One Coal Industry
With oil prices soaring, gas prices doubling in the last 12 months and ageing Magnox nuclear stations to be phased out, Brian J. Rostron, director general of the Confederation of UK Coal Producers (COALPRO), argues the case for a secure, clean and efficient coal industry
From the smallest to the largest, the UK’s coal producers share the same customers and face the same challenges. There is no conflict between surface and underground coal mining. One supports the other and vice versa in terms of costs, quality and rates of production. Any support for the coal industry must be for the entire industry, not just a part of it.
The coal industry has reached its critical mass. If it gets any smaller it will be unable to invest or attract investors and maintain the skills sets necessary for a vibrant and effective industry. Too much capacity has been closed because policy-makers and their advisors have consistently got their projections wrong on coal demand. Coal is a major contributor to the security of the UK energy supply and the diversity of the UK’s generation portfolio, and can provide the UK with an effective hedge against high gas prices if its share of electricity generation is maintained at around present levels.
Contrary to the Government’s Performance and Innovation Unit’s Energy Review and current thinking in some Department of Trade and Industry circles, the coal producers believe that security of supply is substantially enhanced by indigenous coal production, given that the UK will become a net importer of natural gas by 2005.
The current market for coal
In 2001 the UK consumed 65 million tonnes of coal. Fifty-one million tonnes were used in power stations for electricity generation, the remainder being used in the steel industry and for other industrial and domestic applications. The producers in the UK mined 32 million tonnes, with some 17 million tonnes coming from deep mines and 15 million tonnes from opencast mines. The remainder was imported from South Africa, Australia, South America, Poland, Russia, USA, China, Columbia and Indonesia.
Why did the UK need so much coal last year? Essentially because gas became very expensive for power generation, nuclear power stations had a second poor year, and electricity imports from France fell away as wholesale prices plunged under the new electricity trading arrangements.
But coal has proved to be competitive at 1.5p/kWh, reliable, able to load follow, and today provides one third of all the UK’s electricity. It is the cheapest generator of electricity from fossil fuels. With current gas prices, it costs 2.2p/kWh to produce electricity at gas-fired power stations, and apparently modern combined-cycle gas turbines (CCGTs) are unsuited to being turned off and on! Nor have they achieved the levels of efficiency originally claimed.
Renewable energy will not be competitive in the short-to-medium term, and with the rundown in nuclear capacity coal-fired electricity generation will enhance both diversity and security, and maintain competitiveness.
The projected market to 2010 and beyond
If there are no significant changes to oil, gas or coal prices in the years up to 2010 the use of coal will, with no other constraints, at least remain constant or more than likely increase.
Environmental constraints will cap the amount of coal used rather than economic factors. The EU Large Combustion Plant Directive, which will limit coal-fired power stations that do not have flue-gas desulphurization plant (FGD) to an operating life of 20,000h from 2008, will significantly reduce coal burn by the end of the decade and may have an impact on the operation of non-abated stations before then. Retro-fitting FGD to these stations would enable coal burn to be maintained beyond 2008 at present levels.
However, there are further environmental implications. If the UK continues to burn at existing levels it can easily achieve its Kyoto target, but not the 60% reduction in CO2 called for by the Royal Commission on Environmental Pollution, and maybe not the Government’s more immediate 20% ambition for 2010. It should also be noted that if all fossil fuel power stations were to be closed without addressing transport, which is the major contributor to greenhouse gas emissions, the UK would still not achieve the Royal Commission’s target.
Unfortunately, coal is seen as an easy target for those politicians and administrators who wish to be seen to be doing something, but if greenhouse gas emissions are the main driver of global warming they are really just tinkering at the edges without sense or direction.
On conservative assumptions the UK could burn 40 million tonnes of coal a year to 2010 in power stations. A far bigger question is how much can and how much does the UK want to supply from its own indigenous reserves?
How much coal should the UK produce?
The UK currently produces 32 million tonnes of coal a year. It is clear the industry’s customer – the electricity generators – want to burn more, and that the end-users – business and the population – continue to consume more electricity each year. Why should this not be supplied from indigenous production? There are only two reasons, cost and quality.
After over 25 years of decline the industry would be pleased to see indigenous production rise to meet demand, but producers are not calling for this. The industry believes that maintaining a production level of more than 30 million tonnes is essential if it is to maintain anything like a critical mass.
The mix of coals produced is also important, so again the producers are promoting the status quo – ie maintaining a deep-mined output in excess of 17 million tonnes and a surface-mined output of over 15 million tonnes. The coals so produced would meet the quality criteria required by customers and, with FGD, would meet environmental emission limits set by the Environment Agency in England and Wales and SEPA in Scotland.
Can the UK coal industry compete?
While coal producers may aspire to maintain current levels of production, unless the coal produced is competitive the electricity generators are not going to purchase it. UK coal producers are not looking to mine coal at any price (as is the case in Germany, Spain and France) but rather to compete on a level playing field with both international coal and other sources in the UK generating markets.
Looking at the international coal market there is no coal produced specifically for the UK market. Most major mine projects are set up with an end-user in mind, such as a mine-mouth power station, a primary steel production unit or a significant export market such as Japan. The UK imports those coals which most closely match the quality of the UK coal for which our power stations were designed.
World demand for energy will continue to increase, particularly in India, the Far East, China, Africa and Indonesia, and there will be a substantial increase in demand for local coal in these areas. China, for example, is currently mining 1 billion tonnes a year but anticipates increasing production to 2 billion tonnes a year by 2020 to satisfy local demand. The scale of this increase makes a nonsense of the reductions being forced upon the UK industry in the name of reducing global emissions of greenhouse gases.
While the electricity generators currently enjoy a spot market for coal where supply exceeds demand, a small increase in local demand could radically alter this in terms of both price and availability. Demand patterns, exchange rates and freight rates can all change in a relatively short timescale. However, the simple answer to the question ‘can we compete?’ is yes we can. If the industry could not compete it would not be here now. Since privatization in 1993 the industry has had to compete to survive, often kicking uphill into the wind on a far from level playing field, but survive it has.
Clearly the Operating Aid Scheme introduced in 2000 was welcomed by the industry which was competing against short-term, very low international prices resulting from overproduction, the high pound and low sea-freight rates. It has undoubtedly preserved the size of the industry and the Government must be commended for recognizing the industry’s plight and for rapidly reacting by instituting the scheme. As a result, the medium-to-long-term viability of many of the deep mines has been secured and the industry is competitive.
However, the industry will continue to contract unless the issues facing it are urgently addressed and, as a result, the UK will lose a substantial number of jobs, both direct and indirect . To put this into perspective, some 12,000 people are employed in both surface and deep mines, and as many again in support industries.
On the positive side, the UK coal industry contributes over £1 billion to the balance of payments. Out of this it pays over £250 million in wages with resultant income and indirect taxes of over £100 million. In addition, it pays corporation tax, business rates, fuel tax, governmental royalties (the only form of natural resource energy to be levied with production taxes in the UK) and VAT on everything it does in supplying the coal. These contributions are far in excess of the amount being paid under the state aid scheme, which provides a good rate of return on the investment.
How can the industry continue to supply at existing levels?
To maintain the industry somewhere above the 30 million tonne level there are two main requirements.
On the surface mining side the industry requires certainty in the planning system, which it currently does not have. Surface mining is the only mineral extraction process where there is a presumption against the granting of planning permission. Anything else can be extracted in or exported from the UK – limestone, granite, salt, sand, gravel, gypsum or clay. The planning system has a presumption in favour of extracting all of these minerals, but not coal. Why is there this blatant discrimination? Coal extraction is no more damaging to the environment than other forms of mineral extraction. Indeed, it is a short-term transitory activity when compared with the quarrying of some aggregates. Coal sites can be readily restored and often derelict and degraded land can be improved through their working.
The reason for the presumption against surface mining is political. There has always been a campaign by a few ill-informed supporters of the coal industry that surface production somehow threatens the deep-mine industry. Nothing could be further from the truth, the surface mining industry has always supported the total coal industry by being low cost and producing those quality coals needed to complement deep-mine production, and the combined surface and deep-mined output cannot satisfy annual demand.
The deep mining industry can be summarized as mines which are viable and compete against imported coal with a long-term future, mines which are exhausting economic reserves and are at the end of their productive life and will naturally close in time, and mines which could access new or additional reserves and compete with imported coal.
A coal industry can only be maintained by continued investment in the future, and in order to invest a company requires finance. Finance can only be provided by institutions where the investment can be repaid from future earnings, but these future earnings in the coal industry can only be demonstrated by contracts to supply coal due to the overwhelming decimation in the industry over the last 10 years and the ensuing lack of confidence. With the fragmented nature of the electricity supply industry, coal supply contracts for more than two years are the exception.
For example, a mine wishing to access a 10-year reserve with a £20m access cost to produce an additional 1 million tonnes a year, could not pay this back over the first one/two year’s production and therefore could not finance the proposal. The producers are therefore calling upon the Government and its ministers to support a new investment aid scheme for the coal industry.
Cleaner coal technology
Finally, looking further into the future, the world will continue to increase its demand for energy, particularly electricity, and up to 40% of the world’s electricity will continue to be generated from coal to 2050 and beyond. This will take coal burn from the current 3.5 billion tonnes a year to nearer 5 billion tonnes.
If the amount of greenhouse gas emissions are to be controlled, carbon dioxide emissions from coal will have to be addressed on a global scale, not just in the UK or EU. The UK Government should support the urgent demonstration of carbon dioxide capture, sequestration and long-term storage, all of which is technologically feasible. This will require the absolute involvement of the two largest coal producers – the USA and China –– if the issue is to be properly addressed.
Cleaner coal via integrated gasification combined-cycle processes offers the best way forward in the long term by providing a near-zero emissions process which will provide an alternative to CCGT gas stations, contribute to diversity and security, and provide a cap on electricity prices as gas becomes an increasingly expensive resource.
Conclusion
The coal industry in the UK is viable but declining yet vital to a balanced and supply-secured energy policy.
This decline can be halted by:
From the smallest to the largest, the UK’s coal producers share the same customers and face the same challenges. There is no conflict between surface and underground coal mining. One supports the other and vice versa in terms of costs, quality and rates of production. Any support for the coal industry must be for the entire industry, not just a part of it.
The coal industry has reached its critical mass. If it gets any smaller it will be unable to invest or attract investors and maintain the skills sets necessary for a vibrant and effective industry. Too much capacity has been closed because policy-makers and their advisors have consistently got their projections wrong on coal demand. Coal is a major contributor to the security of the UK energy supply and the diversity of the UK’s generation portfolio, and can provide the UK with an effective hedge against high gas prices if its share of electricity generation is maintained at around present levels.
Contrary to the Government’s Performance and Innovation Unit’s Energy Review and current thinking in some Department of Trade and Industry circles, the coal producers believe that security of supply is substantially enhanced by indigenous coal production, given that the UK will become a net importer of natural gas by 2005.
The current market for coal
In 2001 the UK consumed 65 million tonnes of coal. Fifty-one million tonnes were used in power stations for electricity generation, the remainder being used in the steel industry and for other industrial and domestic applications. The producers in the UK mined 32 million tonnes, with some 17 million tonnes coming from deep mines and 15 million tonnes from opencast mines. The remainder was imported from South Africa, Australia, South America, Poland, Russia, USA, China, Columbia and Indonesia.
Why did the UK need so much coal last year? Essentially because gas became very expensive for power generation, nuclear power stations had a second poor year, and electricity imports from France fell away as wholesale prices plunged under the new electricity trading arrangements.
But coal has proved to be competitive at 1.5p/kWh, reliable, able to load follow, and today provides one third of all the UK’s electricity. It is the cheapest generator of electricity from fossil fuels. With current gas prices, it costs 2.2p/kWh to produce electricity at gas-fired power stations, and apparently modern combined-cycle gas turbines (CCGTs) are unsuited to being turned off and on! Nor have they achieved the levels of efficiency originally claimed.
Renewable energy will not be competitive in the short-to-medium term, and with the rundown in nuclear capacity coal-fired electricity generation will enhance both diversity and security, and maintain competitiveness.
The projected market to 2010 and beyond
If there are no significant changes to oil, gas or coal prices in the years up to 2010 the use of coal will, with no other constraints, at least remain constant or more than likely increase.
Environmental constraints will cap the amount of coal used rather than economic factors. The EU Large Combustion Plant Directive, which will limit coal-fired power stations that do not have flue-gas desulphurization plant (FGD) to an operating life of 20,000h from 2008, will significantly reduce coal burn by the end of the decade and may have an impact on the operation of non-abated stations before then. Retro-fitting FGD to these stations would enable coal burn to be maintained beyond 2008 at present levels.
However, there are further environmental implications. If the UK continues to burn at existing levels it can easily achieve its Kyoto target, but not the 60% reduction in CO2 called for by the Royal Commission on Environmental Pollution, and maybe not the Government’s more immediate 20% ambition for 2010. It should also be noted that if all fossil fuel power stations were to be closed without addressing transport, which is the major contributor to greenhouse gas emissions, the UK would still not achieve the Royal Commission’s target.
Unfortunately, coal is seen as an easy target for those politicians and administrators who wish to be seen to be doing something, but if greenhouse gas emissions are the main driver of global warming they are really just tinkering at the edges without sense or direction.
On conservative assumptions the UK could burn 40 million tonnes of coal a year to 2010 in power stations. A far bigger question is how much can and how much does the UK want to supply from its own indigenous reserves?
How much coal should the UK produce?
The UK currently produces 32 million tonnes of coal a year. It is clear the industry’s customer – the electricity generators – want to burn more, and that the end-users – business and the population – continue to consume more electricity each year. Why should this not be supplied from indigenous production? There are only two reasons, cost and quality.
After over 25 years of decline the industry would be pleased to see indigenous production rise to meet demand, but producers are not calling for this. The industry believes that maintaining a production level of more than 30 million tonnes is essential if it is to maintain anything like a critical mass.
The mix of coals produced is also important, so again the producers are promoting the status quo – ie maintaining a deep-mined output in excess of 17 million tonnes and a surface-mined output of over 15 million tonnes. The coals so produced would meet the quality criteria required by customers and, with FGD, would meet environmental emission limits set by the Environment Agency in England and Wales and SEPA in Scotland.
Can the UK coal industry compete?
While coal producers may aspire to maintain current levels of production, unless the coal produced is competitive the electricity generators are not going to purchase it. UK coal producers are not looking to mine coal at any price (as is the case in Germany, Spain and France) but rather to compete on a level playing field with both international coal and other sources in the UK generating markets.
Looking at the international coal market there is no coal produced specifically for the UK market. Most major mine projects are set up with an end-user in mind, such as a mine-mouth power station, a primary steel production unit or a significant export market such as Japan. The UK imports those coals which most closely match the quality of the UK coal for which our power stations were designed.
World demand for energy will continue to increase, particularly in India, the Far East, China, Africa and Indonesia, and there will be a substantial increase in demand for local coal in these areas. China, for example, is currently mining 1 billion tonnes a year but anticipates increasing production to 2 billion tonnes a year by 2020 to satisfy local demand. The scale of this increase makes a nonsense of the reductions being forced upon the UK industry in the name of reducing global emissions of greenhouse gases.
While the electricity generators currently enjoy a spot market for coal where supply exceeds demand, a small increase in local demand could radically alter this in terms of both price and availability. Demand patterns, exchange rates and freight rates can all change in a relatively short timescale. However, the simple answer to the question ‘can we compete?’ is yes we can. If the industry could not compete it would not be here now. Since privatization in 1993 the industry has had to compete to survive, often kicking uphill into the wind on a far from level playing field, but survive it has.
Clearly the Operating Aid Scheme introduced in 2000 was welcomed by the industry which was competing against short-term, very low international prices resulting from overproduction, the high pound and low sea-freight rates. It has undoubtedly preserved the size of the industry and the Government must be commended for recognizing the industry’s plight and for rapidly reacting by instituting the scheme. As a result, the medium-to-long-term viability of many of the deep mines has been secured and the industry is competitive.
However, the industry will continue to contract unless the issues facing it are urgently addressed and, as a result, the UK will lose a substantial number of jobs, both direct and indirect . To put this into perspective, some 12,000 people are employed in both surface and deep mines, and as many again in support industries.
On the positive side, the UK coal industry contributes over £1 billion to the balance of payments. Out of this it pays over £250 million in wages with resultant income and indirect taxes of over £100 million. In addition, it pays corporation tax, business rates, fuel tax, governmental royalties (the only form of natural resource energy to be levied with production taxes in the UK) and VAT on everything it does in supplying the coal. These contributions are far in excess of the amount being paid under the state aid scheme, which provides a good rate of return on the investment.
How can the industry continue to supply at existing levels?
To maintain the industry somewhere above the 30 million tonne level there are two main requirements.
On the surface mining side the industry requires certainty in the planning system, which it currently does not have. Surface mining is the only mineral extraction process where there is a presumption against the granting of planning permission. Anything else can be extracted in or exported from the UK – limestone, granite, salt, sand, gravel, gypsum or clay. The planning system has a presumption in favour of extracting all of these minerals, but not coal. Why is there this blatant discrimination? Coal extraction is no more damaging to the environment than other forms of mineral extraction. Indeed, it is a short-term transitory activity when compared with the quarrying of some aggregates. Coal sites can be readily restored and often derelict and degraded land can be improved through their working.
The reason for the presumption against surface mining is political. There has always been a campaign by a few ill-informed supporters of the coal industry that surface production somehow threatens the deep-mine industry. Nothing could be further from the truth, the surface mining industry has always supported the total coal industry by being low cost and producing those quality coals needed to complement deep-mine production, and the combined surface and deep-mined output cannot satisfy annual demand.
The deep mining industry can be summarized as mines which are viable and compete against imported coal with a long-term future, mines which are exhausting economic reserves and are at the end of their productive life and will naturally close in time, and mines which could access new or additional reserves and compete with imported coal.
A coal industry can only be maintained by continued investment in the future, and in order to invest a company requires finance. Finance can only be provided by institutions where the investment can be repaid from future earnings, but these future earnings in the coal industry can only be demonstrated by contracts to supply coal due to the overwhelming decimation in the industry over the last 10 years and the ensuing lack of confidence. With the fragmented nature of the electricity supply industry, coal supply contracts for more than two years are the exception.
For example, a mine wishing to access a 10-year reserve with a £20m access cost to produce an additional 1 million tonnes a year, could not pay this back over the first one/two year’s production and therefore could not finance the proposal. The producers are therefore calling upon the Government and its ministers to support a new investment aid scheme for the coal industry.
Cleaner coal technology
Finally, looking further into the future, the world will continue to increase its demand for energy, particularly electricity, and up to 40% of the world’s electricity will continue to be generated from coal to 2050 and beyond. This will take coal burn from the current 3.5 billion tonnes a year to nearer 5 billion tonnes.
If the amount of greenhouse gas emissions are to be controlled, carbon dioxide emissions from coal will have to be addressed on a global scale, not just in the UK or EU. The UK Government should support the urgent demonstration of carbon dioxide capture, sequestration and long-term storage, all of which is technologically feasible. This will require the absolute involvement of the two largest coal producers – the USA and China –– if the issue is to be properly addressed.
Cleaner coal via integrated gasification combined-cycle processes offers the best way forward in the long term by providing a near-zero emissions process which will provide an alternative to CCGT gas stations, contribute to diversity and security, and provide a cap on electricity prices as gas becomes an increasingly expensive resource.
Conclusion
The coal industry in the UK is viable but declining yet vital to a balanced and supply-secured energy policy.
This decline can be halted by:
- removal of the planning presumption against surface mining to allow a rolling programme of annual production totalling around 15 million tonnes.
- adopting an investment aid scheme to maintain production at existing mines and to allow new reserves to be accessed.