Today’s graph is sourced from the recent Goldman Sachs analysis of the thermal coal industry, and its conclusion that the window for investment is closing rapidly – thanks to reduced demand, and because of the rise of renewables and other cleaner energy sources.
Goldman Sachs says there are three big themes governing the outlook for thermal coal; the first is environmental regulation, be it air quality or greenhouse gas emissions (which lead to more expensive coal); the second is energy efficiency (which leads to less consumption of coal), and the third is the growth in renewables.
To illustrate the point about how growing amounts of renewables impact coal generation, the Goldman Sachs analysts looked at the recent experience of Spain.
Goldman Sachs says Spain is a good example of how increases in renewable energy production has to be offset by a lower average load among fossil fuel plants. “Rising generation from solar plants in particular (whose output often coincides with the time of peak power demand) can result in lower peak power tariffs, undermining the profitability of many conventional power plants,” it says.
The first graph (exhibit 33) of daily power output statistics shows the variability of wind power on a day-to-day basis, while solar power output varies during the day as well as on a seasonal basis. Goldman says despite this, the Spanish grid operator has been able to manage successfully the intermittency of solar and wind power, partly by leveraging the spare capacity of gas and coal-fired plants.
Goldman noted that over a 12-month period to September 2012, wind power contributed roughly 17 per cent of total Spanish power generation (although in some months it contributes significantly more) and is on track to match and even exceed the share of coal (20 per cent) in coming years.
Because daily wind output varied between 20 and 320GWh (exhibit 34) the daily generation from gas and coal-fired plants was negatively correlated with wind power output, so the profile of coal-fired plants became that of mid-merit energy source rather than the traditional base load profile its cost competitiveness would imply, as exhibit 35 illustrates.
This, of course, has also been seen on a broader scale in Germany, where many fossil fuel plants are being shut down because they are no longer economic. And in Australia too, where the combination of environmental regulation (the carbon price), lower demand and growing renewables has had a similar impact on the share of coal generation.
Nor is coal-fired generation likely to be saved by carbon capture and storage, Goldman Sachs notes. It expects little more than 2GW of CCS to be installed by 2020, and the technology has not delivered a viable solution for coal fired generation.
Goldman Sachs says CCS is more likely to find a niche in “enhanced oil recovery” – encouraging the production of more fossil fuels, rather than reducing emissions from burning them. That’s because EOR projects do not usually have the same requirements to ensure that CO2 remains trapped underground.
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