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I was willing to setup a private ethereum network with low difficulty. I can fix the difficulty of each block to 1 (or constant) to avoid problem of very high difficulty with increase in no of blocks.

But this has a downside of decreased block time and hence running out of disk space sooner.

Is there any way geth source code could be modified to remove miners reward and hence coinbase transactions? So a block is added to chain when there is some real transaction. This will save disk space to great extent and we can enjoy constant difficulty.

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Ethereum doesn't have a coinbase transaction. Rewards are acredited automatically to the miner address in the block header (after processing all transactions). The miner address is only 20 bytes so you won't save much by eliminating it.

In a PoW chain the security is based on mined blocks, so generating less blocks is against the chain security. Perhaps you might want to switch to a PoA network or another alternative, like using a Plasma chain.

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