Power generation: changing landscape with fluctuations in fuel costs and challenges involved.

Dominance of Coal

Historically, the power generation industry has been dominated by coal as a source of fuel. The fossil fuel fulfilled 1,520 Mtoe of the 3,292 Mtoe of additional global primary energy need from 2000 to 2012, or a little more than 46%. The Economic Impact Analysis (EIA) projects, that global electricity generation is likely to increase by 69% from 21.6 trillion kWh in 2012 to 25.8 trillion kWh in 2020, and to 36.5 trillion kWh in 2040.

US, the major consumer

However, it should be noted that there have been changes in the power mix, in response to the fuel prices and availability of competing fuels. For instance, till 2010, the US had the highest share in world net power generation. Earlier in the 1960s the country saw a shift from coal to petroleum-fired power generation plants, due to low and stable crude oil prices. The twin oil price shocks in the 1970s along with the Power plant and Industrial Fuel Use Act of 1978 (PIFUA) and a large build-out of new capacities in the 1970s-80s resulted in a shift from petroleum to coal. By 1990, PIFUA had been repealed and natural gas was deregulated, markets substituted petroleum with natural gas as a fuel for power generation. The petroleum-fired plants, in particular, were restricted by environmental regulations and emission norms. Apart from the volatile fuel prices, other factors that influenced the power mix included: availability of generation capacity, generators' non-fuel variable operating costs, start-up/shut down costs, emission rates and allowance costs,transmission constraints on the electricity grid and reliability requirements.

Present trends

If we observe the current scenario, the industry is undergoing a gradual and structural change in its landscape driven by climate agreements, national prices and carbon pricing schemes. The renewable energy, which up until recently was considered an alternative source of energy, is now becoming the mainstream power generator. The EIA estimates that the share of renewable in world electricity production will grow from 22% in 2012 to 29% in 2040, growing at 2.9% annually. The renewable as a source of energy has transformed the energy structure in the past decade, from a widely acknowledged, potential fuel source to an investment that is able to sustain direct and indirect economic benefits, while reducing dependence on imported fuels. From 2004, total renewable power capacity-excluding large hydro, increased from 85 GW in 2004 to 560 GW by the end of 2013. The total wind power installed capacity of 48 GW in 2004 increased to 318 GW in 2014, and Solar Photovoltaic (PV) power generation grew from 2.6 GW to 139GW.

Source: International Energy Outlook 2016

During the last year, renewable excluding large hydro saw around 134GW of capacity commissioned, this comprised of 62GW of wind, 56GW of photovoltaics and a modest amount of biomass and waste-to-power, geothermal, solar thermal and small hydro. Further, another 22GW was through large hydro-electric projects and there was approx. 15GW of nuclear power added in the same period. On the other hand, 42GW of coal-fired capacity and 40GW of gas-fired generators were installed last year. Renewable excluding large hydro attracted $265.8 billion of asset finance and small-scale project investment in 2015, excluding the small amount going to biofuels. This was far higher than the coal and gas power figure of $130 billion of gross investment .The estimated spend on new power generation capacity is $12.2 trillion over the next 25 years, two-thirds of which will go to renewables like wind and solar owing to falling costs. Of the new additional power generation capacity, 60 % will come in the form of renewable.

Source: Global Trends in Renewable Energy Investment 2016, UN Environmental programme

The challenges

Nevertheless, the fact that most of the world's power generation fleet consists of fossil fuel plants and that more are being added every year. Even as the role of renewable increases across all sectors, its development faces challenges. Although, the cost of generating renewable energy is expected to decrease and policy initiatives are expected to give a push to this growth, along with raised concerns about the climate change. But we need to understand the fact that while the numbers paint a rosy picture and renewable energy will play an instrumental role as a fuel source in the upcoming years. It does present a significant challenge which calls for a fundamental change in the industry, major policies and subsidies to attract investment, and research and development. The acceptance of renewable energy and integration of new technologies in the power systems might pose a big hurdle.

Traditionally, a continuous supply of energy was made possible because of the exploitation of fossil fuels, which is a direct result of millions of years' of the sun's energy stored in the form of coal, oil and gases. Alternative energy forms such as solar and the wind are produced intermittently based on the availability of sunlight and strong air currents. If we propose to integrate the renewables in the contemporary system, we will have to overcome the challenge of balancing availability and demand. There are still numerous concerns which need to be dealt in order to achieve seismic changes in the global power mix. It may be a lot simpler for developed countries to facilitate the shift, as compared to developing countries where growth in demand increases electricity consumption.

The future

In fact, one can be of the view that the move to renewable is more forced than natural and is unfair to an extent since developed countries have traditionally been the largest emitters of CO2. There is a close link between the prosperity (GDP), energy use, and GHG emissions, most economies cannot achieve deep reductions in GHG emissions in the short term without negative impacts on their GDP growth. The transition towards renewable is imminent, but would require a fundamental transformation in the energy generation industry, which would take decades, require higher infrastructural investments and quick and effective breakthroughs in energy technologies.