Market Failure: The Economic Challenge to a Clean Energy Transition

Written by: Liad Wolch

Edited by: Sonja Colford

In the past fifteen years, the cost of producing renewable energy has plummeted. Electricity generation from solar panels, for instance, fell from $359 to $40 per megawatt-hour (MWh) between 2009 and 2019 (Roser, 2020). As a result, renewable electricity generation has become financially competitive with electricity generated from fossil fuels, leading some analysts to argue that the technical-economic challenges to the clean energy shift have largely been solved. Accordingly, any remaining problems are deemed to be of a political nature. This mindset is reflected in recent US energy policy: leading up to the 2024 US presidential elections, Brian Deese, Director of the White House National Economic Council under President Joe Biden, made the case for a “Clean Energy Marshall Plan,” under which renewable energy investment would be incentivized through the extension and expansion of subsidies as well as increased tax credits (Deese, 2024). Such a plan would serve as an entrenchment of Biden’s Inflation Reduction Act (IRA), a hallmark policy which planned at least 37 billion dollars of spending over the next decade to boost clean energy by empowering private investors to initiate the shift (The Economist, 2023).

Yet, despite significant reductions in the cost of renewable energy generation, the share of world electricity produced by fossil fuels has fallen meagerly, from 68 percent in 2013 to 60 percent in 2023. In comparison, renewable electricity generation has only increased from 20 percent to 30 percent over the same period (Ritchie and Rosado, 2024). So why haven’t markets allowed for a renewable energy breakthrough on electricity generation markets?

Neoliberal Energy Markets

In discussing his new book, The Price is Wrong: Why Capitalism Won’t Save the Planet, Brett Christophers, an economic geographer at Uppsala University in Sweden, presents a compelling analysis for why electricity markets continue to inhibit the proliferation of renewable energy. Christophers argues that while clean energy policies such as the IRA provide some stability to the flow of capital, they do not address price volatility on electricity transmission markets. On the market, generators participate in race-to-the-bottom auctions in which they bid progressively decreasing prices until selling is no longer profitable. Once demand is met, all generators receive the price of the highest bidder. Due to the uncertainty of the market-clearing price, investors see renewable energy as a risky asset compared to fossil fuels, which have more predictable revenue flows. So, while climate-conscious entrepreneurs are currently generating cost-competitive clean energy, investors are unwilling to finance it (Christophers, 2025).

Additionally, due to the competitiveness of energy transmission markets, the marginal returns for producers remain low. While fossil fuel producers establish oligopolistic control through organizations such as the Organization of the Petroleum Exporting Countries (OPEC), a multinational oil cartel, renewable energy generators are unable to accumulate enough market share to dictate their own prices, limiting would-be profits from falling production costs. In turn, policy-makers are reluctant to reform these markets, as they have an interest in keeping energy prices low for consumers (The Break Down, 2024).

Finally, though many governments have committed to decarbonization, little tangible pressure has been placed on fossil fuel producers to give up their higher rates of return. In November 2024, for instance, British Prime Minister Keir Starmer pledged carbon emissions reductions by 81 percent compared with 1990 levels by 2035 (Harvey and Niranjan, 2024). Yet in February 2025, BP, a British energy producer, announced it would be investing in “10 large-scale oil and gas projects by 2027 and a further eight to 10 projects by the end of the decade.” (Ambrose, 2025). Allowing fossil fuel producers to maintain and expand production, rather than shift to renewable energy, further exacerbates the economic challenges to a clean transition.

The dominant narrative that a clean energy transition will occur inevitably due to technological innovation and market forces doesn’t appear to hold true. What alternative systems, then, could offer a more concerted renewables push?

An Effective Transition: The Case of Uruguay

Uruguay’s electricity grid outlines one potential solution to the economic challenges facing renewable energy: public ownership. The country has been able to run transmission markets by way of the state-owned electricity company, the National Administration of Power Plants and Electric Transmissions (UTE), due to its history of collectivist economic policy. During the early 20th century, for instance, Uruguay became the first Latin American country to establish a welfare state (BBC, 2024). Rather than pitch race-to-the-bottom bids, the UTE auctions Purchase Power Agreements (PPAs), which offer generators a set price for a given amount of supply over a long-term period. This price stability plays a critical role in making renewable energy less risky for investors (Markert, 2024).

Uruguay has used public ownership to catalyze a robust clean energy transition on its electricity grid. In 2008, the government announced a 25-year National Energy Policy (NEP), which emphasized increasing renewable energy production, improving energy infrastructure and energy efficiency, as well as reducing the grid’s environmental impact (Petrovic and Reed, 2023). According to Ramon Mendez Galain, the country’s director of energy during the NEP’s implementation, the policy became a success due to firm and broad-based partisan support for a clean energy regulatory framework, in combination with abundant natural conditions, particularly for wind- and hydro-based energy (Watts, 2015). By 2016, 100 percent of Uruguans had access to electricity, and by 2022, 91 percent of electricity production was from renewables (IEA, 2023).

Uruguay’s approach represents an effective model for catalyzing a rapid and robust decarbonization of the grid. Critically, the transition has had a positive impact on emissions: in 2022, electricity and heat generation accounted for 0.7 megatonnes of carbon emissions, or 0.21 tonnes per capita (IRENA, 2024). In comparison, Canada’s electricity generation in 2023 accounted for 49 megatonnes of carbon emissions, or 1.2 tonnes per capita (Canada, 2025).

Conclusion

With recent technological advancements, economic challenges to the clean energy transition have taken a backseat in government climate policy. However, these challenges loom large as major inhibitors to both renewable energy investment and reduced fossil fuel production. To effectively address the economic constraints of liberalized electrical grids, politicians and policymakers must consider creative solutions, as countries such as Uruguay have done. Without such leadership, fossil fuels will likely continue to dominate in the short to medium term, significantly hampering efforts to reduce the catastrophic impacts of carbon emissions on the planet.

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