When Low Wholesale Prices Spell Trouble: The Missing Investment Signal for Renewables
Introduction
The rapid expansion of wind and solar power has brought down wholesale electricity prices to historically low levels. At first glance, this seems like a victory for the energy transition—cheaper power for consumers and lower carbon emissions. However, a troubling paradox is emerging: these rock-bottom prices provide virtually no incentive for building new power plants, and they even threaten the viability of existing fossil fuel and renewable generators. The current market signal is broken, and without a fix, the path to a reliable, clean energy future is at risk.
The Mirage of Low Wholesale Prices
Wholesale electricity prices have tumbled due to the massive influx of zero-marginal-cost renewable energy. Solar and wind farms, once built, operate with very low ongoing costs, meaning they can bid electricity into the market at near-zero prices. This drives down the clearing price for all generators.
Why Low Prices Fail to Signal Investment
In a well-functioning market, high prices during periods of scarcity encourage investors to build new capacity. But when renewables dominate the market and push prices to the floor during most hours, the occasional price spikes are too rare and uncertain to justify the upfront capital costs of a new wind farm, solar array, or gas plant. The result is a missing money problem: revenues are insufficient to recover construction costs, let alone provide a reasonable return.
Consequences for New and Existing Generation
The low-price environment doesn’t just discourage new investment—it also pressures existing plants. Older coal and gas units, which rely on higher average prices to cover their operating expenses, are being forced into early retirement. Even some renewable projects are struggling, as they depend on the occasional high-price periods (like summer heat waves) to make their economics work. Without a clear price signal, the entire fleet of generators becomes economically fragile.
A Better Path Forward
To break the cycle, we need a market design that separates the short-term energy price from the long-term investment incentive. The suggestion is to adopt capacity payments or contracts for difference (CfDs). These mechanisms guarantee generators a stable revenue stream for making capacity available, independent of volatile wholesale prices.
Designing a Stable Investment Framework
Under a capacity market, generators receive a fixed price for promising to deliver electricity when needed. CfDs, on the other hand, set a strike price—if the wholesale price falls below that, the government (or system operator) pays the generator the difference; if it rises above, the generator pays back the surplus. This approach ensures that wind and solar developers can secure financing without relying on unpredictable spot markets.
Several jurisdictions are already experimenting with these models. For example, the UK’s CfD scheme has successfully brought down the cost of offshore wind by giving developers long-term revenue certainty. Similarly, capacity auctions in the US (PJM) have maintained resource adequacy while renewable penetration grows. Such “hybrid” markets retain the efficiency of short-term competition while providing the investment signal that pure energy-only markets now fail to deliver.
Conclusion
Low wholesale electricity prices are a double-edged sword. They reflect the success of cheap renewables, but they also obscure the urgent need for new capacity. Relying solely on the spot market to guide investment is a mirage that will lead to blackouts and stalled decarbonization. By embracing mechanisms like capacity payments and contracts for difference, we can create a clear, stable signal for building the next generation of clean energy. The future is bright—but only if we fix the market first.