Examination of Witnesses (Quesitons 320-339)
MR ALAN
ROBINSON AND
MR DAVID
MANNERING
3 JULY 2006
Q320 Mr Wright: In terms of the importation
of gas, we have heard evidence from a number of companies that
have suggested that they have some rather large projects in being
at the moment which are going to take into account that importation
of gas, such as the Langled Field and ExxonMobil in terms of the
LNG depot. What we have not seen is any evidence about any projects
that you as a company, RWE npower, are involved in. Do you have
any projects? Where does your gas come from at the moment?
Mr Robinson: The projects we are
involved in are ones that will probably already have been covered
in the sense that we are not the lead players in projects. We
are involved in a number of potential LNG import projects, et
cetera. They are confidential in their nature because it is
a very competitive area at the moment. Yes, we are involved in
some of those LNG projects, looking at long-term arrangements,
contracts and possible capital investment, but the reason we have
not led on them is because we are not the lead player. Upstream
gas is not a key part of our business. Within RWE, there is a
company RWE Dea that is an upstream gas company but it is a very
small part of what our business is. We are much more about securing
contracts on other people's facilities. That is really the way
we have seen it.
Q321 Mr Wright: Where do you get
your gas supply from at the moment at your existing stations?
Mr Robinson: We have a number
of long-term contracts that were put in place at the time the
stations were built. Some of them are just flat, 15-year contracts
for an amount of gas; others are fuelled contracts where you take
the output of a field and, as the field declines, so the volume
declines. We have some of those. Otherwise, for the balance of
our requirements we look usually about three years ahead into
the market and we source gas on a rolling programme in the traded
market in the UK. That is where it comes from: it is a mixture
of long-term contracts, medium-term contracts, and forward purchasing
in the traded market.
Q322 Mr Wright: So you are satisfied
in terms of the security of supply for gas that can look after
your projects in the foreseeable future?
Mr Robinson: Yes. The reason to
be involved in these LNG projects is that we think it is right
to have a mixture of tenor, as the traders would say, of period
ahead that you buy. That is the right risk approach , not to buy
everything on a long-term contract nor everything in the spot
market but to do a rolling programme of contracts of different
durations. It is our long-term contracts that were obviously signed
a number of years ago that are starting to come to an end, and
we see those very much being replaced by arrangements to import
LNG particularly.
Q323 Mr Clapham: Mr Robinson, just
before I turn to look at coal, your coal-fired stations in particular,
coming back to your analysis there of gas in the energy mix, if
we look at the shorter period—you were looking at the long
term—we know that there is likely to be a gap around 2012-2015.
Even if a decision is made therefore to bring on new nuclear build,
we still have that first gap to deal with. We know that we are
going to have gas coming in from Norway and there is likely to
be a glut of gas in another 12 months on the market. There are
people who say the market needs to be controlled, otherwise we
may have another dash for gas. The forecast that you have given
for the longer term of 80% of our electricity generating capacity
coming from gas is likely to come sooner, maybe not the 80% but
perhaps 60%. That therefore means that the diversity that we are
looking for in the market could in fact be thwarted. Is it your
view that gas should be controlled when that first new import
of gas comes in from Norway or are you satisfied, do you feel
that the market will actually decide which is going to be the
energy mix?
Mr Robinson: Let me correct one
point. The statement we made about gas is not a forecast; it is
a consequence of doing nothing. We are not proposing that nothing
be done, so it is not in that sense a forecast; it is just saying
that if you do nothing and just let gas be the only form of new
plant, then that is the natural consequence of that situation.
Coming back to your question, though, we do expect to see some
coal coming in around 2015, maybe a little earlier than that,
with some clean coal projects. We have announced our own study
for the Tilbury project. We can come back to that if you want
to do that. Otherwise, you are right to say that for the next
four or five years, clearly there is going to be significant emphasis
on energy efficiency. We have some thoughts about how those efforts
can be redoubled. Also, you have to be aware that the majority
of the plant that will close over that period is plant that is
closing not for any market or technical reason but purely for
regulatory reasons. Clearly, that is an option that exists in
seven, eight or nine years' time. If there is some new plant under
construction, perhaps committed in five years' time, some new
nuclear, some clean coal, et cetera, then there has to
be a question mark about whether plant that is due to close in
2012, 2013 and 2014 could be life-extended a few more years to
cover some of that gap. We would certainly say that there is very
little, if any, of the plant on the system, non-nuclear plant
at least, which is technically incapable of running on. It could
all be refurbished; it could all be kept going for some more years,
if that was needed to fill a gap. It is a short-term option and
it is good to have short-term options because uncertainty means
that you would want to have some things you can turn on and off
at one or two years' notice rather than at eight or ten years'
notice. We do think that the coal and oil plant are candidates
for rethinking about exact life expectancy in a few years' time
when we really know where we stand on the other options.
Q324 Mr Clapham: Turning to what
you say in your submission about coal, you tell us that you burnt
in 2005 something like 7,089 kilo tonnes of coal. Where did most
of that coal come from?
Mr Robinson: Of that 7 million
tonnes, the vast majority is imported. The reason for that is
that our three Coal-Fired power stations are all southerly based
and the one at Tilbury on the Thames does not even have a rail
link; it is an importing coal station with a jetty and international
coal ships come straight into the station. Didcot is linked directly
by rail to our own facility within the port at Bristol and it
takes its coal that way. Aberthaw is the one station that does
burn some local Welsh coal. The quantities of that are constrained
for two reasons: one is that we could not get anywhere near our
sulphur content if we were to use all local coal; secondly, the
availability of Welsh coal has actually declined anyway. There
are quite a few, like Tower Colliery, which is right at the back-end
of its life and is beginning to run down just through naturally
using the recoverable reserves. About one-third of Aberthaw's
coal is Welsh coal; all of the coal at Tilbury and nearly all
of the coal at Didcot is imported. The source of that coal varies
from year to year depending on the quality we require, the sulphur
level, the ash quality level and the cost of shipping. You will
appreciate that with the Chinese economy shipping charges around
the world vary enormously over the years. When shipping costs
are low, it tends to be more Australian and South African; when
shipping costs are high, it tends to be more local in the sense
of Russian, Polish, that sort of more local sourcing of coal.
Last year, just over half was Russian coal, about 29% was South
African, and something like 12% was Welsh coal, and the balance
was small amounts of coal from Indonesia, USA and a few other
odd spot cargoes from other locations. That is the broad balance
but it does change from one year to another because we buy on
quality and price, and shipping costs in particular are a key
factor in that decision.
Q325 Mr Clapham: The two things that
you are looking for from your imported coal, is, one, to ensure
that the price is right, but, two, the sulphur content?
Mr Robinson: It is particularly
the sulphur content. If I use the example of Aberthaw, we have
to achieve an average sulphur content of below 0.6%. Welsh coal
is typically 1 to 1 and a bit% sulphur. International coal of
that quality is generally 0.4% sulphur. You can immediately see
that you have to do about two-thirds imported coal, one-third
Welsh just to maintain a sulphur balance. If you try to get a
higher proportion of Welsh coal, you would have to turn the station
down to achieve the sulphur limit, so it is a self-defeating attempt
if you wanted to move. Once the flue gas desulphurisation equipment
is fitted from 2008, clearly that largely solves the sulphur issue.
There are still some other quality factors to bear in mind, but
it does do that. We are in discussion with half a dozen parties
in Wales about longer term contracts, post-2008 contracts, but
they do pretty well all require planning of some sort—open
cast, either extensions or new mines—and that is a slow
and difficult process. I know it has been subject to judicial
review and challenge in the couple of projects that have tried
to proceed to date. We are having to manage on both fronts. We
can burn more Welsh coal and we are negotiating contracts. At
the same time, we are maintaining our import capabilities so that
we can see which option to play out for us.
Q326 Mr Clapham: Given that the UK
coal industry is now down to six or seven collieries and that
the world market price is beginning to change a little, which
makes British coal comparable, would there be any chance of looking
at longer term contracts with British coal producers, bearing
in mind what you have said about the need perhaps to sleep on
the coal in order to be able to reduce the sulphur?
Mr Robinson: For the Welsh, that
is very much where we are headed. The station at Aberthaw is specifically
designed to burn what is called low volatile coal, which are the
anthracitic coals that you get in South Wales, but are available
on the world market as well. Local coal, known quality, short
delivery routes clearly have the advantage that we are looking
at. In terms of delivery, Tilbury is really not a credible delivery
for UK coal. It would mean literally taking it from a mine to
a port, loading it on a ship and bringing it round, and that would
be a very expensive triple-handling job. Didcot in Oxfordshire
obviously historically going back all the way to the CEGB days,
has taken Midlands coal, but again it is very expensive to bring
in any further than the south Midlands, a short hop from the port
at Bristol but a very expensive run down from Yorkshire, and Scottish
coal would be infeasible. We are the furthest away from the UK
coalfields, apart from the Welsh, and that reflects our purchases.
Q327 Mr Clapham: You mentioned flue
gas desulphurisation at Aberthaw. Are you likely to go that far
with regard to Didcot and Tilbury?
Mr Robinson: No. We have had to
make irreversible decisions under the Large Combustion Plant Directive,
not easy decisions, clearly. We have had to look at each of our
stations in turn and really look hard at the feasibility and economics
of running them after 2008 with FGD. We are spending over £100
million at Aberthaw on that one. We felt that was a justifiable
economic decision, but we also recognise that within a portfolio
of coal stations, some have to operate at medium to lower load
factors, which makes it very hard for them to remunerate these
big capital investments. Quite correctly across the system as
a whole, some stations have opted to fit FGD; others have opted
not to. At Didcot there were significant feasibility issues as
well, such as moving materials and everything else that would
be required to run FGD at Didcot. Tilbury can achieve a strong
environmental performance just through the control of the type
of coal it takes internationally. We felt again that FGD was not
justified and that we can achieve some very good sulphur performances
just by controlling the coal guides.
Q328 Mr Clapham: What about your
plans for new clean coal burn? For example, do you have any super
critical boilers?
Mr Robinson: Yes. We have announced
a feasibility study for Tilbury. It is our smallest station with
350 megawatt units; it is one of our oldest, so it is probably
the one we are likely to close first. We are looking at re-planting
it with high efficiency coal, which at least initially is enabled
for carbon capture. It is at an early stage. We have announced
the study so that we can talk openly to all the stakeholders involved.
We announced that a couple of months ago, and we have started
that work, but we are looking at all the different technologies.
Our parent company, RWE in Germany, has announced that it will
build an integrated gasification combined cycle station with carbon
capture and storage in a local onshore gas field. They are well
away with that. We are looking at the more high efficiency traditional
coal station with carbon capture. They are looking at the integrated
gasification and we are sharing technical knowledge across the
group and developing those options. Yes, it is early days, but
we feel that we need to get on with it and to look at all the
options.
Q329 Mr Bone: I want to get in my
mind that you are suggesting that taking coal from a British coal
field and putting on a train and trundling it down to Didcot is
more expensive than taking coal that has to be dug out in Australia,
boxed from somewhere to an Australian port, transported halfway
round the world, then put on a train to Didcot. Is that right?
Mr Robinson: In terms of net cost,
yes, because UK coal is intrinsically more expensive to mine.
At the moment, Australian coal with transportation because of
where we are, on that equation probably would not work, but in
terms of Russian coal, South African coal, et cetera, it
is cheaper to bring it in large vessels into Bristol and then
on a train to Didcot than it is to bring UK coal down, as well
as again the sulphur issue. Because Didcot will not have FGD fitted,
we still would be under very strict sulphur constraints at Didcot.
So again we have to maintain a very low sulphur diet. I have been
involved in the UK coal industry for many years. I negotiated
long-term, five-year contracts with RJB Mining some years ago
for National Power. Yes, I believe the UK coal industry has a
strong future but its best future is supplying its coal to the
neighbouring coal stations that were built right next door, for
good reason, rather than shipping it the length and breadth of
Britain.
Q330 Mr Bone: I did get it wrong.
It was not the transportation costs that you were suggesting were
unfavourable; it was the fact of the price of the coal.
Mr Robinson: The additional transportation
costs would tip the balance. It is not the total transportation
costs but the additional cost of spending another £3 to £4
per tonne bringing it a long distance that would just tip the
balance in the economic stakes. Frankly, it would give a lower
value to UK coal because we would have to net that back to the
pit. We could pay a lower price than a more local generator could
for the same coal because we would have to recoup that extra cost.
Q331 Mr Hoyle: You have stated with
regard to Welsh coal that there are always delays in planning
guidance issues and securing consents and that is why there have
been no new pits. Is it fair to say that?
Mr Robinson: It is certainly true
of our experience in South Wales. I can talk publicly about one
or two issues. Those who are familiar with the South Wales coal
area will perhaps know of a project called Ffos-y-Fran which has
been nearly there for eight years. I think it is eight years since
it was originally thought of. It did originally get planning consent.
That has now been challenged and has gone to judicial review to
review the Welsh Assembly's decisions and the fact that the planning
guidance for open-cast mining in Wales allows mining nearer to
houses than is allowed in England or Scotland. What is being challenged
is why the rules have not been changed in Wales as well. This
is fairly typical of the situation that exists. We have been purchasing
coal from existing facilities, from Tower, the deep drift mine
there, and indeed from three or four companies that run open-cast,
but all of those licensed deposits are running down and, within
a couple of years, will be run down not quite to nothing but will
certainly need topping up with new consented pits. We are lending
a hand wherever we can in lobbying to help that happen, but it
is a slow process.
Q332 Mr Hoyle: The reality is that
you do not mind raping the countryside through open-cast but you
do not believe that sinking a new pit with new shafts would be
the answer.
Mr Robinson: Two of the mines
from which we take coal in Wales are deep mines.
Q333 Mr Hoyle: Are they new mines?
This is about planning consent?
Mr Robinson: As I say, two are
deep mines; one is certainly looking to sink new shafts and is
looking for a contract from us. That is one of the parties to
which we are talking. So we do not have a particular thing about
open-cast versus deep mines; it is just that the majority of the
recoverable reserves in Wales now tend to be open-cast mines.
Q334 Mr Hoyle: UK Coal have said
to us that the biggest problem is that pits will not exist in
20 years' time. The difficulty is not that they will not be sinking
any new shafts but trying to ensure keeping the existing pits
open is difficult enough. They are saying that the reality is
the price that you will pay for coal is killing the UK coal industry.
Mr Robinson: The price we would
pay for coal is associated with the international competitive
price. That has always been the case. We would not be negotiating
with half a dozen parties if they all felt that we were not able
to meet their aspirations in terms of what they need to open up
new facilities.
Q335 Mr Hoyle: Do you really care
if there is an indigenous UK coal industry?
Mr Robinson: It certainly contributes
to the security of supplies. It is much less clear for Didcot
and Tilbury, for the reasons I have explained. Clearly, Aberthaw
contributes to our security of supply so that we have a mixture
of sources of coal. In particular, the international spot market
where you can source additional coal quickly if the burn is higher
and demand is higher in a particular year underpinned with some
longer term contracts for indigenous coal is a good mix and we
would want to maintain it.
Q336 Mr Hoyle: If I have followed
what UK Coal is saying, it is because you do not pay a fair price
for coal that they—
Mr Robinson: I have no information
about that. We do not buy any coal from UK Coal.
Q337 Chairman: It is important to
clarify this. You have gone to customers—
Mr Robinson: We do not buy any
coal from UK Coal because they do not own any Welsh coal pits.
We buy Welsh coal from a range of companies.
Q338 Mr Hoyle: Would you say that
security of supply is important? Security of supply is only there
if there is coal to buy?
Mr Robinson: Yes.
Mr Hoyle: Therefore, the only way that
you can continue with UK Coal is if you were to put a premium
on to ensure that we could sink a new shaft, or it would pay for
existing coal?
Q339 Chairman: I know you do not
deal with UK Coal at all. Lindsay, you have asked him to be objective
and I think what is needed is help with the English pits rather
than the Welsh pits from your experience of the industry.
Mr Robinson: I think there are
two issues. To me, the key issue of supporting new investment
is the term of the contract. It is not a question simply of saying,
"Let's pay an uneconomic rate and hope somehow to pass that
on to someone else". It is a question of paying the right
rate but, if capital is needed, whether it is a new open-cast
mine where you incur significant cost to take the burden off and
to place bonds to repair it all at the end, or whether it is a
shaft, it is still an up-front capital cost, which is only economic
if supported by a term contract. As for the nature of that term
contract, we would obviously prefer on balance that to be indexed
to international coal prices. I have dealt with UK Coal or RJB
and British Coal before them, and they do prefer international
prices where international prices are high and they prefer RPI
Indexed prices when international prices are low. If you want
a term contract, you have to decide up-front how you are going
to index the price. You cannot keep coming back and saying, "We
want an international price but the international price has dropped,
so can we change it again?" We have a mix. We have some contracts
that are fixed price; some related to inflation; and some indexed
to international prices. It is a free negotiation with the supplier
as to which type of contract works and we can price up the risks
and benefits of those different contract structures.
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