The Impact of Sulfur Limits on Fuel Demand and Electricity Prices in Britain

By the year 1996, about one-quarter of Britain's electricity will be generated from gas, compared to zero in 1992, displacing coal. This switch is required by 2000 to meet the EC and UN mandated sulfur emissions limits, but was advanced by the imperfect market created by privatisation. This paper examines the economics of Flue Gas Desulfurisation, and argues that without the right to trade emissions permits, FGD may run at only 17% load because of premature investment in gas generation. Tradable permits have a large impact on profits for the generators and British Coal. At present the pool fails to schedule plant on avoidable cost, and electricity prices are likely to be set by the price of gas, not the emissions limits, though gas prices may rise with tighter future limits.