Select Committee on Trade and Industry Written Evidence


APPENDIX 23

First supplementary memorandum by E.ON UK

IMPLICATIONS OF INCREASING DEPENDENCE ON COAL IMPORTS

  1.  This note supplements E.ON UK's previous evidence to the Trade and Industry Committee on the energy review and responds to the Committee's decision to examine the implications of an increasing dependence on coal imports for power generation.

COAL-FIRED POWER GENERATION AND THE MARKET FOR COAL

  2.  Coal-fired electricity generation plays an important role in a diverse fuel mix and our ability to switch to coal in response to changes in the price and availability of gas over the last winter was an important factor in maintaining secure electricity and gas prices and in containing the financial consequences for generators and consumers.

  3.  Existing coal-fired power stations are likely to make a declining contribution to UK electricity supplies over the next ten years, with the closure of 8.2 GW of coal-fired capacity opted out of provisions of the Large Combustion Plants Directive by the end of 2015, but we believe that new, more advanced and efficient coal plants, fitted with carbon capture and storage (CCS), should have a role to play in future in due course. Such plants would enable coal-fired generation to continue to contribute to a diverse fuel mix and lower carbon emissions while providing a continuing long-term market for coal for power generation in the UK.

  4.  We are currently carrying out a feasibility study into a commercial scale coal-fired integrated gasification combined cycle (IGCC) demonstration plant with CCS to be located near our existing Killingholme station on the Humber, which could be commissioned by 2012. Coal plant with CCS is not economic in the current energy market and Government support is needed to demonstrate the technology on a commercial scale. HM Treasury published a consultation paper on barriers to commercial deployment at the time of the 2006 budget.

COAL PURCHASING: THE ROLE OF UK AND IMPORTED COALS

  5.  E.ON UK currently buys around 10 million tonnes of coal annually for power generation and sources its coal from a range of domestic and international sources. Our purchasing decisions are informed by economic, environmental, quality and CSR considerations. Total UK coal consumption for power generation is approximately 50 million tonnes annually of which about 20 million tonnes is sourced broadly equally from UK deep mined and open cast production with 30 million tonnes imported, largely from Russia, South Africa and Colombia. UK power station demand for steam coal has remained relatively stable for the last five years, but the proportion of this demand met from UK sources has declined significantly over the period for two main reasons:

    —  the level of economically exploitable UK coal reserves has declined as relatively little investment has been made in deep-mined reserves and planning restrictions on open cast coal production (where there is a presumption against approval of new developments) have constrained expansion of this sector;

    —  the relatively high sulphur content of UK coals have made them less suitable for use in UK coal-fired power stations subject to tightening environmental constraints than lower sulphur coals on the international coal market.

  6.  The restrictions on sulphur dioxide emissions from coal-fired power stations arise principally from EU environmental legislation (primarily the Large Combustion Plants Directive and the National Emissions Ceilings Directive) and its implementation in the UK by the Environment Agency, although other constraints on NOx and dust also affect coal-purchasing decisions.

  7.  Although relatively high in sulphur content, UK coals have some important advantages in that they provide a hedge against international coal prices, freight costs and fluctuating exchange rates, and its continuing availability would reduce the need for further investment in coal import infrastructure. They continue to play an important role in fuelling UK coal fired power stations, particularly those fitted with flue gas desulphurisation equipment (FGD),such as our 2 GW power station at Ratcliffe (whereas low sulphur coal has a particularly important role in enabling UK power stations not fitted with FGD to continue to operate economically within the environmental controls applied to coal-fired plant opted out of the LCPD). The availability of competitive sources of indigenous UK coal would support diversity of supply and our ability to source coal at competitive prices. It is therefore important that the UK does what it can to continue to maintain an economically viable domestic coal industry.

  8.  It is, however, likely that the trend toward greater dependence on imported coal will continue in the absence of substantial new investment in UK deep-mined production and the relaxation of planning controls on open cast production. We do not see increasing reliance on imported coal as a fundamental problem, given the range and volume of alternative sources available. Imported low sulphur coal is widely traded on the international coal market and is not subject to the degree of producer market power that can be a feature of the oil market or could affect the supply of gas to the UK.

  9.  However, increasing volumes on coal imports would impose additional strains on the rail transport of coal from ports. These constraints can be relieved through reinforcement of rail connections from ports and Network Rail have come forward with some investment proposals to help address this problem.

RECOMMENDED ACTIONS

  10.  We recommend the following actions:

    —  a more stable energy policy framework will help clarify the market environment in which coal-fired plant has to operate and the investments required for coal to continue to play a role; in particular more clarity will be needed about the long-term design of the EU ETS from 2012 onwards. We are pleased to see that the Government are consulting on this;

    —  the Government needs to support the demonstration of more advanced coal-fired plants with carbon capture and storage as we have argued in our evidence to the energy review. This will help support a diverse low carbon fuel mix and a long-term market for coal in the UK;

    —  the UK planning system should allow new open cast development proposals to be considered on their merits;

    —  more investment in the rail infrastructure available to facilitate transport of imported coal from UK ports is needed to relieve constraints;

    —  the Government should continue to support other potentially economic opportunities for exploiting the potential of the UK's coal reserves such as underground gasification of coal.

8 June 2006





 
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