MR BRIAN J ROSTRON, MR GORDON MCPHIE AND MR COLIN GODFREY

TUESDAY 13 NOVEMBER 2001

  142. Good afternoon, gentlemen. I should like to welcome you. I am not sure who wants to do the introductions, but maybe you could kick off Mr Rostron.

  (Mr Rostron) On my right I have Gordon McPhie who is Chief Executive of UK Coal PLC. On my left Colin Godfrey is the Managing Director of CLG Energy Consultants and is an independent consultant on various forms of energy.

  143. You know that in some ways we are parallelling what the Government is doing through the PIU inquiry though we are obviously not going into it in quite such depth. We did feel that it was important to get the voices of all of the interested supplyside. We were conscious that there has been in recent months something of a renaissance in coal in the UK as evidenced by the statistics produced by the DTI in the summer. Having represented what used to be called a coal mining constituency and still having miners as constituents, which is by way of declaring an interest, it is a fact that it also tends to be a helter-skelter business. Sometimes you are up and sometimes you are down. How do you assess the UK energy market and coal's place within it at the present moment? What is Coalpro's view of the energy market? I am not asking for exact statistics, more a kind of finger in the wind.
  (Mr Rostron) After seeing ten years of decline in the use of coal it is very heartening from our point of view to see that the percentage of electricity generation from coal burn is currently running well in excess of 35 per cent. The reason for that is the market. Coal is cheaper than gas and the raw material price of fuel is the determinant. Our view on the energy mix at the moment is that the current level of diversity which we have with gas, nuclear, coal and renewables coming forward is a very good mix, a very sustainable and diverse mix. Substantial deviations from that would actually threaten the overall security of supply and the diversity. As we have said in our memorandum and in submissions to the PIU and the Clean Coal Review, we welcome these reviews because we think it is very timely that the generation mix is reviewed both in terms of emissions, which has been a driver recently, but also in terms of cost. Cost has to come into the frame.

  144. How do you see the recent increases which you have attributed as much to the increase in the price of gas as the drop in the price of coal? How do you see the demand from electricity generators in the UK for coal? Do you see it as being sustainable that your product is going to be consumed consistently over the coming months?
  (Mr Rostron) I think it will. If we look in terms of year on year, last year we burned 46 million tonnes of coal, which was a substantial increase on the year before. This year we shall probably burn of the order of 50 million tonnes. We were mining in the UK 32 million tonnes last year, probably 31-ish this year, which is two thirds of the demand. Other than longer term emission and environmental constraints we see no reason at all why coal could not continue to feature at those sorts of levels, but it will need clean coal technology to take it forward.

  145. So far I get the impression from the nuclear industry that they think there should be more nuclear, from the gas industry that there should be more gas and surprise, surprise, from your good selves that there should be more coal. We are asking the same question. Do you have a view about the optimum fuel mix to maximise security of supply? So far we are getting each particular industry, perhaps not surprisingly, saying the optimum fuel mix is a bit more of theirs.
  (Mr Rostron) That is not what I said. I said I think the current levels are about right.

  146. I was about to say congratulations on being the first to say that. In all seriousness why do you think the current situation is about right? What is the basis for thinking about the optimum fuel mix to maximise security?
  (Mr Godfrey) There are a few statistical measures you can use in terms of how the market is operating. One of them is a term called evenness which as the name describes is the evenness of fuel sources for power generation. It varies between nought and one; one is a perfect market and nought is absolutely 100 per cent one fuel. What we have seen is an improvement through the 1990s. We have moved away from the over-dependence on coal and we are at the position now where it looks as though we are just about at the maximum level of evenness that we are likely to see. If we take the Government's energy projections forward, we see a very significant deterioration in that level of evenness in the electricity market. It is going to take us back down to the sorts of levels we had in 1990. If we are not very careful and we have further displacement of coal and nuclear by gas, we are going to become over-dependent on gas within the electricity market as well as gas use in other sectors of the economy, we believe that is going to decrease our security of supply.

  147. Why should that be a problem?
  (Mr Godfrey) You have to look as to where the gas comes from. You have to look at what is likely to happen. Today the UK is self-sufficient in energy, in fact an energy exporter, but we know over the next 20 years that situation is going to change very markedly. We in the UK are likely to be dependent upon imported gas for 60 to 90 per cent of our requirements. Those are the figures from the 1998 White Paper; that is the sort of level of dependency. Then you start to look at where that gas is going to come from. You probably have to look at this at the European level, not just the UK level. The pipelines cross large tracts of Europe and therefore it is very hard to look at the UK in isolation. The basic reserves of gas around the world are concentrated in the Middle East, North Africa and Russia, a long way away from the shores of the UK. There is gas in the North Sea and we should certainly be looking to ensure that we get as much out as we can. There is gas from Norway, but mostly that goes to continental Europe anyway. We think there is an inherent weakness in our energy supply systems if we are over-dependent on gas, where a large tranche of that gas is going to come from Russia and from the Middle East and North Africa.

  148. In your memorandum you do say that what the Government should be doing is maximising use of indigenous energy. Clearly there is a trade-off here, is there not? That is a bit of an extreme statement, is it not? You can maximise the use of indigenous energy at enormous cost.
  (Mr Rostron) We should have qualified that "at competitive prices". That is the market we are in at the moment.

  149. In which case leave it to the free market.
  (Mr Godfrey) There is danger in leaving it to the free market. There is no such thing as a totally level playing field. There are all sorts of drivers within the marketplace and we have seen what has happened to coal burn with the removal of some of those distortions like the new electricity trading arrangements, like the ending of the contract with EDF for the import of electricity. When those constraints come off suddenly it is finding a very much higher level of natural burn that you have seen over recent years. We believe that there is a very strong position for coal within the marketplace if we are not boxed into any environmental corners. On fundamental economics of power generation, coal fired stations currently generate the lowest cost electricity on the system and have done through the 1990s as we have gone through the dash for gas. We have been to this Committee before arguing against the electricity trading arrangements, against the distortions we face. We are thankful that those have been removed and we are now seeing a very much more open market in which coal can compete. We think it is worth putting a safety net around security of supply and diversity of supply. We think it is probably a role for Government to take on the question of security and diversity because the market maybe will not do that. If we look at the projections in EP68 the market tends to be heading for a very strong over-dependence on gas. There is a number of drivers which force gas to displace coal and nuclear, there are the nuclear decommissionings and there are environmental pressures. There is a risk that we could go down that track. It is not that we need protection otherwise it will go down that track: it is that there is a significant risk and one you can guard against.

  150. You are essentially saying that the way the market operates at the moment is generally working for your industry in so far as the market is being deregulated. Presumably as gas prices have started to go up that has worked slightly to your advantage. Looking at it over the last five years, clearly there are various subsidies being given to your industry and there are other incentives being given to other different sorts of energy producers. Do you feel that the balance in terms of government intervention in the free market is about right? Or do you think that it could be changed for the better in some ways? Mr Rostron, you mentioned that for the industry to move forward there would have to be a move towards clean coal. I did notice that this Committee recommended support for clean coal, both in 1993 and in 1998. Presumably this is not a new topic of discussion. Why has that side of things not moved forward?
  (Mr McPhie) You are in the position where existing forms of energy generation are cheaper than any new forms which are coming in. There has had to be market support for any new energy form such as we have with renewables. Looking at clean coal generation, that would need some form of market support in the same way as renewables would. The existing gas stations, the existing coal fired stations, the existing nuclear stations would all generate electricity more cheaply than any new gas, nuclear or clean coal station.

  151. Do you have figures for that?
  (Mr McPhie) There are lots of figures for it. I would say that there is no source which is regarded as being the bible for it and further work needs doing on it. If I look at some figures prepared by ETSU in 2000, which were looking at the cost abatement curve for greenhouse gasses, they that placed photovoltaics and nuclear as the most expensive, followed by wind and biomass, then clean coal, then hydro, then CCGT. If you go to different experts than these, you will get different placings and different claims from each of the generation sources. Perhaps one of the things which the DTI should be doing, perhaps as an extension of the clean coal review, is looking to present and verify such a cost curve so that people can rationally decide on what is the cheapest form of removing carbon dioxide from our energy generation sources. There is no bible at the moment.
  (Mr Rostron) It would be fair to say that the figures published do show that the cost of carbon captured from clean coal compared to the renewables, or CO2 sequestration would be half that of the current renewables obligations; £300 per tonne versus £150 per tonne in round figures. There is an awful lot of disinformation about the actual cost of things. In our memorandum we have talked about a clean coal obligation costing one penny per kilowatt hour on the generation of the coal.

  152. You spoke about the fact that 30 to 31 million of the 45 million was UK produced. Therefore I presume the other 14 million is imported. Is that correct?
  (Mr Rostron) Absolutely right; yes.

  153. So we are talking about a so-called indigenous fuel of which we still have to import some 30 per cent?
  (Mr Rostron) Yes; correct.

  154. How much of the 30 to 31 million is accounted for by deep mine as against open cast?
  (Mr Rostron) Last year it was approximately 19 million tonnes of deep mine coal and 13 million tonnes of open cast.

  155. Do you envisage there being environmental problems with open cast mines? Do you anticipate having increasing difficulty in getting new planning permissions for access to open cast reserves as the existing ones become exhausted?
  (Mr Rostron) It is actually self evident. Currently the success rate for open cast mining applications throughout the country is less than 30 per cent. This is of sites which are picked by operators as fitting the planning guidance, which it has to be said is the most strict within Europe and the world. We have the most strict environmental controls on our open cast mining.

  156. If I were to ask you what the potential was for additional coal being produced within the UK, to sustain the present level of production, would it have to be imported or are you confident that you could sustain that through a mixture of deep mined and open cast?
  (Mr Rostron) From a reserve point of view, there is more than enough coal to keep the current levels of deep mined and open cast mining going for 50 years.

  157. Accessible coal?
  (Mr Rostron) Accessible coal. It is purely a planning problem.

  158. It is a planning problem with open cast and it is an economic one with deep mining.
  (Mr Rostron) Yes, and a planning problem.
  (Mr McPhie) Yes, that is fair.

  159. Is the planning problem as great for securing permissions for new mine shafts as it is for open cast?
  (Mr McPhie) It would be very much the same, so you would still need to prepare an environmental impact statement and it would probably take three years to go through a complete environmental review for a deep mine.