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Fuel switching and climate and energy policies in the European power generation sector: A generalized Leontief model

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  • Pettersson, Fredrik
  • Söderholm, Patrik
  • Lundmark, Robert

Abstract

The purpose of this paper is to analyze: (a) the role and the nature of price-induced switching behavior between fossil fuels (i.e., coal, oil, and natural gas) in the western European power sector; as well as (b) the fuel choice impacts of a number of public policies implemented in this sector during the last 20years. The analysis is conducted within a Generalized Leontief cost function framework, and employs pooled data across eight countries over the time period 1978–2004. We present short-run own- and cross-price elasticities of fossil fuel demand, and assess the impacts of a set of government policies implemented over this time period. The empirical results show evidence of notable short-run interfuel substitution between oil and gas, and particularly in countries where fossil fuels are used extensively for both base and peak load purposes. These findings support the notion that ex post fossil fuel substitution takes place in dual- and multi-fired plants, by switching load between different single-fuel fired plants, as well as through the conversion of power plants to be able to burn alternate fuels. The results also illustrate that different public policies – i.e., removal of coal subsidies, electricity market liberalization etc. – have had profound impacts on fossil fuel choices and have in particular favored power generation gas use at the expense of coal. Finally, the paper makes use of the empirical results to simulate the fuel switching impacts of different carbon prices within the European Emissions Trading Scheme (EU ETS).

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  • Pettersson, Fredrik & Söderholm, Patrik & Lundmark, Robert, 2012. "Fuel switching and climate and energy policies in the European power generation sector: A generalized Leontief model," Energy Economics, Elsevier, vol. 34(4), pages 1064-1073.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:4:p:1064-1073
    DOI: 10.1016/j.eneco.2011.09.001
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    4. Harrison Fell & Daniel T. Kaffine, 2014. "A one-two punch: Joint effects of natural gas abundance and renewables on coal-fired power plants," Working Papers 2014-10, Colorado School of Mines, Division of Economics and Business.
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    12. Papageorgiou, Chris & Saam, Marianne & Schulte, Patrick, 2013. "Elasticity of substitution between clean and dirty energy inputs: A macroeconomic perspective," ZEW Discussion Papers 13-087, ZEW - Leibniz Centre for European Economic Research.
    13. Rui Liu & Qiushuang Li & Yingqi Zhao, 2017. "Analysis of Existing Problems and Improvement Schemes for Substituting Electricity for Scattered Coal in China," Sustainability, MDPI, vol. 9(5), pages 1-21, May.
    14. Roberts, Gavin, 2019. "Revisiting the Drivers of Natural Gas Prices. A replication study of Brown & Yücel (The Energy Journal, 2008)," International Journal for Re-Views in Empirical Economics (IREE), ZBW - Leibniz Information Centre for Economics, vol. 3(2019-2), pages 1-24.
    15. Julien Chevallier & Stéphane Goutte, 2017. "Estimation of Lévy-driven Ornstein–Uhlenbeck processes: application to modeling of $$\hbox {CO}_2$$ CO 2 and fuel-switching," Annals of Operations Research, Springer, vol. 255(1), pages 169-197, August.
    16. Bigerna, Simona & D'Errico, Maria Chiara & Polinori, Paolo, 2020. "Heterogeneous impacts of regulatory policy stringency on the EU electricity Industry:A Bayesian shrinkage dynamic analysis," Energy Policy, Elsevier, vol. 142(C).
    17. Devlin, Joseph & Li, Kang & Higgins, Paraic & Foley, Aoife, 2017. "Gas generation and wind power: A review of unlikely allies in the United Kingdom and Ireland," Renewable and Sustainable Energy Reviews, Elsevier, vol. 70(C), pages 757-768.
    18. Jurate Jaraite-Ka~ukauske and Corrado Di Maria, 2016. "Did the EU ETS Make a Difference? An Empirical Assessment Using Lithuanian Firm-Level Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    19. Tan, Xiujie & Wang, Banban & Wei, Jie & Taghizadeh-Hesary, Farhad, 2023. "The role of carbon pricing in achieving energy transition in the Post-COP26 era: Evidence from China's industrial energy conservation," Renewable and Sustainable Energy Reviews, Elsevier, vol. 182(C).
    20. Cabello Eras, Juan José & Mendoza Fandiño, Jorge Mario & Sagastume Gutiérrez, Alexis & Rueda Bayona, Juan Gabriel & Sofan German, Stiven Javier, 2022. "The inequality of electricity consumption in Colombia. Projections and implications," Energy, Elsevier, vol. 249(C).
    21. J. Scott Holladay and Steven Soloway, 2016. "The Environmental Impacts of Fuel Switching Electricity Generators," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
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    Keywords

    Interfuel substitution; Electric power; Europe; Climate policy;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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