Examination of Witnesses (Questions 142-159)|
J ROSTRON, MR
TUESDAY 13 NOVEMBER 2001
142. Good afternoon, gentlemen. I should like
to welcome you. I am not sure who wants to do the introductions,
but maybe you could kick off Mr Rostron.
(Mr Rostron) On my right I have Gordon
McPhie who is Chief Executive of UK Coal PLC. On my left Colin
Godfrey is the Managing Director of CLG Energy Consultants and
is an independent consultant on various forms of energy.
143. You know that in some ways we are parallelling
what the Government is doing through the PIU inquiry though we
are obviously not going into it in quite such depth. We did feel
that it was important to get the voices of all of the interested
supplyside. We were conscious that there has been in recent months
something of a renaissance in coal in the UK as evidenced by the
statistics produced by the DTI in the summer. Having represented
what used to be called a coal mining constituency and still having
miners as constituents, which is by way of declaring an interest,
it is a fact that it also tends to be a helter-skelter business.
Sometimes you are up and sometimes you are down. How do you assess
the UK energy market and coal's place within it at the present
moment? What is Coalpro's view of the energy market? I am not
asking for exact statistics, more a kind of finger in the wind.
(Mr Rostron) After seeing ten years of decline in
the use of coal it is very heartening from our point of view to
see that the percentage of electricity generation from coal burn
is currently running well in excess of 35 per cent. The reason
for that is the market. Coal is cheaper than gas and the raw material
price of fuel is the determinant. Our view on the energy mix at
the moment is that the current level of diversity which we have
with gas, nuclear, coal and renewables coming forward is a very
good mix, a very sustainable and diverse mix. Substantial deviations
from that would actually threaten the overall security of supply
and the diversity. As we have said in our memorandum and in submissions
to the PIU and the Clean Coal Review, we welcome these reviews
because we think it is very timely that the generation mix is
reviewed both in terms of emissions, which has been a driver recently,
but also in terms of cost. Cost has to come into the frame.
144. How do you see the recent increases which
you have attributed as much to the increase in the price of gas
as the drop in the price of coal? How do you see the demand from
electricity generators in the UK for coal? Do you see it as being
sustainable that your product is going to be consumed consistently
over the coming months?
(Mr Rostron) I think it will. If we look in terms
of year on year, last year we burned 46 million tonnes of coal,
which was a substantial increase on the year before. This year
we shall probably burn of the order of 50 million tonnes. We were
mining in the UK 32 million tonnes last year, probably 31-ish
this year, which is two thirds of the demand. Other than longer
term emission and environmental constraints we see no reason at
all why coal could not continue to feature at those sorts of levels,
but it will need clean coal technology to take it forward.
145. So far I get the impression from the nuclear
industry that they think there should be more nuclear, from the
gas industry that there should be more gas and surprise, surprise,
from your good selves that there should be more coal. We are asking
the same question. Do you have a view about the optimum fuel mix
to maximise security of supply? So far we are getting each particular
industry, perhaps not surprisingly, saying the optimum fuel mix
is a bit more of theirs.
(Mr Rostron) That is not what I said. I said I think
the current levels are about right.
146. I was about to say congratulations on being
the first to say that. In all seriousness why do you think the
current situation is about right? What is the basis for thinking
about the optimum fuel mix to maximise security?
(Mr Godfrey) There are a few statistical measures
you can use in terms of how the market is operating. One of them
is a term called evenness which as the name describes is the evenness
of fuel sources for power generation. It varies between nought
and one; one is a perfect market and nought is absolutely 100
per cent one fuel. What we have seen is an improvement through
the 1990s. We have moved away from the over-dependence on coal
and we are at the position now where it looks as though we are
just about at the maximum level of evenness that we are likely
to see. If we take the Government's energy projections forward,
we see a very significant deterioration in that level of evenness
in the electricity market. It is going to take us back down to
the sorts of levels we had in 1990. If we are not very careful
and we have further displacement of coal and nuclear by gas, we
are going to become over-dependent on gas within the electricity
market as well as gas use in other sectors of the economy, we
believe that is going to decrease our security of supply.
147. Why should that be a problem?
(Mr Godfrey) You have to look as to where the gas
comes from. You have to look at what is likely to happen. Today
the UK is self-sufficient in energy, in fact an energy exporter,
but we know over the next 20 years that situation is going to
change very markedly. We in the UK are likely to be dependent
upon imported gas for 60 to 90 per cent of our requirements. Those
are the figures from the 1998 White Paper; that is the sort of
level of dependency. Then you start to look at where that gas
is going to come from. You probably have to look at this at the
European level, not just the UK level. The pipelines cross large
tracts of Europe and therefore it is very hard to look at the
UK in isolation. The basic reserves of gas around the world are
concentrated in the Middle East, North Africa and Russia, a long
way away from the shores of the UK. There is gas in the North
Sea and we should certainly be looking to ensure that we get as
much out as we can. There is gas from Norway, but mostly that
goes to continental Europe anyway. We think there is an inherent
weakness in our energy supply systems if we are over-dependent
on gas, where a large tranche of that gas is going to come from
Russia and from the Middle East and North Africa.
148. In your memorandum you do say that what
the Government should be doing is maximising use of indigenous
energy. Clearly there is a trade-off here, is there not? That
is a bit of an extreme statement, is it not? You can maximise
the use of indigenous energy at enormous cost.
(Mr Rostron) We should have qualified that "at
competitive prices". That is the market we are in at the
149. In which case leave it to the free market.
(Mr Godfrey) There is danger in leaving it to the
free market. There is no such thing as a totally level playing
field. There are all sorts of drivers within the marketplace and
we have seen what has happened to coal burn with the removal of
some of those distortions like the new electricity trading arrangements,
like the ending of the contract with EDF for the import of electricity.
When those constraints come off suddenly it is finding a very
much higher level of natural burn that you have seen over recent
years. We believe that there is a very strong position for coal
within the marketplace if we are not boxed into any environmental
corners. On fundamental economics of power generation, coal fired
stations currently generate the lowest cost electricity on the
system and have done through the 1990s as we have gone through
the dash for gas. We have been to this Committee before arguing
against the electricity trading arrangements, against the distortions
we face. We are thankful that those have been removed and we are
now seeing a very much more open market in which coal can compete.
We think it is worth putting a safety net around security of supply
and diversity of supply. We think it is probably a role for Government
to take on the question of security and diversity because the
market maybe will not do that. If we look at the projections in
EP68 the market tends to be heading for a very strong over-dependence
on gas. There is a number of drivers which force gas to displace
coal and nuclear, there are the nuclear decommissionings and there
are environmental pressures. There is a risk that we could go
down that track. It is not that we need protection otherwise it
will go down that track: it is that there is a significant risk
and one you can guard against.
150. You are essentially saying that the way
the market operates at the moment is generally working for your
industry in so far as the market is being deregulated. Presumably
as gas prices have started to go up that has worked slightly to
your advantage. Looking at it over the last five years, clearly
there are various subsidies being given to your industry and there
are other incentives being given to other different sorts of energy
producers. Do you feel that the balance in terms of government
intervention in the free market is about right? Or do you think
that it could be changed for the better in some ways? Mr Rostron,
you mentioned that for the industry to move forward there would
have to be a move towards clean coal. I did notice that this Committee
recommended support for clean coal, both in 1993 and in 1998.
Presumably this is not a new topic of discussion. Why has that
side of things not moved forward?
(Mr McPhie) You are in the position where existing
forms of energy generation are cheaper than any new forms which
are coming in. There has had to be market support for any new
energy form such as we have with renewables. Looking at clean
coal generation, that would need some form of market support in
the same way as renewables would. The existing gas stations, the
existing coal fired stations, the existing nuclear stations would
all generate electricity more cheaply than any new gas, nuclear
or clean coal station.
151. Do you have figures for that?
(Mr McPhie) There are lots of figures for it. I would
say that there is no source which is regarded as being the bible
for it and further work needs doing on it. If I look at some figures
prepared by ETSU in 2000, which were looking at the cost abatement
curve for greenhouse gasses, they that placed photovoltaics and
nuclear as the most expensive, followed by wind and biomass, then
clean coal, then hydro, then CCGT. If you go to different experts
than these, you will get different placings and different claims
from each of the generation sources. Perhaps one of the things
which the DTI should be doing, perhaps as an extension of the
clean coal review, is looking to present and verify such a cost
curve so that people can rationally decide on what is the cheapest
form of removing carbon dioxide from our energy generation sources.
There is no bible at the moment.
(Mr Rostron) It would be fair to say that the figures
published do show that the cost of carbon captured from clean
coal compared to the renewables, or CO2 sequestration would be
half that of the current renewables obligations; £300 per
tonne versus £150 per tonne in round figures. There is an
awful lot of disinformation about the actual cost of things. In
our memorandum we have talked about a clean coal obligation costing
one penny per kilowatt hour on the generation of the coal.
152. You spoke about the fact that 30 to 31
million of the 45 million was UK produced. Therefore I presume
the other 14 million is imported. Is that correct?
(Mr Rostron) Absolutely right; yes.
153. So we are talking about a so-called indigenous
fuel of which we still have to import some 30 per cent?
(Mr Rostron) Yes; correct.
154. How much of the 30 to 31 million is accounted
for by deep mine as against open cast?
(Mr Rostron) Last year it was approximately 19 million
tonnes of deep mine coal and 13 million tonnes of open cast.
155. Do you envisage there being environmental
problems with open cast mines? Do you anticipate having increasing
difficulty in getting new planning permissions for access to open
cast reserves as the existing ones become exhausted?
(Mr Rostron) It is actually self evident. Currently
the success rate for open cast mining applications throughout
the country is less than 30 per cent. This is of sites which are
picked by operators as fitting the planning guidance, which it
has to be said is the most strict within Europe and the world.
We have the most strict environmental controls on our open cast
156. If I were to ask you what the potential
was for additional coal being produced within the UK, to sustain
the present level of production, would it have to be imported
or are you confident that you could sustain that through a mixture
of deep mined and open cast?
(Mr Rostron) From a reserve point of view, there is
more than enough coal to keep the current levels of deep mined
and open cast mining going for 50 years.
157. Accessible coal?
(Mr Rostron) Accessible coal. It is purely a planning
158. It is a planning problem with open cast
and it is an economic one with deep mining.
(Mr Rostron) Yes, and a planning problem.
(Mr McPhie) Yes, that is fair.
159. Is the planning problem as great for securing
permissions for new mine shafts as it is for open cast?
(Mr McPhie) It would be very much the same, so you
would still need to prepare an environmental impact statement
and it would probably take three years to go through a complete
environmental review for a deep mine.