Short-Run Interfuel Substitution in West European Power Generation: A Restricted Cost Function Approach

This paper analyzes short-run interfuel substitution between fossil fuels in West European power generation. The problem is studied within a restricted translog cost model, which is estimated by pooling time-series data across eight countries in West Europe. The empirical results indicate that interfuel substitution in existing power plants is substantial, especially that between oil and gas. This is consistent with the notion that short-run fuel substitution primarily occurs in multi-fuel fired plants, by switching load between different single-fuel fired plants, or by some conversions of electric plants to be able to burn alternate fuels as well. Acknowledgements: Financial supports from Vattenfall, the Kempe Foundations, and SNS Energy are gratefully acknowledged, as are helpful comments from Ernst Berndt, Denny Ellerman and Marian Radetzki on earlier versions of this paper. Responsibility for any remaining errors, however, resides solely with the author.