Interfuel Substitution in OECD - European Electricity Production

Fuel substitution in OECD-European electricity production is described by a putty-clay formulation. At the time of investment, fuel shares are determined according to a logit model. These fuel shares are maintained throughout the lifetime of the power plants. However, a significant share of capacity is assumed to be flexible. Short-term fuel switching is described by a logit model. An attempt has been made to formulate the model such that all parameters have a real life interpretation. This enables the use of a priori data about all parameters. The model gives a very good fit to historical time-series for oil, gas and coal demand when fuel premiums are calibrated. The most striking finding is that there is a strong preference for the use of coal. Because of the a priori data, the model is not very sample dependent. Thus, it should be well suited for policy studies or for predictions. The model should be used with caution if very high fuel prices are expected.