> I do and given the practice is pretty common, it seems like most people would.
Definitely not “most people”, only the small number of economists and politicians that designed these scheme.
> To be clear, the incentive is: you make more money when you can produce energy cheaper than everybody else.
Which is a bad incentive for an electricity market, because as I said above, “energy” is free basically free for both renewable and nuclear. What ain't free is “installed power”. And what customers need is “available power”. If you design a virtual market around things that have nothing to do with the underlying physical reality of the actual value being produced, it's simply never going to work well.
> Are capital costs not real underlying costs? If I borrow money from a bank I have to return that money plus interest. I would argue that this is a very real cost.
It is a “real cost” indeed, but it cost you the same whether you produce electricity or not, it's a fixed, upfront, cost, not a marginal cost.
> Also, renewables do require maintenance. That is not as expensive as the ongoing cost of burning fossil fuel, but it’s still a cost
Most of maintenance aren't linked to how much electricity you've produced (for solar, for instance, it only depends on time, and cost you the exact same amount whether or not you've produced any electricity), so it's again not a marginal cost but a fixed one.
And let say you restrict yourself to the maintenance that depends on electricity production (for nuclear, refueling maintenance is like that) you'll end up with a marginal cost that is very low compared to your average cost, and if you price at marginal cost then you're going to go bankrupt.
For illustration say operating your 1GW solar plant cost 200 million a year in fixed costs (including maintenance and the cost of capital) and then it costs 0 to produce a MWh as long as the sun is up. If you price it at marginal cost, then you'll never make any money, so the only hope you have is that in a long enough period the market prices will be high due to the marginal cost of fossil fuel plants, in a way that it ends up covering your fixed costs. But, as a plant owner/manager, you have absolutely no control over that, you aren't being incentivized into doing anything.