Examination of Witnesses (Questions 180-199)|
J ROSTRON, MR
TUESDAY 13 NOVEMBER 2001
180. But should it be?
(Mr McPhie) It should be less prescriptive certainly.
181. Earlier you were talking about being fairly
happy with the current mix.
(Mr McPhie) Yes.
182. If nuclear is phasing out, do you think
coal should be replacing the nuclear or are you worried if gas
replaces the nuclear?
(Mr McPhie) What we saw as the desirable mix going
forward was about one third gas, one third coal and one third
nuclear and renewables.
183. You would see a regeneration of the nuclear
to fill the gap.
(Mr McPhie) Yes, together with the clean coal.
(Mr Godfrey) Or renewables. The one thing you do have
with that mix is flexibility and the one thing coal does offer
you is flexibility, as we have seen over the last 12 or 18 months
where coal has picked up increased levels of generation. Had it
not been there, that would have inevitably gone to gas and there
would have been even further price reaction on gas. Because of
the substitutability for mid merit plants, you can increase levels
of coal burn and decrease levels of gas. One of the very few tunes
you can play within the energy supply scene, because you cannot
change the fuel into your boiler at home or the petrol you put
in your car particularly easily, and nuclear is running flat out
at base load so that cannot help at all in any supply disruption,
so one of the very few options and flexibilities you have within
the energy systems is the substitution of coal and gas within
the electricity market.
184. One of the new technologies for vehicles
is hydrogen fuel. My understanding is that the only two ways in
which significant quantities of hydrogen could be produced is
either through nuclear power or through coal. Is this something
you have looked into?
(Mr McPhie) It is something we are aware of. We have
not examined it in any depth. Yes, we could see it as a future
use for coal as part of the move towards a hydrogen economy.
(Mr Godfrey) It is part of the transition to clean
coal technology. You start off with the IGCC, the integrated gasification
combined cycle. You can then take carbon sequestration. You can
take the production of hydrogen for the hydrogen economy. It is
a long-term view but if you do not start the first step you do
not get to the end of it. The first step is what we are talking
about in terms of the clean coal technology today and the need
to demonstrate some of those technologies. Start working down
that track to get you towards the ultimate of perhaps a hydrogen
economy in however many years' time.
185. The other issue which is very relevant
at the moment is that the Government has awarded significant compensation
claims to certain types of mining related injuries. Are those
sicknesses recurring? In other words, I simply do not know how
they work. Is it such that if mining is to continue, those sicknesses
will be recurring, or are there now remedies which in the future
would mean that compensation would not have to be payable?
(Mr McPhie) The conditions underground have improved
dramatically over the course of the last 20 or 30 years when most
of those claims were incurred.
186. So we are talking about an historic event
rather than something which will be
(Mr McPhie) Yes, essentially.
187. There are one or two particular things
I am not quite clear about. When you talk about one third, one
third, one third, one of those being coal, what does that represent
in terms of your anticipation of coal demand in order to satisfy
(Mr McPhie) The current market for ESI coal is around
50 million tonnes and coal has about a 35 per cent share of the
market generation. You are probably talking about 45 to 46 million
tonnes as being the ESI market. Then there will be an industrial
and domestic market on top of that. You are looking at something
just north of 50 million tonnes.
188. We are seeing increases in demand for coal
at present this year compared to last and you are anticipating
the year ahead to be an increase again. On the strength of what
you were saying, it sounded as though you were not anticipating
that increase would be met by indigenous sources of coal. What
is the reason it cannot be met in that way? Is it because there
is insufficient flexibility in production? Let us say demand were
to fall to 30-35 million tonnes, does it follow that indigenous
supplies would meet all of that, or are there some economics concerned
with inland power stations versus those on coastal sites?
(Mr Rostron) It would be purely price driven. If that
were to happen today, we could match imported coal prices tonne
for tonne. If we look back from 1996 through to 1999 we would
struggle to match imported coal prices. Earlier this year we could
beat imported coal prices by 25 per cent. The world coal market
is very volatile.
189. I am with you up to a certain point. I
understand that. Does your answer not imply that if one were to
seek to try to create a mix with one third coal generated electricity,
if world prices were to change in an adverse way for UK producers,
it would not necessarily be met by indigenous supplies even to
the extent that it is now?
(Mr Rostron) It has to be based on the production
costs without any form of support. Whilst we have made big inroads
into getting the costs of both deep mining and surface mined coal
down, even since 1994, we could improve the levels we are at somewhat.
You cannot compete against dumped coal, if there is a glut of
coal on the world market. We are looking at 400 million tonnes
of traded coal playing 30 million tonnes of coal mined in the
190. Clearly one of the relationships we have
to look at is, as with nuclear, the cost relationship to that
of gas fired generation. What kind of gap is there between your
costs of generation and that of gas as you anticipate it, leaving
out of the count for the moment some of the additional investment
required for clean coal technologies?
(Mr McPhie) What you have seen over the course of
the last 18 months with the higher gas prices moving north of
20p per therm is that the coal fired generation has become competitive
and has taken increased market share. That is into a market with
average electricity prices now perhaps 1.8p per kilowatt/hour.
With the change onto NETA earlier on this year, again the coal
fired stations have fared quite well and coal use is up 17 per
cent in the current year. The coal fired stations are older technology
than the CCGTs. I do not know to what extent it is that, but as
part of their design they have a flatter power curve than the
gas fired power stations, which means that they are actually more
flexible than the CCGTs. When NETA has paid for being able to
guarantee a supply at a particular time, the coal fired stations
have done particularly well out of that. They are more flexible
if they have a flatter power curve.
191. What level of investment would be required
in order to fit the flue gas desulphurisation (FGD) plant and
the nitrous oxide removal equipment onto the existing coal fired
(Mr McPhie) Some of the existing plant already has
FGD. The most recent one having been fitted is at West Burton
and that is at a cost of circa £100-£120 million, but
you would need to talk to the generators to get the exact number
192. Looking forward into clean coal technology,
you have referred to some of the things you want to see and in
particular a demonstration project in effect. When you talk in
your memorandum to us about a structured support programme, what
do you think that looks like? What kind of programme are you looking
for and what kind of resources do you regard as being necessary
in order to commit to that?
(Mr Rostron) You can look at it in a number of ways.
It was mentioned earlier that you could actually have a low carbon
obligation which would encompass the renewables obligation that
we have now. Clean coal would also come under that umbrella and
any other form of generation you might want to bring in; photovoltaics
etcetera. That is purely deciding what level of pence or fractions
of pence per kilowatt hour you are prepared to contribute to a
low carbon level. Currently the renewables obligation is three
pence per kilowatt hour. If the low carbon obligation is three
pence, you could have clean coal and CO2 sequestration, the market
would deliver; provided solely that there are contracts for the
sale of the electricity. You still have to have a payback for
193. When we were discussing this morning with
the British Nuclear Industry Forum they were looking effectively
for fiscal measures which would enable them then to compete with
gas fired on the basis of a positive incentive for effectively
carbon free electricity generation. They did not see it in terms
of an obligation. You do see it in terms of an obligation rather
than market-based measures. Why do you take a different view?
Why do you take the view that you do as opposed to relying upon
a market-based measure?
(Mr Godfrey) An obligation is a market-based measure
effectively. It is saying to an electricity supplier that you
have to buy so much of your electricity from whatever source.
At the moment it works for the renewables obligation and they
have to buy a certain amount of their electricity which they sell
on to customers from renewable sources. If they do not do that
and they have a shortfall by any degree, they have to pay three
pence per kilowatt hour, which is then redistributed amongst the
renewable suppliers. It is an encouragement to the renewables
market to build more schemes, to be able to satisfy the requirements
of the obligation. We are advocating a similar approach for clean
coal although clean coal stage one to come in at a premium, rather
than three pence per kilowatt hour but at an obligation premium
of one pence per kilowatt hour.
194. There is quite a significant difference,
is there not, in that an obligation to purchase coal fired electricity
might have quite a different result from a fiscal measure which
is intended to promote carbon free electricity generation since
at least then coal would be in a market with other producers who
are able to do so on a low carbon or carbon free basis? You are
looking in effect for coal to be isolated from other market pressures.
(Mr Godfrey) It is a more focused measure which will
yield you the result you want rather than perhaps finding some
different solution evolves from the market. At the end of the
day the customer is paying a slight premium on electricity for
a certain technology to be developed. Both come down at the end
of the day to the same result. The obligation can be even more
clearly focused than perhaps a carbon tax would be and perhaps
195. The scenario you paint of one third, one
third, one third sounds to me as though you are trying to manipulate
the market, some sort of ordered market system. Would it be right
for me to reach that conclusion?
(Mr McPhie) If there are no significant changes to
the market as it is currently operating today, then market forces
will tend to deliver that sort of shape. It will not encourage
new forms of generation other than renewable generation forms
going forward. You will get the renewables coming in and they
will be displacing perhaps a nuclear replacement programme. If
you start to introduce other measures, which then cause other
market distortions, then we are suggesting that a clean coal obligation
measure applied in that way would keep the balance of generation
in that split, which gives you reasonable security and diversity
196. In your submission you have identified
the development of ICGG, the integrated gasification combined
cycle power stations, as a potential means of contributing significantly
to both supply security and environmental objectives. To what
extent do you think coal gasification can replace the demand for
conventional gas supplies? Would the gas produced be cheap enough
to substitute for natural gas in electricity generation?
(Mr McPhie) Any of these new technologies are more
expensive than the existing ones. To give a flavour for that difference,
when we were looking at the Kellingley clean coal project, we
were looking at three pence per kilowatt hour as being the cost
there compared with an existing market price for electricity of
Sir Robert Smith
197. Going back to this carbon sequestration,
I see in your memorandum that you are talking about BP estimating
additional 15 per cent recovery of oil by the use of CO2. Is that
from discussions you have had with BP or something you have picked
up from elsewhere?
(Mr McPhie) It is something we picked up from BP literature.
There are various potential sources for that carbon dioxide.
198. You do not see that coming back up. You
see that being something locked out.
(Mr McPhie) Yes, it gets locked in.
(Mr Rostron) There is no reason why it should not.
The oil has been down there for 150 million years.
199. Do you do much research yourself ? You
have spoken about Kellingley and that research was really part
of the old British Coal work, was it not?
(Mr McPhie) We worked with Texaco and BP at that time
to look at how to design a new clean coal technology power plant.
It was based on a Texaco process which was from Tampa in Florida
and at that time National Power's engineers had a look at the
process flow and said that to make it work as a commercial plant
rather than as a technical demonstration plant would need two
of these units: take out that one, we do not need such and such.
So the plant, design and layout would have been significantly
changed. The majority of the original process designs for clean
coal technologies at Kellingley were principally by Texaco or
NP and it is taking that process flow and then demonstrating that
it will work so someone has something real they can look at.
Chairman: Thank you very much. If we need any
additional information we shall be in touch. Thank you very much
for the help you have given us this afternoon.