III. THE GOVERNMENT'S RESPONSE TO THE CRISIS (CONTINUED)
Moratorium on Section 36 consents
38. Companies intending to build power stations with
a capacity over 50MW require Government consent under section
36 of the Electricity Act 1989. Since 1990 section 36 consents
have been granted for the construction of 44 gas-fired power stations
as well as the conversion of two coal-fired power stations to
dual firing with gas.
Power station projects involving the construction of, or conversion
to, oil or gas fired facilities with a capacity of 10-50MW require
Government's consent under section 14 of the Energy Act 1976.
Information about section 14 consents are not in the public domain.
Projects with a capacity less than 10MW do not require any statutory
approval. Since 1 May 1997 the Government has granted five section
36 consents to power stations projects, all of which will use
gas to generate electricity, although four are combined heat and
power schemes. The Minister explained that these consents were
granted because "they were so well advanced that we would
be in great legal difficulty if at that stage we were to suggest
they could not be accepted".
39. As the coal crisis developed, the Government
was urged to introduce a moratorium on new section 36 consents,
in order to prevent the construction of large gas-fired power
stations, the use of which squeezes the generation market for
coal. On 26 November
1997 the Minister resisted these calls, arguing that "these
[gas-fired] stations can take three to four years to get fully
into commission. A moratorium on new gas-fired stations will not
benefit coal until after 2000. It would slow down the move towards
Combined Heat and Power. It would suddenly bring down off the
shelf all those gas-fired stations which have received section
36 consent but, for one reason or another, have been put on hold...I
am not convinced that a moratorium is the right answer. But we
have no intention of simply waving through new applications for
gas-fired stations. We will look at applications on a case-by-case
basis and I will want to see arguments for approval, not simply
in terms of local planning concerns, but also in terms of our
long-term energy policy objectives".
The Minister confirmed this view in his written evidence to us,
dated 2 December 1997.
40. On 3 December 1997, the Prime Minister announced
at Prime Minister's Question Time the introduction of a moratorium
on section 36 consents, while the Government undertook a review
of "the long-term energy requirements of the nation".
The moratorium apparently resulted from the security of supply
concerns raised in late November by the National Grid Company
as a result of the increasing employment of gas-fired power stations,
as well as advice received by the Minister for Science, Energy
and Industry from the Energy Advisory Panel.
On 22 December the moratorium was extended to include section
14 consents but it was also announced that exceptions to the moratorium
would be considered, particularly for CHP schemes.
28 applications for section 36 consent were awaiting determination
when the moratorium was announced, including 22 new gas-fired
projects and 5 conversion projects from coal-fired to dual gas
with coal power stations. An 80MW windfarm was also affected.
Firms may still apply for section 36 consent during the period
of the moratorium. Details of projects awaiting section 14 consent
have not been made publicly available.
41. Those companies with section 36 applications
trapped by the moratorium, or planning imminent applications,
were naturally dismayed by the Prime Minister's announcement.
Much of the evidence we have received as part of our on-going
inquiry into aspects of energy policy has called for the cessation
of the moratorium. We were impressed by the Minister's statement
of 26 November, that a moratorium could not help the coal industry
in the short run, with which other witnesses, including the Confederation
of UK Coal Producers, agreed.
There are a number of additional reasons why the moratorium will
not help the coal industry in the short run and may adversely
affect both the coal industry and other energy industries:
(a) The moratorium may well hasten the
decline of generators' coal burn, by encouraging the development
of some of the projects which have received section 36 consent
but which have yet to progress beyond the drawing board.
Construction work commenced on the 400MW Enfield Energy Centre
CCGT project, consent for which was given in June 1994, soon after
the moratorium was announced.
(b) The discretionary nature of the moratorium,
in particular the ambiguous position of CHP generating projects,
is likely to lead to small CHP elements being tagged onto current
applications in a bid to achieve consent.
BP's 1200MW Saltend CCGT plant, which was granted section 36 consent
in August 1997, has a heat utilisation element amounting to less
than 100MW, enough for the Government to regard it as a CHP project.
Companies seeking to avoid the moratorium may design their plant
in a similar fashion.
(c) The moratorium has also affected renewables
projects, such as the Humble Hill windfarm, and no clear guidance
has yet been provided about whether or not renewable generators
can expect exemptions from it.
(d) Both the Engineering Construction Industry
Association and the Association of Electricity Producers have
warned that the moratorium could cause 10,000 job losses in the
gas station construction industry, more than could be saved in
the deep-mined coal industry.
These figures have been disputed, but policies designed to help
the coal industry must impact elsewhere in the economy, with employment
implications which require careful consideration.
We do not believe that the moratorium on section
36 and section 14 consents for new power stations will assist
the coal industry in the short run; nor is it necessarily to the
nation's advantage to resist the development of new power station
capacity, especially in anticipation of the liberalisation of
the domestic electricity market. While we acknowledge that the
Government requires some "breathing space" in which
to conduct its review of energy policy, and that it has no criteria
for determining whether or not applications for section 36 consents
should be granted, we look to the Government to ensure that the
review be speedily completed and the moratorium be lifted as soon
42. One problem our inquiry has revealed is the difficulty
of finding accurate data about the section 36 consents granted
by the Government. We are pleased to be able to publish a full
list of section 36 consents given up until December 1997 with
this Report. Since then, another has been granted to a CHP project
and announced in a House of Lords debate.
We recommend that all section 36 and section 14 consents be
published, with associated details, by Written Answer in the House
of Commons Official Report on the day they are granted.
43. In October 1997 the Minister announced that he
was inviting the Director General of Electricity Supply (DGES)
to set up a review of electricity trading arrangements in England
and Wales-the so-called Pool. In November 1997 DGES sought the
views of those concerned on the objectives, scope and process
of the review. On 28 January 1998 he published his proposals for
a review, envisaging a report to the Minister in July 1998. The
review, which will be assisted by "a panel of independent
senior advisers" and by professional consultants, will cover
a range of issues, including the needs of customers and the requirement
for transparency and flexibility. Perhaps most significantly in
the context of coal, it is proposed that the review should consider
what changes to trading arrangements will "avoid discrimination
against particular energy sources and be compatible with government
policies to achieve diverse, sustainable supplies of energy at
competitive prices and with wider government policy, including
on environmental and social issues".
44. Many agree that the time is right for such a
wide-ranging review of the Pool, quite apart from the particular
concerns of the coal industry.
It has now been running since 1989. Comparable trading arrangements
in other countries, in particular the joint Scandinavian pool,
now offer a useful means of comparative assessment.
The onset of full liberalisation of the market for domestic electricity,
albeit unfortunately delayed, with consequent variations in the
retail price of electricity paid by consumers, makes it particularly
appropriate to re-examine the mechanisms for wholesale price setting.
45. The concerns of the coal industry stem from the
realisation that the theory underlying the Pool, that generators
would bid their marginal costs, does not work. The nuclear power
generators bid in at zero, since they can only with difficulty
cease or reduce generation. Many gas-fired plants are similarly
bid in, either because the nature of their contracts with gas
suppliers obliges them to take the gas in any event, or because
they already have a guaranteed price under side contracts with
the RECs. The result, put simply, is that nuclear and gas-fired
plants are run as baseload, with coal-fired power stations acting
as swing producers, with the three coal generators effectively
setting the system marginal price for much of the time. This does
not reflect the true marginal cost of generation, although it
has proved a reasonably resilient method of providing a pricing
mechanism for about 30 separate generators. More accurate cost
reflectivity could reduce artificial incentives for the construction
of new gas-fired plant, and so restore the balance in favour of
electricity generated from coal.
46. The Minister told us that he had asked if the
structure of the Pool was "stacked against coal".
In 1993 the Select Committee similarly suggested that the operation
of the Pool appeared to disadvantage coal-fired generation and
called for its effect on coal-fired generation to be considered
as part of the Pool review. In the event, the outcome of that
review did nothing to help coal-fired generation. This review
offers grounds for only limited optimism, not least in view of
its proposed completion in July 1998, too late to have any effect
on any contracts for coal to be agreed by the end of June. As
one coal industry witness put it, "it might well be too late
for the coal industry".
We recommend that the Director General of Electricity Supply
be invited to convey to Ministers as soon as practicable any preliminary
findings of his review which suggest that the current electricity
trading arrangements do indeed discriminate against coal-fired
generation, together with proposals for change.
Review of early gas contracts
47. At the time of the privatisation of the electricity
industry, the DGES encouraged entry into the generating market
by independent power producers (IPPs). Following the relaxation
of an EU directive which prevented the use of gas for electricity
production in 1990, the IPPs concentrated on gas-fired projects,
encouraged by the favourable financial conditions then pertaining.
The IPPs were primarily backed by regional electricity companies
(RECs), wishing to secure their own supplies of electricity.
Two aspects of the deals struck during the first phase of the
'dash for gas' in the early 1990s have now attracted the Government's
attention. First, the IPPs signed take-or-pay contracts with their
gas suppliers, whereby they promised to pay for a set volume of
gas, irrespective of whether or not that gas was supplied for
generation purposes. The costs inherent in the IPPs' take-or-pay
contracts were easily passed on to electricity consumers, via
the RECs' monopoly franchises. The Minister has now asked the
DGES to "examine [the] long-term take-or-pay gas contracts...to
prevent those high costs being passed on in full to domestic customers".
The second controversial aspect of the early 'dash for gas' was
that the IPPs were contractually prohibited by British Gas from
re-selling the gas they received if and when commercial opportunities
arose to do so. Thus, when gas prices are high, the IPPs continue
to produce electricity rather than exploring opportunities to
sell their gas, which necessitates the RECs buying electricity
from the IPPs rather than buying potentially cheaper coal-generated
electricity. The Confederation of UK Coal Producers have complained
to the European Commission about this practice, claiming that
it is anti-competitive. The Government have now requested the
Director General of Gas Supply (DGGS) to consider taking action
48. It remains unclear exactly which aspects of the
take-or-pay contracts the DGES has been asked to review.
He may consider the way in which RECs have been able to pass the
costs of the contracts onto consumers, with a view to requiring
the RECs to buy electricity generated more cheaply than at present.
He reviewed this issue in 1993 and concluded that no change to
the present arrangements was desirable. He argues that once the
domestic electricity market is liberalised "it would not
be possible for an electricity supplier automatically to pass
on to customers the costs of high-price contracts, whether for
gas or for coal-fired generation".
The recently announced delay to electricity liberalisation is
therefore a matter of some concern to the coal industry. DGES
may also wish to examine the contracts for differences signed
by RECs and IPPs for electricity supply. The design of these contracts
permits the IPPs to bid into the electricity pool at a low, or
even zero, marginal price, ensuring that their electricity is
sold, and thus marginalising coal-fired generators. This issue
will be considered as part of DGES' review of the pool, an object
of which is to "avoid discrimination against particular energy
sources and be compatible with Government policies to achieve
diverse, sustainable supplies of energy at competitive prices".
The Pool review is considered in more detail above.
49. DGGS is currently consulting on the issue of
the prohibition of gas re-sale by IPPs. If DGGS considers that
the prohibition is anti-competitive and the restriction is lifted
then growth in arbitrage in the gas market can be expected. When
gas demand is high and prices rise, particularly during the winter,
incentives may exist for IPPs to sell their gas into the transmission
network rather than to use it for electricity generation. The
RECs would then be required to buy electricity from other sources,
particularly coal-fired power stations. If the prohibition is
lifted then the impact of the change can be expected to be felt
during the winter of 1998/99. This change will not, however, allow
coal-fired power stations to operate on base load throughout the
year; the impact on coalburn, although appreciable at times of
peak demand, will therefore be limited. There will also be security
of supply concerns relating to both the electricity and gas systems
from an increase in gas arbitrage, which must be considered along
with any proposals for reform in this area.
50. The prospect of a positive impact on the deep-mined
coal industry resulting from these reviews is slight in the short
run. The regulators' reviews may highlight the anti-competitive
nature of long-standing contractual arrangements between gas suppliers,
IPPs and RECs, but reform can be expected to proceed only slowly.
While we support any attempt by the regulators to prevent anti-competitive
practices in the gas and the electricity supply industries in
future, we are disturbed by the suggestion that the regulators
may seek to make up for their past inattention to such practices
by unpicking established contracts. This course of action would
serve only to harm business confidence in the industries' regulatory
regimes, adversely affecting the best interests of electricity
and gas consumers.
Extension of existing coal contracts
51. Many of the actions taken by the Government to
assist the coal industry have been reviews and medium-term measures
which could not protect the industry from closures and job losses
after 31 March 1998, when the old British Coal contracts between
RJB Mining and the three generators were due to expire. On 10
December 1997, however, the Prime Minister announced at Prime
Minister's Question Time, that:
"I understand that the three main generators-National
Power, PowerGen and Eastern-and RJB Mining have agreed in principal
to make supply arrangements covering the period between now and
30 June 1998. That will allow the UK deep-mine coal industry to
continue production at present levels without immediate redundancies
or pit closures. That is a six-month delay. However, it is important
that we use that opportunity to review the long-term energy requirements
of the nation and make sure that we have an energy policy consistent
with a competitive industry and the long-term energy needs of
Both the DTI and the generators were reported to
be unaware that any such agreement had been reached at the time
of the Prime Minister's announcement.
It has subsequently become clear that the Paymaster General acted
as a catalyst for an agreement reached on 15 December 1997 between
RJB Mining and the generators about an extension, which will maintain
RJB Mining's production levels. RJB Mining also agreed to extend
until 30 June the redundancy terms for its workers transferred
from British Coal.
RJB Mining "will use this period to continue to reduce operating
costs and to improve their competitiveness".
52. It is important to recognise that, in agreeing
to extend their contracts with RJB Mining, the generators have
not agreed to buy any more coal than had previously been negotiated.
National Power will "accelerate delivery" of 350,000
tonnes of coal from RJB during the second quarter of 1998; Eastern
will take "advanced deliveries" of 250,000 tonnes. Both
totals represent a bringing forward of tonnage options agreed
during 1997. PowerGen
has agreed to take 1.1 million tonnes of coal, before signing
a new contract with RJB. This figure represents only half of the
tonnage PowerGen is expected to contract for from RJB, however,
and some is likely to be stocked at, and burnt by, Eastern's Drakelow
and High Marnham power stations under the leasing agreement between
the two companies.
Consequently, the agreement reached between the generators and
RJB Mining represents less than the "six months delay"claimed
by the Prime Minister to aid the coal industry, but is instead
a revision of the generators' existing commitments which will
protect RJB Mining for just three months. The Government must
also be reminded that RJB is just one of several mining companies
involved in the deep-mined coal industry. Other companies, such
as Midlands Mining, have not required Government assistance in
order to secure orders from the power generators. The deal brokered
by the Paymaster General may well harm Midlands Mining and other
small coal firms, by encouraging the generators to stockpile RJB
coal at the expense of coal produced more competitively elsewhere.
Concerns have also been raised that the generators may, in return,
seek favourable responses from Government to other commercial
issues, such as those involving the vertical integration of the
electricity supply industry, as a result of agreeing to extend
their current coal contracts.
While we recognise the Government's intentions in seeking at least
a short-term resolution of the coal crisis in this way, we remain
to be convinced that an exception should have been made to the
rule that the Government should not intervene in commercial transactions
between private enterprises and note that the outcome of the deal
between the generators and RJB Mining may well be rather less
propitious than was initially indicated.
Ev, pp 217-9; HL Deb, 19 Feb 98, c310. Consent was also granted
to PowerGen to develop a test centre for large gas turbines at
Cottam coal-fired power station, in June 1996 Back
Ev, pp 217-9, 230-1; also Power UK, January 1998, pp18-19 Back
Ev, p210; also HC Deb, 26 Nov 97, c919 Back
DTI Press release, Battle acts to level coal playing field,
26 Nov 97 Back
Ev, p60 Back
Q190; Ev, pp 215-7; HC Deb, 3 Dec 97, c349; 10 Dec 97, c1003;
and see paragraph 15 Back
HC Deb, 22 Dec 97, c519w; 10 March 1998, c107w; also see Financial
Times, 30 Dec 97, p6 Back
HC Deb, 2 Dec 97, c160w Back
See The Times, 9 Dec 97; Power UK, December 1997,
Qq 13-14 Back
Such projects are listed in Power UK, January 1998, pp17-18:
also unprinted memorandum from Dr J Watson, Science Policy Research
Unit at the University of Sussex. Back
Since the moratorium commenced, one CHP plant has received consent
- British Sugar's 80MW factory at Bury St Edmunds: Ev, p253 Back
See Ev, pp 206-8 for evidence that this is already occurring Back
Guardian, 5 Dec 97, p24;
Daily Mail, 18 Dec 97, p31 Back
HL Deb, 19 Feb 98, c310 Back
eg Qq89, 122, 125 Back
National Power and PowerGen also commissioned several gas-fired
plant at that time. Back
For one detailed explanation of the 'dash for gas' see The
Economics and Sustainability of Gas Use for Power Generation in
the UK, G. MacKerron, Coalfield Communities Campaign Special
Report 13, 1991. Also Ev, pp 51-3, 183-4, 189-90 Back
HC Deb, 5 Nov 97, c345; HC Deb 26 Nov 97, c930; Qq26-28; Ev, pp
2-3, 210-1; Ofgas, 1997 Competitive Market Review, Consultation
Document, Dec 97, p12 Back
See Power UK, December 1997, p7. Back
Ev, pp 183-4, 189-90; Unprinted Memorandum from the UDM Back
OFFER Press notice, Electricity trading arrangements: advice
to John Battle on terms of reference, 26 Jan 98. Back
Q228; Ev, pp219-20. See also Daily Telegraph, 27 Nov 97.
Also unprinted memorandum from Centrica plc Back
HC Deb, 10 Dec 97, c1003 Back
Coal UK, December 1997, p2 Back
Ev, pp 84, 253 Back
Ev, p84 Back
See paragraph 10. Also Ev, pp224, 226 Back
Coal UK, October 1997, p12; Ev, pp 84, 262 Back
Power UK, December 1997, p6; Financial Times, 12
Dec 97, p20. Coal UK, December 1997, p2. Also Ev, p252 Back
Coal UK, December 1997, p2 Back