First supplementary memorandum from the
Office of Gas and Electricity Markets (Ofgem)
1. Ofgem submitted written evidence to the
Trade and Industry Committee inquiry, "The Government's Energy
Review", in March 2006. Following the announcement by the
Committee that it is extending the inquiry's terms of reference
to include "the implications of the increasing dependence
on coal imports", we are pleased to provide further evidence.
2. Ofgem's principal objective is to protect
the interests of present and future gas and electricity consumers,
where appropriate by promoting effective competition. We also
have important duties relating to sustainable development, security
of supply and protecting vulnerable customers. Further details
of Ofgem's approach can be found in our earlier written submission
to the Committee, and in our submission to the Government's Energy
Review consultation which can be found here: http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/15081_8206.pdf?wtfrom=/ofgem/whats-new/archive.jsp.
3. Coal currently represents 35% of the
fuel used in electricity generation in Britain. This compares
with 39% from gas, 20% from nuclear, 4% from renewables, and 2%
from other sources. 
4. There has recently been a resurgence
in commercial interest in coal as a fuel source for generation.
This is due to higher gas prices and to the UK becoming a net
importer of gas. A number of companies have recently announced
plans to invest in Flue Gas Desulphurisation (FGD) equipment at
existing coal fired plants to allow them to continue to operate
under the Large Combustible Plant Directive (LCPD). During the
course of the energy review, companies have also announced plans
to invest in new, cleaner coal fired plant utilising new technologies
such as Integrated Gasification Combined Cycle (IGCC) and, potentially,
carbon capture and storage. More generation from coal has also
resulted in increased emissions; generators have therefore made
purchases under the Emissions Trading Scheme (ETS).
5. The above developments suggest that coal
is likely to continue to play an important role in the fuel mix.
(There is potential for its role to grow, depending on the development
of renewables, microgeneration, gas and possible investment in
nuclear.) They also illustrate the way that participants tend
to view the energy market and react to price changes. If importing
coal proves to be more expensive in the future, we would expect
to see other fuels play a bigger role in the generation fuel mix.
6. As domestic production of coal has declined,
the worldwide market has helped to provide secure and diverse
supplies. Figures from the Department of Trade and Industry show
that, in 1999, Britain imported 11,675 thousand tonnes of steam
coal and 8,020 thousand tonnes of coking coal. In 2004, imports
of steam coal had risen to 29,614 thousand tonnes and imports
of coking coal had fallen to 6,345 thousand tonnes. The largest
single source of our coal imports is South Africa (10,105 thousand
tonnes). Other important sources are Russia, Columbia, Australia,
Indonesia and the United States. Britain's exports of steam coal
were 434 thousand tonnes in 1999 and 440 thousand tonnes in 2004.
7. It is for companies to decide how they
source the coal required to meet demand. This may involve importing
more coal and/or entering into contracts to secure more UK coal.
This is a commercial decision for the generating companies to
make based on the relative costs, quality, reliability and availability
of coal, import capacity and domestic rail capacity to move coal.
Generators have in the past been willing to enter into long contracts
and to invest to increase import capacity. Gas fired generators
have often entered into long term contracts to secure their supplies.
The situation has changed quite rapidly over the last 18 months
and so generators are likely to be actively considering how best
to secure the coal supplies they need. As we have shown in our
energy review submission, the market values diversity and, in
the same way that it has entered into long term contracts for
new gas infrastructure and supplies from a diverse range of sources,
it will do the same for coal to meet this need. But in the absence
of any clear market failures it should be left to the market to
decide how and where to secure future supplies.
8. The Committee may also wish to examine
planning issues associated with UK coal. We are aware of arguments
that the current planning and associated regulations for mining
(both open cast and underground) may be hindering the ability
of UK coal to compete. These issues, however, are primarily for
Government and not for Ofgem.
9. If the Committee would like further information
from Ofgem, we would be happy to provide additional written or
114 Digest of UK Energy Statistics 2005. Back