Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 160-179)



  160. At the moment, could you produce more coal within the UK than your company is doing, if you were required to?
  (Mr McPhie) Yes, we could.

  161. By how much, do you think?
  (Mr McPhie) Probably 15 per cent increase.

  162. About another five million tonnes.
  (Mr McPhie) Yes.

  163. You could produce up to 35 million tonnes without increasing the amount you would need to import.
  (Mr McPhie) If you produce more in the UK, then you would displace imports.

  164. Unless there was an increase in demand.
  (Mr McPhie) Yes; correct.
  (Mr Godfrey) It is important to consider the source of imported coal as well. The spread of coal around the world is very much greater than it is in gas. It is not concentrated in two or three countries, it is in Australia, the US, Canada, South Africa, China, India. It is very well distributed around the globe.

Mrs Lawrence

  165. May I go back to the issue of market forces which you touched on earlier in relation to Jonathan's question? It has been suggested by other groups we have spoken to that market forces are capable of delivering continuity and security of supply. You have touched on that, but you do not feel that is the case. In your evidence you stated quite categorically that market liberalisation alone cannot deliver fuel security and diversity. Bearing in mind you appear to see a role for government intervention at some level, what form do you envisage that taking?
  (Mr Rostron) As was said in the evidence we presented, we still see an interventionist role in terms of obligations like renewables obligation, clean coal obligation and perhaps on top of that something which would take a longer term view of markets. Currently, if you wanted to build a power station, the only one you could build would be a gas fired power station because the capital cost is the cheapest, it is proven technology. Yet it was interesting this morning that it was stated that nobody would build a power station of any sort on today's electricity prices. There has to be a little bit of pump priming of any system while we are in such short-term contracts. You talked earlier about new mines. You need a good long-term contract for the supply of coal to have the confidence to invest in a new mine.

  166. What role do you see European Union regulations playing in any intervention?
  (Mr Godfrey) It is important that Europe looks at security of supply because it is very hard to do it from a UK standpoint alone. We are part of an integrated market and the more we get liberalisation of the markets the more we are hardwired into their systems. Where you have a very large slice—and we are talking about Russian exports probably tripling over the next 20 years into Europe, although production is actually declining at the moment—a massive infrastructure must be put in place. The what-if scenario does require a lot of co-ordination at the European level. Having a paper contract does not guarantee you physical supply and security of supply is about the physical delivery to the power station or to the individual consumer. Therefore we think those things have to be looked at, we have to look at what happens if certain parts of the system are interrupted if there is failure for whatever reason. The one thing we can say about coal is that it is very easy to move, it can be shifted in dry bulk carriers, it is not pipeline constrained in the way that the gas network is across Europe. It is very safe to store. It can be stockpiled; we have very significant stockpiles at power stations and have had over many years for security of supply. Those stockpiles have helped over the last 12 months as the coal generation market grew very quickly. Five million tonnes of coal stocks were lifted last year. We have been able to demonstrate the importance of coal within the energy mix. There is an issue there as to how Europe as a whole looks at its energy security, particularly at sourcing of energy from outside its boundaries.

  167. My understanding is that current regulations within Europe allow for support for fuel up to 15 per cent of production. Can you outline specifically how you would see government support in relation to your industry?
  (Mr McPhie) Such support could be applied in three different ways and areas. One could be to look at coal reserves and act as a security of supply fund to keep those reserves open and accessible, which would apply really to the deep mine reserves. A second would be to look at similar schemes to the one we have just had for state coal aid which is providing operating aid during a period of time to allow individual mines to become competitive long term. The third form of aid which they have in Europe is one of closure aid where some reserves are coming to exhaustion and it is looking to mitigate social impacts in a particular area or region. They are the three forms of aid which are within European legislation currently and which our European partners are using. Stepping aside from that and going back to clean coal technology, the process called carbon sequestration, which takes all of the carbon dioxide out of coal prior to burning it in the gasification process, would allow us to burn coal completely cleanly. We see that as the environmental future for coal in the long term. In the same way as we have encouraged renewables with the renewables obligation, we would advocate a clean coal obligation which brought that sort of technology into the UK. At the moment the DTI are looking at that as a separate issue. The direction they are going in appears to be one of looking at separate small increments of that technology. Our view is that unless we come up and actually have a full-scale demonstration plant, this will pass by. We shall see these plants being developed elsewhere in the world, but we shall not have a show piece here in the UK, one which we could use as part of the building block for our own energy supplies but which also would give our technologists and process engineers something to sell worldwide. We would see it as being a much stronger commitment to that technology, demonstrating something on a worldwide basis if we were to look at a full-scale demonstration plant for that. They are the areas.


  168. If it is such a good idea, why are other people not doing this? The Americans have for a number of years been spending very sizeable sums on clean coal technology. Why have they sidestepped this one?
  (Mr McPhie) Because people are still not confronting the issue that it is new technology, it has got additional processes and it is more expensive than a conventional coal fired power station.

  169. I have to say to you that even any brief study of the history of the British generating industry is littered with bright ideas which if Britain just took to the point of production we would somehow transform the world. If a country like the US, with the resources it has poured into clean coal technology and the size of their coal burning industry, have not picked it up, why should our scheme with a Union Jack wrapped round it be that much more attractive? I am being the Devil's advocate here, but we have chased—I do not want to use the expression Philosopher's Stone—this for some time with conspicuous lack of success.
  (Mr McPhie) We have gone for higher environmental standards here than they have in the US generally and that is perhaps the driver.
  (Mr Godfrey) A second factor is that they have very low energy prices in the US. These technologies favour higher energy price regions of the world. If your energy price is low then energy efficiency does not pay back particularly well. If you are in a region of the world like North West Europe where energy prices are higher then there is more incentive for improving thermal efficiency that you will get through clean coal technology.

  170. I do not want to be too negative but your job is to dig and sell coal. It is not to generate electricity. With respect, it is the people who generate electricity who should be telling us that this is the greatest thing since sliced bread. We do not seem to be getting that message across yet.
  (Mr McPhie) No, because each of the generators will have nuclear, gas, coal or wind and they will arbitrage happily between one and the other. None of them really has a vested interest in coal or any other form of generation. They will all sit quite happily with the existing status quo because any new generation form will be more expensive and why change. Let us wait to see what the regulator or government does to encourage movement in any particular direction. You will not get that from the generators because they will happily move to whatever the rules of the game are.

Linda Perham

  171. You mentioned carbon sequestration. Are there not problems? The way you put it sounded quite neat and tidy, but are there not problems with carbon sequestration which perhaps you could tell us about?
  (Mr McPhie) The technology is proven. Existing plant is running in Canada. You would take the carbon dioxide and you then look to capture it and probably the best use currently would be to use it for enhanced oil recovery perhaps in the North Sea. That would involve building a pipeline from wherever the carbon dioxide was sequestrated to feed those fields. The technology is proven, it is a question really of putting the technologies together to build a demonstration plant. There are existing plants which have been fully worked up and designed and costed at Wansbeck, for example; we have a plant ourselves at Kellingley where we had worked the prices through. The final step as to where you would place the sequestrated carbon dioxide is probably the last bit to be dealt with.

  172. Are there no problems with it escaping?
  (Mr McPhie) No.

Sir Robert Smith

  173. You said you had worked up some of the costs. What is the sort of energy efficiency of that system?
  (Mr McPhie) Existing coal fired plant operates at about 38 per cent efficiency across the piece. The existing gas fired plant is working at about 44 per cent. New clean coal technology power plant would operate at about 15 per cent additional efficiency to the 38 per cent, so you are looking at about 44 per cent efficiency again and that would be expected to improve as you go. That is today's number.

  174. Producing no carbon output, if you store it.
  (Mr McPhie) That is a clean coal technology plant. What you do is take the coal, gasify it, take out carbon dioxide and you are left with hydrogen which you then use for clean burn and then you sequestrate the carbon dioxide.

Dr Kumar

  175. May I explore this issue of dependency on gas? Do I understand correctly that you are saying that if we carry on then we will have far more transportation costs and greater risk of supply if we allow the gas in? Are you asking government to intervene into the market forces, that you are against liberalisation of markets as such?
  (Mr McPhie) No.

  176. That is the impression I am getting from what you are saying. You are trying to protect your own corner and saying very clearly that you want government to intervene.
  (Mr McPhie) The status quo is a satisfactory one for coal burn. Any intervention can move that market one way or another. If we are looking at long term and we are saying we want an environmental intervention, then a clean coal obligation would allow us to maintain the market balance and generate clean electricity. With the cost of gas, the IEA have produced a curve which shows the increasing costs of gas as we increase the volumes and go further and further afield, which we included in our memorandum.<fu1> Above a price, which the market will determine, clean coal technology power stations will become more viable than CCGTs. Perhaps we are not so far off that position; eight years, ten years.

<fo1>  Not printed.

  (Mr Godfrey) We are not particularly arguing that we need to move away from the market principles. What we are highlighting is an over-dependence upon imported gas and that therefore there needs to be critical review made not just of what security of supply and diversity of supply mean. If you look at the gas which is being imported into Europe over the last decade and certainly looking forward as we have to triple our imports of gas into the OECD/Europe area, you find a greater concentration of supply in Gazprom and in the whole imported gas market than you saw within the UK electricity market. Twice in the last decade we forced coal fired generators, National Power and PowerGen to sell stations because there was too much of a concentrated ownership. Now we are moving ourselves into a situation where we are dependent upon suppliers which are outside EU competition law and UK regulation, yet there is a much greater concentration, greater risk of market abuse. Somewhere along the way critical consideration needs to be given to whether or not that is in the best interests of the UK and what the risks are of disruption to supply. The market itself may not be the best people to assess disruption to supply. That may be a role for an all-embracing regulatory function rather than the industry itself. As you said this morning, when the lights go out it is the politicians who will get the blame.

Sir Robert Smith

  177. In your submission you say that in the light of the petrol crisis security of energy supply must be safeguarded before we can look to delivering environmental benefits. Earlier I think I heard the words, "We mustn't be boxed into an environmental corner". Given that the Government has signed up to the Kyoto commitments, is it really realistic to try to address security separately from environmental factors?
  (Mr Godfrey) If you look through the last decade we have had very much abundant energy at low prices and energy security and diversity have been really non-issues and the environmental issues have dominated. We now have a commitment to emissions reductions at Kyoto where we need to ensure that we embrace all the technologies which can help us to achieve it and sustain those reductions. We do believe that there is a very significant role for coal to play within that. If you over-tighten the environmental regulation then you could force coal out of the equation with the knock-on impact on security and diversity of supply. That is really what we are arguing against.

  178. You are arguing that if the market were set up right to say that those forms of energy which reduced carbon emissions were attractive and there was a market, the benefits you are talking about of modern types of clean coal and so on would not respond to those markets?
  (Mr McPhie) Yes, it would within the bands. If the clean coal obligation were one which —

  179. If the Government are saying they want environmentally friendly energy, should it really be so prescriptive as to say which kind of environmentally friendly energy or should it not let the market decide?
  (Mr McPhie) It is prescriptive at the moment, is it not?

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