APPENDIX 15
Memorandum by CoalPro, the Confederation
of UK Coal Producers
OUR ENERGY CHALLENGE—SECURING CLEAN,
AFFORDABLE ENERGY FOR THE LONG-TERM
INTRODUCTION
The Confederation of UK Coal Producers (CoalPro)
represents members companies who produce over 90% of UK coal output.
CoalPro is not opposed to the development of any other form of
energy. CoalPro is pro-coal.
CoalPro believes in a balanced energy policy
and is opposed to over-reliance on any single form of energy.
In particular, CoalPro is concerned that within the next 20 years,
the UK will be dependent on gas for well over half of its electricity
generation and that up to 90% of that gas will have to be imported.
This response takes into account the views of
CoalPro members following a series of discussions. It sets out
the issues for the future of electricity generation and coal production
in the UK, and makes certain policy proposals in relation to both.
The particular questions on which the consultation seeks responses
are dealt with separately in an Annex.
FUTURE OF
ELECTRICITY GENERATION
Over the next 20 years, a significant proportion
of the UK's electricity generating capacity will close as the
opted out coal and nuclear stations reach the end of their lives.
The problem may recede somewhat with life extensions to some of
the AGR stations and because more coal-fired capacity has now
opted in under the Large Combustion Plants Directive than at one
time seemed likely. Nevertheless, significant new investment will
be required.
In this context, the projections in the consultation
document on the expected share of coal-fired generation in the
period 2015 to 2020 seem far too pessimistic (15% to 20% p 39;
16% p 60). The level of investment recently committed to flue-gas
desulphurisation (FGD), which now amounts to 20GW, and the consequent
plant life extensions under the LCPD, represents a fundamental
change. There may also have been a fundamental change in the likely
long-term relativity of coal and gas prices.
Achieving the Government's aspiration of a 20%
contribution to electricity generation from renewables by 2020
will be expensive for electricity customers and will require considerable
effort in other directions. The same considerations apply to a
replacement nuclear programme. Even if both are achieved, the
UK will remain heavily dependent on fossil fuels for the foreseeable
future and investment in new and replacement fossil fuel generating
capacity will be required.
If the Government's longer term aspiration of
a 60% cut in CO2 emissions by 2050 is to be achieved, the investment
in new or replacement fossil fuel generating capacity will have
to address carbon emissions. Fuel switching from coal to gas alone
will be wholly inadequate. In an uncertain world, compounded by
longer term regulatory uncertainty, future investment may be gas-fired
by default, primarily because of low initial capital costs.
Recent events comprehensively demonstrate the
security of supply and price risks associated with an over-reliance
on gas for electricity generation. As a consequence, coal-fired
generation has provided over 50% of UK electricity over the past
winter. The construction of new gas supply infrastructure may
relieve some of the pressures. This will replace a European gas
supply and price environment by one which is global. Similar investment
is underway in the Far East, North America and elsewhere in Europe
and there is no guarantee that a global environment will be more
benign. The United States is becoming a major gas importer. The
recent agreement by Russia to build gas pipelines to China further
highlights the risks. In any event, the abundance of coal compared
with gas reserves will inevitability lead to an ever-widening
price differential in favour of coal over the longer term. Locking
into gas by default will thus lead to reliance on expensive and
constrained gas supply.
CoalPro recognises the difficulties of intervening
in the market to "fix" shares for generation from particular
fuels. There may however be merit on security of supply grounds
for government to maintain a watching brief to ensure that generation
capacity based on particular fuels does not fall below a certain
minimum. Market forces can then determine the actual fuel mix.
CoalPro notes that in February 2006, DTI published
a consultation document on the EUETS Phase II CO2 emissions projections
and related energy price projections to 2020. CoalPro has serious
reservations about these projections and believes that they are
very significantly understated for all fuels. CoalPro will be
commenting separately on these projections in relation to the
EUETS Phase II consultation.
Investment in low-carbon coal technology offers
a way forward which will both address carbon emissions and enable
the UK to continue to make use of abundant world and the UK's
own significant coal reserves. Initially this will require investment
in higher efficiency coal plant, either by the application of
supercritical boiler technology to pulverized fuel plant (new
or retrofit) or by new integrated gasification combined cycle
(IGCC) plant. When combined with up to 20% of biomass in the fuel
stock and feed water heating, these technologies can reduce carbon
emissions from coal-fired plant to levels close to those from
combined cycle gas turbine plant.
Continued progress in reducing carbon emissions
by co-firing with biomass is under threat because of the reduction
in the cap under the Renewables Obligation (RO) with effect from
April 2006. CoalPro recognises that the Government is reconsidering
this but emphasises that a decision is urgent. To maximise potential
in this area, it is also important to resolve the issues associated
with off-site blending of biomass with coal.
The final stage in delivering low-carbon coal
technology is to capture the carbon dioxide emissions from such
plants and store them underground in either exhausting oil and
gas fields to enhance oil and gas recovery or in deep saline aquifers.
CO2 can be captured from the flue gases at supercritical pulverized
fuel plant, or at the pre-combustion stage at IGCC plants. 85%
of CO2 emissions can be abated in this way. Combined with biomass,
the reduction can be even greater. IGCC plants are less well proven
but offer the additional advantage that removal of the CO2 at
the pre-combustion stage provides a stream of hydrogen that can
be used either for electricity generation or, in the longer term,
as a replacement motor fuel. It is imperative to recognise, however,
that the cost penalty associated with carbon capture and storage
(CCS) means that investment in higher efficiency coal plant is
a pre-requisite.
It may be that with the present relativity between
coal and gas prices, investment in higher efficiency coal plant
is competitive with new gas plant. Investors are unlikely to commit,
however, in the absence of longer-term certainty. The most pressing
problem is to provide regulatory certainty and, in particular,
to make available long term carbon allowances beyond phase 2 of
the European Union Emissions Trading Scheme (EUETS) which itself
has yet to be finalised and which will only extend to 2012.
The German government has made available carbon
allowances for up to 18 years. This has stimulated investment
in higher efficiency coal plant and a number of projects are now
proceeding. A similar regime in the UK may well bring forward
investment. CoalPro urges the Government to introduce such a regime.
Additional instruments may be necessary to stimulate
investment in CCS, whether from coal or gas plant. Whilst all
the individual elements of the technology have been proven to
some degree, there remain risks associated with combining them
and Government assistance for a small number of demonstration
plants, involving both coal and gas, may be necessary. The £35
million available under the CATS strategy is unlikely to be sufficient.
CoalPro asks the Government to provide additional assistance for
demonstration CCS plants.
Large-scale deployment of CCS technology is
by definition not economic compared with conventional fossil fuel
generation technologies. It will require further policy instruments.
In addition to the long-term carbon allowances proposed above,
mechanisms such as a replacement or extension of the Renewables
Obligation to a low-carbon obligation, or contracts with Government
to provide a floor price for carbon will be necessary.
Development of low-carbon coal technology as
set out above will minimise carbon emissions whilst avoiding the
risks of over dependence on gas. All low-carbon technologies will
be relatively expensive and it is not the place of this response
to discuss the costs of the various alternatives, which are both
subjective and site-specific. However, general indications are
that low-carbon coal technology is broadly competitive. It thus
offers secure, clean and affordable energy for the long-term.
CoalPro therefore proposes the following policy
agenda in relation to UK electricity generation:
— Reversal of the reduction under the
RO of the cap on co-firing of coal with biomass.
— Resolution of the issues associated
with off-site blending of coal and biomass.
— Provision of long-term carbon allowances
to stimulate investment in higher efficiency coal-fired generation.
— Government assistance for carbon
capture and storage demonstration plants.
— Extension of the RO to a low-carbon
obligation or a mechanism to provide a floor price for carbon,
to enable large-scale deployment of low carbon coal technology
and CCS.
FUTURE OF
UK COAL PRODUCTION
World coal reserves are abundant. It is less
well appreciated that the UK still has several hundred million
tonnes of coal reserves that can be economically extracted at
costs which CoalPro believes will be competitive with the long
run average of delivered world coal prices. CoalPro's concerns
about DTI's projections of long run international coal prices
are referred to above. The amount of coal-fired generation capacity
that will be fitted with FGD means that there are no issues associated
with the acceptability of indigenous production.
Coal offers numerous security of supply and
price advantages compared with reliance on imported gas including
the ability to stock large quantities. These advantages will be
enhanced by including within the coal supply mix a significant
proportion of indigenous production. Coal supplied from the UK
offers security against the volatility of international coal prices,
freight rates and exchange rates and a reliance on limited port
capacity. Strains on a congested railway system are reduced. The
network infrastructure issues referred to on p 55 of the consultation
document also apply to coal. Furthermore, some of the proposed
investment in upgrading this rail and port infrastructure could
be deferred or even eliminated completely. Imported coal also
relies on extensive infrastructure in the supplying countries,
the full economic costs of which in the case of Russia are not
yet reflected in pricing, and results in increased transport-related
carbon and sulphur emissions.
The main impediment to maintaining and increasing
UK coal output is access to the significant reserve base at both
deep and surface mines. Deep mines require periodic injections
of capital to access new areas of reserves without which they
will close prematurely. The necessary investment will not be forthcoming
if coal supply contracts are short term and subject to the vagaries
of international prices. Within the past three years these have
varied from $30 per tonne up to $80 per tonne and back to about
$60 per tonne delivered to North West Europe. Such a commercial
environment is not "bankable" for such long-term capital
intensive operations.
CoalPro urges the electricity generating industry
and the UK Government to consider developing a framework which
will enable longer term coal contracts to be agreed at prices
which smooth out the volatility of international markets and which
recognise the additional security advantages of indigenous production.
Investment will then be forthcoming. In addition, CoalPro believes
government should consider tax credits or similar mechanisms to
encourage generators to burn indigenous fuels at times when these
are disadvantaged because of temporary low world prices.
The UK has several hundred million tonnes of
coal reserves that could be extracted by surface mines. The greatest
impediment to production is the difficulty in obtaining planning
permission. Planning guidelines in England apply a presumption
against approval for surface coal extraction unless strict conditions
are met. No such presumption applies to any other form of development
and specifically any other mineral extraction. It is illogical,
discriminatory and absurd at a time when indigenous fossil fuel
production is declining.
This presumption against has recently been introduced
in Scotland. At the same time, the new Scottish guidelines introduced
a 500 meter buffer zone as opposed to the 200 meter that applies
to some other minerals. This will sterilise large areas of reserves
and eliminate a number of potential sites completely. Draft planning
guidelines in Wales propose a 350 meter buffer zone which will
have the same effect. Arbitrary fixed buffer zones are not based
on any objective criteria and should be replaced by ones which
are assessed on site-specific criteria for each application.
CoalPro also believes that a number of mineral
planning authorities in England are not taking proper account
of the planning considerations that enable the presumption against
to be overcome. There are other sterilisation issues where applications
to extract coal are refused, only for the site to be subsequently
developed, or where coal extraction in conjunction with a wider
development is refused. This is the antithesis of sustainability.
This competitive ratcheting up of requirements
across the devolved administrations and amongst mineral planning
authorities is strangling surface coal production and is wholly
irresponsible against a background of restricted and expensive
energy supplies. Surface coal production has fallen from 18 million
tonnes a year to 10 million tonnes a year over the past decade.
CoalPro urges the Government to remove the presumption against,
to replace arbitrary buffer zones with ones assessed on site-specific
criteria, to ensure that mineral planning authorities properly
apply planning guidance and to ensure, on energy policy grounds,
that a similar regime applies throughout the UK.
Planning guidelines for some other minerals
require a landbank of future permissions to be maintained so that
the nation's need for essential materials can be met. There is
a market for coal in the UK substantially in excess of indigenous
production and import capacity for internationally sourced coal
is tight. Over the past winter, coal-fired generation provided
over 50% of UK electricity and indigenous coal was a major component
of supply. Without this level of generation, electricity supply
difficulties would almost certainly have occurred. There is therefore
a demonstrable need for indigenous coal production which should
be taken into account as a material consideration when applications
for surface mines are considered. CoalPro urges the Government
to adjust planning guidelines accordingly and ensure that this
applies across the UK.
If an adequate landbank of permissions can be
built up, surface coal production could be increased to 15 million
tonnes a year providing invaluable additional indigenous energy
production at a time of constrained and expensive imported supplies.
A landbank of permissions would provide a strategic reserve of
coal in the ground which could be used to supplement indigenous
energy production as required.
Surface mines are also subject to Government
imposed cost pressures that do not apply to the UK's international
competitors. Recent increases in the duty on off-road diesel have
increased costs significantly. The level of duty is well above
the European minimum and does not apply to non-European competitors.
When considered in conjunction with the climate change levy, this
amounts to double taxation. Gas oil used for electricity generation
is exempt for this reason. CoalPro asks the Government to apply
a similar exemption for diesel used in the production of coal,
virtually all of which is used for electricity generation.
Indigenous coal production also offers other
substantial economic benefits in terms of employment, tax revenues
and the balance of payments. These benefits will be lost if access
to the UK's coal reserves continues to be impeded. Any further
reductions in employment risks losing the industry's skills base.
In this context, the EU State Aids regime is
designed, inter alia, to maintain and secure access to
reserves. CoalPro recommends that the various options available
under the regime should be retained over the long-term.
CoalPro therefore proposes the following policy
agenda in relation to UK coal production:
— Development of a commercial environment
for the UK's deep mines which provides long-term contracts at
prices which smooth out the vagaries of international coal prices
in order to encourage investment to access new reserves.
— Consider tax credits or similar mechanisms
to encourage generators to burn indigenous fuels at times when
these are disadvantaged by temporary low world prices.
— Remove the presumption against surface
coal mining applications from planning guidance in England and
Scotland.
— Replace arbitrary fixed buffer zones
in planning guidance in Scotland and Wales by ones which are objectively
assessed on site-specific criteria.
— Change planning guidance to require
the need for coal to be taken into account.
— Ensure on energy policy grounds that
planning guidance, adjusted as above, applies throughout the UK.
— Ensure mineral planning authorities
follow guidance and allow surface coal extraction in all cases
where reserves would otherwise be sterilised.
— Exempt coal mining operations from
duty on red diesel.
— Retain the options to maintain and
secure access to reserves under the EU State Aids regime over
the long-term.
CONCLUSION
CoalPro commends the above policy agenda for
the future of UK electricity generation and UK coal production
to Government. We believe that, if put in place, it will go a
long way towards meeting our energy challenge by securing clean,
affordable energy for the long term.
David Brewer
Director General
29 March 2006
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