The Green Energy Investment Paradox

Wind and solar plants (which I refer to as green energy, GE) have near-zero marginal cost and intermittent generation that depends on weather conditions. Using hourly electricity wholesale market prices and monthly generation data for 51 markets around the globe, I show that these unique characteristics lead to lower and more volatile prices. A purely weather-dependent instrument that is independent of endogenous capacity levels yields evidence for the causality of this effect. The GE investment paradox arises because lower and more volatile prices reduce firms’ incentives to invest in capital-intensive GE plants, which I document based on asset-level data for planned power plants. These results imply that sustaining GE growth will become increasingly costly and hit an upper limit under the current pricing mechanism.