Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 180-199)

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

TUESDAY 13 NOVEMBER 2001

  180. But should it be?
  (Mr McPhie) It should be less prescriptive certainly.

  181. Earlier you were talking about being fairly happy with the current mix.
  (Mr McPhie) Yes.

  182. If nuclear is phasing out, do you think coal should be replacing the nuclear or are you worried if gas replaces the nuclear?
  (Mr McPhie) What we saw as the desirable mix going forward was about one third gas, one third coal and one third nuclear and renewables.

  183. You would see a regeneration of the nuclear to fill the gap.
  (Mr McPhie) Yes, together with the clean coal.
  (Mr Godfrey) Or renewables. The one thing you do have with that mix is flexibility and the one thing coal does offer you is flexibility, as we have seen over the last 12 or 18 months where coal has picked up increased levels of generation. Had it not been there, that would have inevitably gone to gas and there would have been even further price reaction on gas. Because of the substitutability for mid merit plants, you can increase levels of coal burn and decrease levels of gas. One of the very few tunes you can play within the energy supply scene, because you cannot change the fuel into your boiler at home or the petrol you put in your car particularly easily, and nuclear is running flat out at base load so that cannot help at all in any supply disruption, so one of the very few options and flexibilities you have within the energy systems is the substitution of coal and gas within the electricity market.

Mr Djanogly

  184. One of the new technologies for vehicles is hydrogen fuel. My understanding is that the only two ways in which significant quantities of hydrogen could be produced is either through nuclear power or through coal. Is this something you have looked into?
  (Mr McPhie) It is something we are aware of. We have not examined it in any depth. Yes, we could see it as a future use for coal as part of the move towards a hydrogen economy.
  (Mr Godfrey) It is part of the transition to clean coal technology. You start off with the IGCC, the integrated gasification combined cycle. You can then take carbon sequestration. You can take the production of hydrogen for the hydrogen economy. It is a long-term view but if you do not start the first step you do not get to the end of it. The first step is what we are talking about in terms of the clean coal technology today and the need to demonstrate some of those technologies. Start working down that track to get you towards the ultimate of perhaps a hydrogen economy in however many years' time.

  185. The other issue which is very relevant at the moment is that the Government has awarded significant compensation claims to certain types of mining related injuries. Are those sicknesses recurring? In other words, I simply do not know how they work. Is it such that if mining is to continue, those sicknesses will be recurring, or are there now remedies which in the future would mean that compensation would not have to be payable?
  (Mr McPhie) The conditions underground have improved dramatically over the course of the last 20 or 30 years when most of those claims were incurred.

  186. So we are talking about an historic event rather than something which will be —
  (Mr McPhie) Yes, essentially.

Mr Lansley

  187. There are one or two particular things I am not quite clear about. When you talk about one third, one third, one third, one of those being coal, what does that represent in terms of your anticipation of coal demand in order to satisfy one third?
  (Mr McPhie) The current market for ESI coal is around 50 million tonnes and coal has about a 35 per cent share of the market generation. You are probably talking about 45 to 46 million tonnes as being the ESI market. Then there will be an industrial and domestic market on top of that. You are looking at something just north of 50 million tonnes.

  188. We are seeing increases in demand for coal at present this year compared to last and you are anticipating the year ahead to be an increase again. On the strength of what you were saying, it sounded as though you were not anticipating that increase would be met by indigenous sources of coal. What is the reason it cannot be met in that way? Is it because there is insufficient flexibility in production? Let us say demand were to fall to 30-35 million tonnes, does it follow that indigenous supplies would meet all of that, or are there some economics concerned with inland power stations versus those on coastal sites?
  (Mr Rostron) It would be purely price driven. If that were to happen today, we could match imported coal prices tonne for tonne. If we look back from 1996 through to 1999 we would struggle to match imported coal prices. Earlier this year we could beat imported coal prices by 25 per cent. The world coal market is very volatile.

  189. I am with you up to a certain point. I understand that. Does your answer not imply that if one were to seek to try to create a mix with one third coal generated electricity, if world prices were to change in an adverse way for UK producers, it would not necessarily be met by indigenous supplies even to the extent that it is now?
  (Mr Rostron) It has to be based on the production costs without any form of support. Whilst we have made big inroads into getting the costs of both deep mining and surface mined coal down, even since 1994, we could improve the levels we are at somewhat. You cannot compete against dumped coal, if there is a glut of coal on the world market. We are looking at 400 million tonnes of traded coal playing 30 million tonnes of coal mined in the UK.

  190. Clearly one of the relationships we have to look at is, as with nuclear, the cost relationship to that of gas fired generation. What kind of gap is there between your costs of generation and that of gas as you anticipate it, leaving out of the count for the moment some of the additional investment required for clean coal technologies?
  (Mr McPhie) What you have seen over the course of the last 18 months with the higher gas prices moving north of 20p per therm is that the coal fired generation has become competitive and has taken increased market share. That is into a market with average electricity prices now perhaps 1.8p per kilowatt/hour. With the change onto NETA earlier on this year, again the coal fired stations have fared quite well and coal use is up 17 per cent in the current year. The coal fired stations are older technology than the CCGTs. I do not know to what extent it is that, but as part of their design they have a flatter power curve than the gas fired power stations, which means that they are actually more flexible than the CCGTs. When NETA has paid for being able to guarantee a supply at a particular time, the coal fired stations have done particularly well out of that. They are more flexible if they have a flatter power curve.

  191. What level of investment would be required in order to fit the flue gas desulphurisation (FGD) plant and the nitrous oxide removal equipment onto the existing coal fired plant.
  (Mr McPhie) Some of the existing plant already has FGD. The most recent one having been fitted is at West Burton and that is at a cost of circa £100-£120 million, but you would need to talk to the generators to get the exact number there.

  192. Looking forward into clean coal technology, you have referred to some of the things you want to see and in particular a demonstration project in effect. When you talk in your memorandum to us about a structured support programme, what do you think that looks like? What kind of programme are you looking for and what kind of resources do you regard as being necessary in order to commit to that?
  (Mr Rostron) You can look at it in a number of ways. It was mentioned earlier that you could actually have a low carbon obligation which would encompass the renewables obligation that we have now. Clean coal would also come under that umbrella and any other form of generation you might want to bring in; photovoltaics etcetera. That is purely deciding what level of pence or fractions of pence per kilowatt hour you are prepared to contribute to a low carbon level. Currently the renewables obligation is three pence per kilowatt hour. If the low carbon obligation is three pence, you could have clean coal and CO2 sequestration, the market would deliver; provided solely that there are contracts for the sale of the electricity. You still have to have a payback for the investment.

  193. When we were discussing this morning with the British Nuclear Industry Forum they were looking effectively for fiscal measures which would enable them then to compete with gas fired on the basis of a positive incentive for effectively carbon free electricity generation. They did not see it in terms of an obligation. You do see it in terms of an obligation rather than market-based measures. Why do you take a different view? Why do you take the view that you do as opposed to relying upon a market-based measure?
  (Mr Godfrey) An obligation is a market-based measure effectively. It is saying to an electricity supplier that you have to buy so much of your electricity from whatever source. At the moment it works for the renewables obligation and they have to buy a certain amount of their electricity which they sell on to customers from renewable sources. If they do not do that and they have a shortfall by any degree, they have to pay three pence per kilowatt hour, which is then redistributed amongst the renewable suppliers. It is an encouragement to the renewables market to build more schemes, to be able to satisfy the requirements of the obligation. We are advocating a similar approach for clean coal although clean coal stage one to come in at a premium, rather than three pence per kilowatt hour but at an obligation premium of one pence per kilowatt hour.

  194. There is quite a significant difference, is there not, in that an obligation to purchase coal fired electricity might have quite a different result from a fiscal measure which is intended to promote carbon free electricity generation since at least then coal would be in a market with other producers who are able to do so on a low carbon or carbon free basis? You are looking in effect for coal to be isolated from other market pressures.
  (Mr Godfrey) It is a more focused measure which will yield you the result you want rather than perhaps finding some different solution evolves from the market. At the end of the day the customer is paying a slight premium on electricity for a certain technology to be developed. Both come down at the end of the day to the same result. The obligation can be even more clearly focused than perhaps a carbon tax would be and perhaps less unpopular.

Dr Kumar

  195. The scenario you paint of one third, one third, one third sounds to me as though you are trying to manipulate the market, some sort of ordered market system. Would it be right for me to reach that conclusion?
  (Mr McPhie) If there are no significant changes to the market as it is currently operating today, then market forces will tend to deliver that sort of shape. It will not encourage new forms of generation other than renewable generation forms going forward. You will get the renewables coming in and they will be displacing perhaps a nuclear replacement programme. If you start to introduce other measures, which then cause other market distortions, then we are suggesting that a clean coal obligation measure applied in that way would keep the balance of generation in that split, which gives you reasonable security and diversity of supplies.

Linda Perham

  196. In your submission you have identified the development of ICGG, the integrated gasification combined cycle power stations, as a potential means of contributing significantly to both supply security and environmental objectives. To what extent do you think coal gasification can replace the demand for conventional gas supplies? Would the gas produced be cheap enough to substitute for natural gas in electricity generation?
  (Mr McPhie) Any of these new technologies are more expensive than the existing ones. To give a flavour for that difference, when we were looking at the Kellingley clean coal project, we were looking at three pence per kilowatt hour as being the cost there compared with an existing market price for electricity of 1.8 pence.

Sir Robert Smith

  197. Going back to this carbon sequestration, I see in your memorandum that you are talking about BP estimating additional 15 per cent recovery of oil by the use of CO2. Is that from discussions you have had with BP or something you have picked up from elsewhere?
  (Mr McPhie) It is something we picked up from BP literature. There are various potential sources for that carbon dioxide.

  198. You do not see that coming back up. You see that being something locked out.
  (Mr McPhie) Yes, it gets locked in.
  (Mr Rostron) There is no reason why it should not. The oil has been down there for 150 million years.

Chairman

  199. Do you do much research yourself ? You have spoken about Kellingley and that research was really part of the old British Coal work, was it not?
  (Mr McPhie) We worked with Texaco and BP at that time to look at how to design a new clean coal technology power plant. It was based on a Texaco process which was from Tampa in Florida and at that time National Power's engineers had a look at the process flow and said that to make it work as a commercial plant rather than as a technical demonstration plant would need two of these units: take out that one, we do not need such and such. So the plant, design and layout would have been significantly changed. The majority of the original process designs for clean coal technologies at Kellingley were principally by Texaco or NP and it is taking that process flow and then demonstrating that it will work so someone has something real they can look at.

  Chairman: Thank you very much. If we need any additional information we shall be in touch. Thank you very much for the help you have given us this afternoon.





 
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