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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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    Cited by:

    1. Xingang, Zhao & Pingkuo, Liu, 2013. "Substitution among energy sources: An empirical analysis on biomass energy for fossil fuel of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 18(C), pages 194-202.
    2. 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 - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. J. Scott Holladay & Steven Soloway, 2015. "The Environmental Impacts of Fuel Switching Power Plants," Working Papers 2015-05, University of Tennessee, Department of Economics.
    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.
    5. Gao, Jing & Nelson, Robert & Zhang, Lei, 2013. "Substitution in the electric power industry: An interregional comparison in the eastern US," Energy Economics, Elsevier, pages 316-325.
    6. Asche, Frank & Misund, Bård & Sikveland, Marius, 2013. "The relationship between spot and contract gas prices in Europe," Energy Economics, Elsevier, pages 212-217.
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    9. 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.
    10. 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).
    11. Meyer Andrew & Pac Grzegorz, 2015. "How Responsive Are EU Coal-Burning Plants to Changes in Energy Prices?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, pages 1481-1506.
    12. Pompei, Fabrizio, 2013. "Heterogeneous effects of regulation on the efficiency of the electricity industry across European Union countries," Energy Economics, Elsevier, pages 569-585.
    13. Ouedraogo, Nadia S., 2013. "Energy consumption and human development: Evidence from a panel cointegration and error correction model," Energy, Elsevier, vol. 63(C), pages 28-41.

    More about this item

    Keywords

    Interfuel substitution; Electric power; Europe; Climate policy;

    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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