Submission to the Energy Review Team,
Department of Trade and Industry
Annex
OUR ENERGY CHALLENGE—SECURING CLEAN,
AFFORDABLE ENERGY FOR THE LONG-TERM
The Confederation of UK Coal Producers (CoalPro)
represents member companies who produce over 90% of UK coal production.
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.
CoalPro's main response is set out in a covering
letter to this Annex. 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.
CoalPro's comments on the individual questions
on which the consultation document seeks responses are set out
below in this Annex. These comments are restricted to those issues
on which CoalPro is competent to comment.
Q.1 What more could the Government do on the
demand or supply side to ensure that the UK's long-term goal of
reducing carbon emissions is met?
On the demand side, much is made of the possibilities
of energy efficiency and changes in behaviour. The objectives
are laudable but CoalPro counsels against placing too much hope
that they will result in massive reductions in carbon emissions.
If it were that easy, it would have been done by now.
On the supply side, it is clear that, even with
the enormous effort and expense required to develop renewables
and microgeneration, and even with similar effort and expense
to develop a replacement programme of nuclear power stations,
the UK will be dependent on fossil fuels for 60% or more of its
overall energy requirements for perhaps several decades. It follows
from this that the UK's long-term goal of reducing carbon emissions
by 60% by 2050 cannot be met unless the abatement of such emissions
from the consumption of fossil fuels is addressed.
It is equally certain that a technology that
is absolutely fundamental to such abatement, and perhaps the only
way to achieve large scale reductions relatively early, is the
widespread application of carbon capture and storage (CCS) at
large point sources. A specific developments programme is needed
to address this issue and is dealt with at Q.4 below. Relying
solely on fuel switching from coal to gas will be wholly inadequate
and gives rise to major security of supply and price risks (see
Q.2 below).
Q.2 With the UK becoming a net energy importer
and with big investments to be made over the next twenty years
in generating capacity and networks, what further steps, if any,
should the Government take to develop our market framework for
delivering reliable energy supplies? In particular, we invite
views on the implications of increased dependence on gas imports.
Recent events have comprehensibly demonstrated
the security of supply and price risks of an increased dependence
on gas imports. In this context, it is important not to make an
artificial distinction between security of supply and price. They
are two sides of the same coin in that as security of supply becomes
more fragile, so the price will go up as countries and businesses
seek to secure energy supplies. If prices rise to the extent that
businesses have to reduce production, relocate or cease operating,
or the fuel poor are left with inadequate heating, that is the
equivalent of losing their supply.
The consultation document rightly refers to
the investment taking place in new gas supply infrastructure.
It does not follow that there will be any gas to flow through
it and it certainly does not follow that prices will fall. Similar
investment is taking place in North America, the Mediterranean
Basin and South and East Asia. The increased reliance on gas imports
risks still being reliant to a degree on the European market (ultimately
Russia) whilst at the same time becoming increasingly reliant
on the world market. There is no guarantee whatsoever that the
latter will be any more benign. The recent agreement by Russia
to build gas pipelines to China further highlights the risks.
It may always be possible to obtain the gas that we need if we
are prepared to outbid all other players at excessive costs to
the economy.
An excessive over-reliance on imported gas can
be avoided by reducing the reliance on gas for electricity generation.
Over this winter this has occurred because of the high price of
gas relative to coal and coal has provided over half of the UK's
electricity generation. Over the longer term, the relative abundance
of global coal reserves, including significant UK reserves, compared
with the relative paucity of gas reserves, including declining
UK reserves, means that the price differential must move inexorably
in favour of coal. Recent announcements on investments in FGD
at coal-fired power stations mean that nearly 20GW of coal-fired
power plant has opted in under the LCPD. Allied with life extensions
at some nuclear power stations, this means that capacity at existing
generating plant will be up to 10GW greater in 2015 than seemed
likely only a few months ago, thus serving to reduce the medium
term dependency on imported gas.
There remains the risk, however, that the low
initial capital costs of gas plant mean that, in an uncertain
world, investment in new capacity will be gas-fired. CoalPro recognises
the difficulty 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.
The Government can improve the market framework
to reduce the reliance on gas in two respects. First, under the
EUETS, for Phase 2 and beyond, the Government can grant carbon
allowances for new plant which are fuel and technology specific.
Second, the Government can guarantee long-term carbon allowances
for new, higher efficiency plant on the German model. In Germany,
allowances have been guaranteed for up to 18 years and this has
stimulated significant investment in higher-efficiency coal-fired
plant.
Minimising the dependence on imported gas means
relying more on coal. 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. 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. 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 15m tonnes
a year providing invaluable additional indigenous energy production
at a time of constrained an 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.
Q.3 The Energy White Paper left open the options
of nuclear new build. Are there particular considerations that
should apply to nuclear, as the Government re-examines the issues
bearing on new build, including long-term liabilities and waste
management? If so, what are these, and how should Government address
them?
CoalPro believes in a balanced energy policy
and is not opposed to a programme of nuclear new build to replace
stations as they close. It would, however, be imprudent to regard
nuclear new build as a "silver bullet" solution, just
as it would be imprudent to place excessive reliance on any other
technology or fuel source.
CoalPro is not competent to comment on the detailed
issues associated with new build, including long-term liabilities
and waste management. There will be many other bodies who will
profess to be able to do so. CoalPro urges Government to afford
them a healthy degree of scepticism.
It is clear, however, that new build will not
take place without supporting market mechanisms. Amongst these
will need to be some form of Government guarantee associated with
long-term liabilities.
Q.4 Are there particular considerations that
should apply to carbon abatement and other low-carbon technologies?
CoalPro is not opposed to the development of
any particular carbon abatement or low-carbon technology but urges
Government to avoid excessive reliance on intermittent renewable
sources that are inflexible and cannot meet peaks in electricity
demand. The enormous costs associated with some of the more exotic
renewable technologies, such as marine technologies, may offer
more reliability but will do nothing for affordability.
CoalPro is not competent to comment in detail
on most of these technologies and the response is therefore restricted
to low carbon coal technologies.
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 prerequisite.
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.
Q.5 What further steps should be taken towards
meeting the Government's goals for ensuring that every home is
adequately and affordably heated?
In general terms, the continuing availability
of diverse and secure sources of energy, including fuels for electricity
generation, is an essential pre-requisite for ensuring adequate
and affordable home heating.
No doubt, an extension of energy efficiency
measures across the housing stock, including through building
regulations, can make an important contribution. It would be a
mistake, however, to place excessive reliance on such measures.
If it were that easy, it would have been done by now.
There is one area in which the new Building
Regulations act against both the alleviation of fuel poverty,
and a reduction in carbon emissions. Customers are being driven
away from solid fuel as a matter of policy. They are effectively
being prevented from choosing solid fuel and are thus forced to
use more expensive oil, gas or electricity. Customers who at present
use these more expensive fuels are being prevented from switching
to cheaper solid fuels. Given constrained gas supplies, this is
also causing security of supply concerns.
As many solid fuel appliances are designed to
be multi-fuel and also burn logs or wood products of various kinds,
this is also acting to prevent a net reduction in carbon emissions.
Customers burning gas are being prevented by the Building Regulations
from switching to a cheaper alternative which would also result
in a net reduction in carbon emissions.
CoalPro recommends that Government urgently
reviews the way the Building Regulations operate and are being
applied to ensure customers are able to have a free choice to
seek the lowest cost alternative.
The consultation document also invites comments
on certain other issues.
(i) The long term potential of energy
efficiency increases in the transport, residential, business and
public sectors, and how best to achieve that potential.
CoalPro has only one point to make under this
topic. There must be a net carbon footprint gain if a higher tonnage
of more accessible, easily transported indigenous coal is burned
by UK generators.
(ii) Implications in the medium and
long term for the transmission networks of significant new build
in gas and electricity generation infrastructure.
CoalPro is not competent to comment on gas and electricity
infrastructure issues but wishes to point out that there are also
issues associated with the railway infrastructure.
A greater reliance on indigenous coal as opposed
to imports would reduce strains on a congested railway network,
associated maintenance costs and port capacity. Furthermore, some
of the proposed investment in upgrading this infrastructure could
be deferred or even eliminated completely.
(iii) Opportunities for more joint working
with other countries on our energy policy goals.
This is essential if the concentration of CO2 in
the atmosphere is to be stabilised and ultimately reduced. Whatever
efforts are involved in reducing CO2 emissions in the UK, and
the costs of so doing, will come to nought if progress is not
also made elsewhere, and particularly in the developing economies.
Technology transfer will be essential, but will only happen if
the technologies are first developed and demonstrated to be effective.
As carbon capture and sequestration may be the only technology
capable of effecting large emissions reductions from the rapidly
increasing amount of coal-fired generating plant in the developing
world, it is incumbent on developed countries, including the UK,
to demonstrate that this type of technology can work to the point
where multiple large scale commercial applications are possible.
CoalPro has commented elsewhere in this response on what needs
to be done on CCS to get to this point.
At the same time there are opportunities for an appropriate
"division of labour" and hence also costs amongst the
developed economies. In particular, CoalPro points out the work
now beginning in the US FutureGen project.
These propects for joint working also provide great
opportunities for the UK economy in design, engineering and contract
work.
(iv) Potential measures to help bring
forward technologies to replace fossil fuels in transport and
heat generation in the medium and long term.
CoalPro supports measures to increase the availability
of biofuels for motor transport and small scale microgeneration/CHP
installations for domestic and local heating needs, but is not
competent to comment further on these.
Perhaps the greatest opportunity to achieve reductions
in carbon emissions from these sectors lies in the potential for
using hydrogen as a motor fuel. Two routes have been put forward
for producing hydrogen—from fossil fuels and by electrolysis.
The latter is proposed by supporters of renewables such that electricity
generated by renewables is then used for the electrolysis of water
to produce hydrogen. The energy requirements of electrolysis are
enormous and this route is likely to be horrendously expensive.
A much more promising route is from fossil fuels.
When combined with carbon capture and storage, this offers a low
carbon route at reasonable cost for both electricity generation
and transport. With gas likely to be both expensive and subject
to supply constraints, coal will be at least an equally suitable
and economic source. Production of hydrogen from coal requires
gasification of coal in the first instance and pre-combustion
capture and sequestration of CO2. The resultant gas, essentially
hydrogen, can then be used either to generate electricity or as
a transport fuel. IGCC technology is thus required for electricity
generation.
Elsewhere in this response, the case is made for
higher efficiency electricity generation from coal. Supercritical
boiler technology associated with post-combustion CCS is one alternative
but the greater long-term potential lies in the deployment of
IGCC technology with pre-combustion CCS and the associated production
of hydrogen.
UK COAL SUPPLY AND DEMAND BALANCE
| 1996 | 1997
| 1998 | 1999 |
2000 | 2001 | 2002
| 2003 | 2004 |
2005 |
| Consumption (million tonnes) |
| | |
| | | |
| |
| Total | 71 | 63
| 63 | 56 | 59 |
64 | 59 | 62 | 61
| 62 |
| Power Stations | 55 | 47
| 49 | 42 | 47 |
52 | 49 | 53 | 51
| 52 |
Production (million tonnes) |
| | |
| | | |
| | |
| Total | 50 | 48
| 41 | 37 | 31 |
32 | 30 | 28 | 25
| 21 |
| Deep | 32 | 30
| 26 | 21 | 17 |
17 | 16 | 16 | 13
| 10 |
| Opencast | 16 | 17
| 14 | 15 | 13 |
14 | 13 | 12 | 12
| 10 |
| Other | 2 | 1 |
1 | 1 | 1 | 1
| 1 | | | 1
|
Imports (million tonnes) | 18
| 20 | 21 | 20 |
23 | 36 | 29 | 32
| 36 | 43 |
| | |
| | | |
| | | |
It follows that a presumption against indigenous coal production
is a presumption in favour of imports.
| Year | Total |
England | Scotland
| Wales |
OPENCAST OUTPUT ('000 TONNES)
|
| | |
|
| 1996-97 | 16,225 | 8,379
| 5,585 | 2,261 |
| 1997-98 | 16,288 | 8,206
| 6,332 | 1,750 |
| 1998-99 | 14,964 | 7,034
| 6,422 | 1,508 |
| 1999-00 | 14,929 | 6,165
| 7,224 | 1,540 |
| 2000-01 | 13,253 | 4,774
| 7,078 | 1,401 |
| 2001-02 | 14,473 | 5,113
| 8,186 | 1,174 |
| 2002-03 | 13,097 | 4,953
| 7,074 | 1,070 |
| 2003-04 | 11,627 | 3,674
| 6,776 | 1,177 |
| 2004-05 | 11,778 | 2,720
| 7,632 | 1,426 |
| 2005-06 | 10,153 | 1,204
| 7,739 | 1,210 |
| PLANNING APPROVALS ('000 TONNES) |
| | | |
| 2001-02 | | 2,355 |
| | |
| 2002-03 | | 2,727 |
| | |
| 2003-04 | | 1,270 |
| | |
| 2004-05 | | 24 |
| | |
| 2005-06 | | 1,711 |
| | |
| | |
| |
WINTER COAL BURN AT POWER STATIONS
| 2004-05
| 2005-06 |
| m tonnes | m tonnes
|
| December | 5.5 | 6.7
|
| January | 5.3 | 6.6
|
| February | 5.4 | 6.0
|
| March | 5.6 | 6.5
|
| | |
At times, in the 2005-06 winter, coal-fired power stations
were providing over 50% of UK electricity demand.
|
