Environmental Regulations and Interfuel Substitution in the Power Sector: A Generalized Leontief Model

Abstract

This paper analyzes short-run interfuel substitution between fossil fuels in West European power generation, and the impact of SO₂ regulations on fossil fuel choices. These problems are studied within a short-run Generalized Leontief cost function. The empirical results indicate that price-induced interfuel substitution in existing power plants is substantial in West Europe, especially that between oil and gas. This is consistent with the notion that short-run fuel substitution primarily occurs in multi-fired plants, by switching load between different single-fired plants, and/or by converting power plants to be able to burn alternate fuels as well. With regard to the impact of the SO₂ regulations, the empirical investigation provides few conclusive answers. In general it is hard to separate the individual effects of the SO₂ regulations on the one hand, and other fuel affecting policies on the other. Still, during the last 20 years the aggregate effect of public energy policies seems to have been coal and gas promoting and oil discouraging.