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A counterfactual simulation exercise of CO2 emissions abatement through fuel-switching in the UK (2008–2012)

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Abstract: This paper uses the E-simulate model of electricity generation to estimate how much the stacking order of different technologies changes when a carbon price is uitroduced. Different coal and gas price scenarios are explored, and some sensitivity analysis is made of the relative market share of coal and gas under various carbon price levels. The objective of the paper is to estimate how much COi reduction could happen in the UK through fuel switching (coal to natural gas) for different carbon price levels dunng Phase n (2008-2012) of the EU ETS. This country is indeed reported to have the greatest potential within the EU thanks to its suitable fuel mix (39% of coal and 36% of gas in 2007). Our results feature that 27 Mton of CCh/year can be abated at carbon prices around e25'ton (essentially through fuel-switching during the summer), 36 Mton of CCWyear can be abated at carbon prices around e40/ton (in that case, the carbon price triggers fuel-switching during the whole year), and that a maximum of 40 Mton of C02/year can be achieved at high carbon prices (el25/ton). We also provide various scenarios depending on the relative levels of fuel prices.

Introduction

The trading of CO2 emissions rights in Europe started in 2005. as the Directive 2003/87/CE entered into force under the European Union Emissions Trading Scheme (EU ETS). To date, the European market for CO: emissions represents the world's largest ETS. not only in terms of coverage, but also in terms of trading activity. Thus, the accurate measure of CCb emissions abatement achieved in the EUETS appears central for policy makers, industrial operators, and financial analysts alike.

At high levels of carbon prices, a decrease in COi emissions can be expected as a result of fuel-switching 1. This reduction may vary significantly depending on the country and its fuel mix. Previous literature documents that fuel-switching took place in Germany during the summer 2005. when gas prices were cheap and the load sufficiently low (Delarue et al.. 2008b: Ellerman and Feilhauer. 2008). Delarue and D'haeseleer (2007) showed that a 9.5% reduction is achievable in the Belgian-based electrical power system. More generally in the power sector. Delarue et al. (2008a) report that the variations in CO2 emissions depend on the fuel mix, the carbon intensity and the ability to switch between different fuels.

Total CO2 emission reduction in Europe, through fuel-switching only, is reported to be around 300 Mton/year at high carbon prices (el50/ton of COi) (Delarue et al.. 2008b). Studying the fuel-switching behaviour in the UK appears particularly relevant, since this country is very likely to have the greatest potential for COi emissions abatement in the power sector thanks to its suitable energy mix [39% of coal and 36% of gas in 2007 according to DECC (2008)].

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