit margins get squeezed.

Investors begin to refuse to build new potato farms because a return on their investment gets worse whenever anyone decides to build a new farm.

But the people need potatoes and more potato farms! The government issues an incentive scheme to guarantee a minimum price for each potato sold. Potential farm owners bid against each other for the lowest price, but it means they can build a farm and expect to break even.

> Investors begin to refuse to build new potato farms because a return on their investment gets worse whenever anyone decides to build a new farm.

If they all refuse, then they're leaving money on the table. One investor could invest in 10% production only, and that would be very lucrative. It would be exactly my low cost to produce potato scenario.

In practice, they don't all refuse, or all invest. The market finds a balance. In time, producers switch to the new method, because anybody who doesn't leaves an opportunity for someone else to take their business and make more money.

This takes time, though. If we want things to go quicker, then we need to guarantee return on investment for longer, which is exactly what the government does by guaranteeing prices to renewable energy producers.

> This takes time, though. If we want things to go quicker, then we need to guarantee return on investment for longer, which is exactly what the government does by guaranteeing prices to renewable energy producers.

Yes exactly. The incentives to renewables producers exist to ensure accelerated growth. This may mean we are paying more for renewables in the short term (though no more than fossil fuels) but the investment should pay dividends in future.

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