Declining Fossil-Plant Utilisation and Falling Substitutability with Wind & Solar

Abstract

The elasticity of substitution between wind and solar (W&S) and fossil-fuel electricity generation is pivotal for the cost of decarbonisation, yet unsettled. It is not a constant: as intermittent W&S penetration deepens, integration costs rise and substitutability falls. We estimate this profile from the capacity margin—a reduced-form, supply-side measure of how fast utilisation of the retained fossil fleet falls as the W&S share rises. In a country panel through 2025 the elasticity is high—about nine at today’s 15% share of generation—and falls to about four as W&S penetration deepens; an independent, price-based integration-cost literature finds a similar decline. Because substitutability falls as abatement deepens, non-uniform carbon prices across regions grow more inefficient the deeper the abatement, strengthening the case for harmonising carbon prices internationally as the transition advances.