Fossil fuel dependence and interfuel substitution in the electricity sector of Western European countries between 1990-2011

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and EconomicsThis paper investigates (i) the diversity of fuel mix for power generation in the European Union measured by the Shannon-Weiner Index (SWI) computed for the 28 member-states between 1990 and 2010, and (ii) the degree of interfuel substitution in the electricity system of eight Western European countries where liberalization and other public policies have been implemented since the 1990s. We find evidence of high concentration of fuels for power generation, with fossil fuel sources still dominating the fuel-mix in spite of concerns over energy security supply and compliance with the EU target to reduce CO2 emissions to 20% below 1990 levels by 2020. A Linear Logit Model was built to compute the elasticities of substitution between coal, natural gas and oil, accounting for electricity market liberalization and the creation of the Emissions Trading Scheme (ETS) in the Western power sector for 1990-2011. The findings suggest that natural gas has been regarded as a transition fuel to a low-carbon area, mostly at the expense of oil. Liberalization has also generated more flexibility for fuel-switching