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To elaborate the approach further, Table 3 gives two examples of model-output applications to predict fuel switching triggered by a change in the CO2 price, with different starting points for coal and gas prices (low coal price/high gas price and vice versa). The price of CO2 in both cases increases from EUR 15 to EUR 30 per tonne (t) of CO2, a realistic increase observed in the past (although over a long period). Policy makers with an interest in such predictions could base them on their own observations of coal, gas, and expected CO2 price changes. Table 3 follows a variation of the calculation steps described in the previous section:

Fixed fuel prices ■ change in CO2 price ■ changes in fuel costs ■ changes in fuel inputs

3. www.eia.doe.gov/cneaf/electricity/page/restructuring/ restructure_elect.html

4. Combined heat and power (CHP) plants are treated under "special regime"status and are dispatched first, but only 16% of electricity is generated in CHP plants (IEA data for 2008).

The simulated policy change assumes a EUR 15 /tCO2 increase, assuming other fuel prices are fixed - the CO2 price change could also come from a change in fundamentals. Using CO2 emission factors for coal and gas, the extra CO2 cost is added to the net fuel costs (columns 5 and 6). The gas price is much lower in Example 2, which amplifies the effect of a CO2 price rise on gas cost compared to Example 1 (14% versus 8%); the same argument applies to coal, but the price is higher in Example 2. These combinations of fuel prices result in a larger difference between cost increases for coal and gas in Example 1 (35% and 8%), which understandably leads to more fuel switching than in Example 2 (since switching is triggered by changes in relative costs). To summarise, fuel prices are a significant factor in switching from coal to gas, but the effect of a change in CO2 price diminishes when the price of coal grows relative to gas.

Table 3

Projected effect of hypothetical CO2 price incease on use of coal and gas in Spain

Table 3

Projected effect of hypothetical CO2 price incease on use of coal and gas in Spain

Example 1

Example 2

Coal price

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