Select Committee on Trade and Industry Written Evidence


APPENDIX 13

Memorandum by The Coal Authority

IMPLICATIONS OF THE INCREASING DEPENDENCE ON COAL IMPORTS

  The Coal Authority (CA) welcomes the opportunity to submit evidence to the Trade and Industry Select Committee inquiry into Energy Policy and, in particular, to address the extension of the terms of reference to include the implications of the increasing dependence on coal imports. Specifically the CA is grateful to the Committee for accepting this submission after the published closing date.

  The CA is responding to the consultation as the owner of unworked coal and mines of coal throughout the UK and as the body which regulates certain activities of the mining companies to whom it grants licences to work coal. As the owner of unworked coal, with a duty under the Coal Industry Act 1994 to hold, manage and dispose of its assets (including coal), the CA wishes to see the commercial exploitation of its coal estate. To fulfil this duty and achieve its aims the CA is interested in the factors which will influence the working and utilisation of coal. The Government's energy objectives, policies and strategies are major factors in deciding coal's future.

  Accompanying this letter is the CA's submission to the Energy Review, which outlines our view on current energy issues. [57]Before I draw your attention to the relevant sections in relation to this inquiry, I would first like to outline the situation explaining why coal imports have been rising over recent years.

  Contrary to Government forecasts coal burn for electricity generation has been much higher than predicted. The electricity generation sector accounts for around 85% of UK coal demand. In 2005 this market grew by 3.4% to 52.2mt, reflecting the stronger competitive position of coal against gas. Since 1999 coal consumption in the electricity generation sector has grown by 27%. However, over the same period, indigenous production has fallen from 48.5mt to 25.1mt (-48%). Coal still remains a major energy source within the UK, accounting for around one third of electricity generated in 2005. Over the recent winter coal has been meeting 50% of average weekday demand.

  Electricity generators want to burn coal; it is the fuel of choice in the current liberalised energy market, even taking into account environmental costs. In the UK, imported coal has been taking an increasingly higher proportion of this market despite domestic coal having lower costs than the price of international traded coal and the increase in flue gas desulphurisation equipment at power stations reducing the need to import on quality grounds.

  Coal imports have been rising simply because indigenous coal production has been unable to meet demand and this trend looks set to continue unless action is taken. Coal production in the UK has been falling for many years. There was extensive rationalisation of the nationalised industry before privatisation. More recently production has fallen more rapidly than the market as deep mine collieries have reached the end of their economic lives and surface mines have found difficulty in obtaining planning permission. In 2005 UK production fell to its lowest recorded level of 20.6 million tonnes.

  There is an abundance of coal remaining within the UK but that alone is not enough to sustain production; economics, environmental issues and political attitudes are also relevant factors in the part indigenous coal will play. The industry has the ability to produce around 20 million tonnes per year via conventional mining methods for the foreseeable future, but change is needed for this to happen. I would in particular like to draw your attention to Appendix 2 of the CA's submission, which gives a summary of the coal reserves position in the UK.

  The indigenous industry faces two main problems; in deep mines it is the ability to maintain the periodic investment needed to access new areas of reserves and with opencast mining it is the difficulty in obtaining planning permission.

  Future investment into deep mines must be covered by contracts which allow producers to mine the coal, develop further coal faces and provide adequate risk adjusted returns. Contracts linked to the vagaries of international prices, which have varied between $26/t to $80/t delivered into North West Europe over the last three years, make investment planning very difficult.

  Without further investment in UK collieries accessible reserves will be effectively lost to the nation forever. In order to acquire the necessary price levels to promote investment, the CA believes it is important for there to be a framework (possibly influenced by Government intervention) which will enable long term coal contracts to be agreed at prices which reflect a premium for the reliability of the "local" product, and with a mechanism that smoothes out the volatility of international price fluctuations.

  Achieving security of supply and a balanced energy mix does not come without cost. At present we have the Renewables Obligation and historically the Non Fossil Fuel Obligation (NFFO) to support nuclear. Going forward there will certainly, have to be a market mechanism introduced to encourage new nuclear build. Providing a mechanism to help deep mine investment is simply an extension of this principle.

  The UK has several hundred million tonnes of coal reserves that could be extracted by opencast methods. The greatest impediment to production is the difficulty in obtaining planning permission. The introduction of Minerals Planning Guidance Note 3 (MPG3) in England and Wales in 1999, introduced a presumption against approval for opencast coal extraction unless strict conditions are met, and opencast production in England has fallen by 61% since its introduction. No such presumption applies to any other form of development and specifically any other mineral extraction. This presumption against has now been introduced in Scotland and there is a real danger that a similar trend may develop.

  The CA feels that opencast mining should be treated, within the planning process, in the same way as "other" minerals. This would still require proper consideration of environmental and community issues, but would provide the need for a "secured" supply of indigenous coal within a strategic planning framework. This would take away the perception created by the "presumption against" principle that coal starts from a negative position and is somehow less important than other minerals.

  The CA believes that Government should review planning policy to remove the presumption against and ensure that national need is taken into account in a similar fashion to the statement of need on LNG terminals recently made by Alistair Darling the Secretary of State for Trade and Industry.

  Sections 5 and 6 of the CA's main submission goes into further detail on the issues outlined above but I would like to draw your attention in particular to Appendices 3 and 4.

  Appendix 3 shows the projected output level from the UK opencast sector. The opencast sector annual production will be maintained at around 11 million tonnes for the next 4 years, as sites which have planning consents or are expected to receive consent come into production. However, without new consents output will drop, with the major reduction in 2010

  Appendix 4 shows the potential for deep mine output, but that is achievable only with the necessary investment. Without it, production declines and accessible reserves become exhausted between 2014 and 2020, depending upon whether all the identified resources at the existing mines can be converted into reserves and worked successfully.

  In summary, indigenous coal can provide a buffer against vagaries of energy supply. The energy market is continually shifting and a viable coal industry can help mitigate fluctuations in energy demand and price volatility, whilst providing both security and diversity. If an indigenous industry is not maintained then coal imports will continue to grow and the UK's indigenous coal resource and its benefits will be lost to the nation forever.

Director of Mining Projects and Property

12 June 2006





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