How renewables are pushing coal and gas out of energy markets | RenewEconomy

How renewables are pushing coal and gas out of energy markets

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New report by UBS says rate of closure of coal and gas plants in Europe is accelerating. Soon enough, nearly half of the fossil fuel plants will not be generating enough cash to stay open. That might require a new fossil fuel subsidy to keep the lights on as the transition accelerates.

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The influx of renewable energy sources such as wind and solar into energy markets is forcing coal and gas fired generation out of the market, quicker than most analysts expected.

In a new analysis, the energy market team at UBS note that the pace of closures in the coal and gas sector in Europe is accelerating – even as the growth in renewables steadies and, in some countries, slows.

According to their data, some 70GW of coal and gas-fired generation shut-downs have occurred in the last five years, and the pace is increasing, as this graph below illustrates.

ubs thermal closures pastThat will not be the end of it. The combination of reduced demand and yet more renewable energy additions over the next two years will force the closure of at least 24GW of thermal capacity (coal and gas), and could lead to another 30GW of closures just to ensure that the remaining coal and gas fired plants can stabilise profits.

ubs thermal closures futureBut UBS says there is a risk that many more plants could close. According to its analysis, nearly half of the remaining 260GW of coal- and gas-fired generation in Europe is cash-flow negative, meaning they do not earn enough money to cover basic costs.

As this graph below shows, many of those plants are in Germany, which continues with the highest penetration of renewables, but the UK, France and Spain also have significant capacity at risk.

ubs coal negative cash

The question is what to do about it, if anything. It’s a question that is being asked in Australia as well, which already has a surplus of baseload coal-fired generation, and more gas plants than it needs.

That is despite the deployment of large-scale renewables coming to a virtual stop in the last 18 months as the coal-fired generation pressure the government to cut, or even abandon the renewable energy target.

UBS says European policy makers may have to agree to offer a subsidy to the fossil fuel generators, in the form of capacity payments, or similar, to ensure that the generators earn enough money to stay on line.

UBS says the cost of this can be relatively small, and may add only 0.2 per cent to prices, or a total cost of just over €1 billion per annum.

But there is fierce debate across the EU about the need for capacity payments.

The centre-right German government is under intense pressure to introduce capacity payments, but is resisting. Instead, it is considering new carbon bills in an effort to force out brown coal generators instead of less polluting, and more flexible, black coal generators.

The capacity payments system has been mooted in Australia.  But capacity markets can have perverse outcomes, as Western Australia has discovered to its considerable cost, spending billions of dollars on plants that are not needed, and in some cases not even switched on.

UBS describes the potential closure of so much at-risk capacity as a potential disaster that could cause the lights to go out. If 125GW did leave the grid, it would leave the system precariously balanced, with not enough capacity to meet peak demand.

In the end, however, there is unlikely to be 125GW of coal and gas-fired generation in the next three years, because the market would quickly rebalance. As more generators exit, the surplus energy diminishes and prices recover.

ubs energy market share europe

Just to conclude, here is an interesting graph that highlights the different sources of energy – by capacity – in the European market. Coal and gas currently account for just 30 per cent of that capacity.

Below, UBS estimates the output from the various technologies. Black coal will suffer the most significant reduction in production over the next five years.

ubs euro output

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  1. Paul McArdle 5 years ago

    Thanks Giles

    You’ve presented some interesting data from the other side
    of the world – representing the same problem confronting the NEM (and particularly
    any large-size market where electricity supports industry as well as households).

    At the bottom of your article you state “In the end, however, there is unlikely to be 125GW of coal and gas-fired generation in the next three years, because the market would quickly rebalance. As more generators exist, the surplus energy diminishes and prices recover.”

    In particular the words “unlikely” and “quickly” are important. I’m not sure how certain we can be about either.

    I have been trying to get my head around the issues of this transition being worked through and, to me, it seems there are two separate, but related, issues:

    1) There’s the one you note that has to do with nameplate capacity on the ground. You say it’s unlikely that all 125GW will be removed – however we know from many other commodity markets that they tend to overshoot in both directions (too much supply in iron ore right now in relation to demand, with expectations of more, forcing the price down). Hence in Europe (and the Australian NEM) it’s an open question about how much will be closed, where and when. All three factors will have impacts.

    2) There’s a second issue, which I wrote about here that’s potentially more significant:
    In a cash starved environment, with ongoing indecision about the way forward (including a lack of bipartisan agreement that can be depended upon) are decisions being made that will result in systemic rise in unreliability of plant that’s not being closed, but which is not being invested in?

    You also talk about capacity payments – I also have reservations about these, as noted here:

    If any of your readers can help me to think through these issues, I’d be interested in their comments?


    • Mark Roest 5 years ago

      Ignoring the opinions of the Abbott government, you could look at it this way:
      1. Do a comprehensive study of the region’s weather, solar and wind energy resources through the day and across the season, and electricity demand, in each location.
      2. Figure the price of solar at $1 per Watt installed for PV, and $2 per Watt installed for concentrating solar (thermal or PV, with heat from the cooling process available — combined heat and power, or CHP).
      3. Figure the price of batteries at $200 per kWh available capacity, installed.
      4. Do an analysis following the methodology of PJN’s study that showed that they could run the whole region on a moderate amount of storage balancing solar and wind (including offshore wind) with power sharing across the region, due to the time-complementarity of supply in different locations.
      Because the cost of batteries is going to be a fraction of the price PJN used in its study, adjust for the benefit to cost ratio. The levelized cost of energy delivered from battery storage will reach a few cents per kWh within 2-4 years, and may drop below 1 cent per kWh within 5 to 10 years, due to extensions of the life cycle to 10,000, then 15,000, 20,000 and beyond (the current lithium-ion technology will be replaced). Run the methodology with these prices as target scenarios, adjusting to maximize the value provided from peak shaving, load shifting, frequency stabilizing, and all of the other main and ancillary values of instantaneously available, clean (in the senses of source and controlled frequency and amplitude) electricity.

      5. Compare that set of scenarios, which do Australia’s share of helping to control global warming, as well as giving Aussies free electricity after 5 to 10 years of finance payments, with the scenario of gold-plated utilities extracting (it’s called ‘rents’ for some reason) ever-increasing amounts of money from society until the whole economy collapses because you can’t grow food any more, and no one else has any to export to you, either. Quantify the direct electricity prices that are likely, year by year and cumulatively, and then give your best shot (or research other people’s work) at the economic losses of the destruction of nature and humanity; then add the two together, and figure out a way to show the comparison, year by year, on a graph, and publish it in Renew Economy, as well as wherever else you can get coverage.
      That will not only be the best way to think through the issues, but it will do a huge service to your nation and the world.

      • Paul McArdle 5 years ago

        Hi Mark

        Thanks for the suggestion. What you are proposing sounds like a pretty expensive consulting engagement. Any ideas who would pay for that one?



        • Mark Roest 5 years ago

          First, it’s less expensive if existing information is plugged in; that can be located in the US DOE, and simply by going through RenewEconomy back issues. And lots of other places.
          Second, I hope to be persuasive about starting the knowledge base for business reasons.
          Third, by crowd-sourcing content and editing among the 2+ million NGOs working for environmental and/or social justice (Paul Hawkins, Blessed Unrest), frameworks for each culture can be translated and detailed.
          Fourth, the youth leaders, community developers, griots (keepers of oral tradition and cultural values; storytellers) and shamans of traditional cultures can flesh out the actual content, adapting it to the current state of their ecosystems, and the specifics of their cultures.
          If it is a tool for empowerment, it will be enthusiastically taken up by many.

          • Peter F 5 years ago

            I would be willing to help in such a collaborative enterprise and it could turn out to be an update and enhancement of many of the reports that have been made over the years.
            It would however have three limitations.
            a) there is no obligation for anyone of influence to even read it let alone act on it.
            b) it would be out of date as soon as it is published as many of the sources you rely on would be anywhere between 3 months and 3 years old by the time it is collated but any decisions you make would be in an environment 2-10 years hence. For example if Australia had launched a grand plan six or seven years ago it would have included 2-5% solar, 6-8% hydro, 40% wind 30% gas and perhaps 20% ultra-supercritical coal That would have more than halved our emissions from electricity generation and have been seen as a pretty good result.

            A grand plan today will have perhaps combined 10-15% coal and gas while wind and solar would be almost equal.

            In 5 years time it will be different again so we will spend a lot of time arguing about changing the rules because circumstances have changed.

            There is a much simpler solution. We could just do five things,
            1. Put a price on carbon equal to the average of California, Europe and China
            2. Apply proposed US EPA standards to CO2 emissions by power generating companies, this would force them to favour their most carbon efficient plants and phase out old
            3. Apply Californian/EU efficiency standards to vehicles, buildings and electrical equipment.
            4. Apply some of the revenue from the carbon tax to supporting revolving loans for energy efficiency projects in existing buildings and businesses.
            5. Change, tax, fiscal and regulatory policies that discriminate against electrified transport or subsidise fossil fuels

            Given Australia’s highly polluting coal power stations and high gas prices these measures would drive almost all thermal generation out of the market over 5-10 years and the technology/distribution mix will be quite different to what any of us would expect today, but you can be sure that the cost would be lower than any of us can reasonably predict now.
            Previous analysis I have done would show that it would have a very small net energy cost to the community while reducing health and environment costs and improving energy and economic security

          • Alastair Leith 5 years ago

            Also pricing externalities in a serious way. The CT or a carbon price averaged from those three other locations in no way prices the actual externalities of buying coal and gas (somewhat vague though the climatic impacts in dollar terms may be for now). I refer you to EV’s latest report commissioned into Hazelwood Power Station, prepared by American researchers at Harvard Medical School associated with similar studies of US coal plants. ~$900m p.a in externalities from medical and Climate costs with a range of [$500m, $2.1b] p.a.

          • Peter F 5 years ago


            You are right the externalities are a huge problem and there are even more, (coal ash waste in Vietnam, US etc.)

            However I think the combination of CT, 500kg/ and declining renewable prices and finally increasing maintenance cost of old plant would force a 7-15 year retirement of 80-90% of all fossil fuel generation, thereby eliminating most of the externalities. Even at current prices there have been no new investments approved in North America or Europe or Australia/NZ in the last 3-4 years for coal plants (About 15GW is currently in build but that was approved 5-10 years ago and investment had already started) and something like 50GW retired because renewables are cheaper than new coal with no carbon price in the US and a low price in Europe

            Getting rid of current subsidies to fossil fuels and again declining renewable/EV prices/ vehicle efficiency standards/more investment in public transport should reduce transport emissions and urban pollution by 30-40% and again reduce health effects.

            Rising gas prices + increasing efficiency of heat pumps and solar thermal should end most applications of gas/coal for heating under 100C. i.e. 65-75% of heating demand, further reducing CO2 output.

            Steel, cement and glass production remain, but even there improved technologies for steel making and new types of cement are less carbon intensive. In addition standard grades of cement, steel and glass are getting significantly stronger and design techniques are improving so over the years you can use less material for the same size project. A carbon tax, at even low levels will reinforce these trends

    • Mike Dill 5 years ago

      My feeling is that effective real-time time-of-use pricing can cause enough power-shifting / demand-deferment during peak usage events to remove the need for capacity payments.

      Having energy storage that could sell back power during those events (at a higher ‘current-peak rate’) would increase the value of that storage to the owner and grid operator. Pumped-hydro facilities do this, as can batteries. It will take a few years and some regulatory changes to get to where smaller organizations and individual people can get involved.

      • Paul McArdle 5 years ago

        Thanks Mike

        Given we’re actively involved with a number of (larger) energy users in helping them to secure the benefits that real-time pricing can deliver to them, I am an advocate to the concept.

        However I also see some limitations that are currently barriers to it becoming more widely adopted, including:
        1) Lack of distributed storage that works economically (we’ve heard predictions of how this might change in future – as with all predictions, they are not certain, so we’ll have to wait and see);
        2) Additionally, however, real-time prices only deal with part of the puzzle (being the “black” wholesale) with other components of the energy price being neither locational or time-varying. Network charges are the biggest of these, but the green schemes also fit into this boat. When these change, then this will be another spur to innovation – but there are a number who will make arguments against.


  2. patb2009 5 years ago

    “As more generators exist, the surplus energy diminishes and prices recover.” is a typo, you mean as ‘more generators exit’

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