Select Committee on Trade and Industry Written Evidence


APPENDIX 43

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. [114]

  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. [115]

  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 oral evidence.







114   Digest of UK Energy Statistics 2005. Back

115   http://www.dti.gov.uk/files/file17406.xls Back


 
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