Examination of Witnesses (Questions 160-179)|
J ROSTRON, MR
TUESDAY 13 NOVEMBER 2001
160. At the moment, could you produce more coal
within the UK than your company is doing, if you were required
(Mr McPhie) Yes, we could.
161. By how much, do you think?
(Mr McPhie) Probably 15 per cent increase.
162. About another five million tonnes.
(Mr McPhie) Yes.
163. You could produce up to 35 million tonnes
without increasing the amount you would need to import.
(Mr McPhie) If you produce more in the UK, then you
would displace imports.
164. Unless there was an increase in demand.
(Mr McPhie) Yes; correct.
(Mr Godfrey) It is important to consider the source
of imported coal as well. The spread of coal around the world
is very much greater than it is in gas. It is not concentrated
in two or three countries, it is in Australia, the US, Canada,
South Africa, China, India. It is very well distributed around
165. May I go back to the issue of market forces
which you touched on earlier in relation to Jonathan's question?
It has been suggested by other groups we have spoken to that market
forces are capable of delivering continuity and security of supply.
You have touched on that, but you do not feel that is the case.
In your evidence you stated quite categorically that market liberalisation
alone cannot deliver fuel security and diversity. Bearing in mind
you appear to see a role for government intervention at some level,
what form do you envisage that taking?
(Mr Rostron) As was said in the evidence we presented,
we still see an interventionist role in terms of obligations like
renewables obligation, clean coal obligation and perhaps on top
of that something which would take a longer term view of markets.
Currently, if you wanted to build a power station, the only one
you could build would be a gas fired power station because the
capital cost is the cheapest, it is proven technology. Yet it
was interesting this morning that it was stated that nobody would
build a power station of any sort on today's electricity prices.
There has to be a little bit of pump priming of any system while
we are in such short-term contracts. You talked earlier about
new mines. You need a good long-term contract for the supply of
coal to have the confidence to invest in a new mine.
166. What role do you see European Union regulations
playing in any intervention?
(Mr Godfrey) It is important that Europe looks at
security of supply because it is very hard to do it from a UK
standpoint alone. We are part of an integrated market and the
more we get liberalisation of the markets the more we are hardwired
into their systems. Where you have a very large sliceand
we are talking about Russian exports probably tripling over the
next 20 years into Europe, although production is actually declining
at the momenta massive infrastructure must be put in place.
The what-if scenario does require a lot of co-ordination at the
European level. Having a paper contract does not guarantee you
physical supply and security of supply is about the physical delivery
to the power station or to the individual consumer. Therefore
we think those things have to be looked at, we have to look at
what happens if certain parts of the system are interrupted if
there is failure for whatever reason. The one thing we can say
about coal is that it is very easy to move, it can be shifted
in dry bulk carriers, it is not pipeline constrained in the way
that the gas network is across Europe. It is very safe to store.
It can be stockpiled; we have very significant stockpiles at power
stations and have had over many years for security of supply.
Those stockpiles have helped over the last 12 months as the coal
generation market grew very quickly. Five million tonnes of coal
stocks were lifted last year. We have been able to demonstrate
the importance of coal within the energy mix. There is an issue
there as to how Europe as a whole looks at its energy security,
particularly at sourcing of energy from outside its boundaries.
167. My understanding is that current regulations
within Europe allow for support for fuel up to 15 per cent of
production. Can you outline specifically how you would see government
support in relation to your industry?
(Mr McPhie) Such support could be applied in three
different ways and areas. One could be to look at coal reserves
and act as a security of supply fund to keep those reserves open
and accessible, which would apply really to the deep mine reserves.
A second would be to look at similar schemes to the one we have
just had for state coal aid which is providing operating aid during
a period of time to allow individual mines to become competitive
long term. The third form of aid which they have in Europe is
one of closure aid where some reserves are coming to exhaustion
and it is looking to mitigate social impacts in a particular area
or region. They are the three forms of aid which are within European
legislation currently and which our European partners are using.
Stepping aside from that and going back to clean coal technology,
the process called carbon sequestration, which takes all of the
carbon dioxide out of coal prior to burning it in the gasification
process, would allow us to burn coal completely cleanly. We see
that as the environmental future for coal in the long term. In
the same way as we have encouraged renewables with the renewables
obligation, we would advocate a clean coal obligation which brought
that sort of technology into the UK. At the moment the DTI are
looking at that as a separate issue. The direction they are going
in appears to be one of looking at separate small increments of
that technology. Our view is that unless we come up and actually
have a full-scale demonstration plant, this will pass by. We shall
see these plants being developed elsewhere in the world, but we
shall not have a show piece here in the UK, one which we could
use as part of the building block for our own energy supplies
but which also would give our technologists and process engineers
something to sell worldwide. We would see it as being a much stronger
commitment to that technology, demonstrating something on a worldwide
basis if we were to look at a full-scale demonstration plant for
that. They are the areas.
168. If it is such a good idea, why are other
people not doing this? The Americans have for a number of years
been spending very sizeable sums on clean coal technology. Why
have they sidestepped this one?
(Mr McPhie) Because people are still not confronting
the issue that it is new technology, it has got additional processes
and it is more expensive than a conventional coal fired power
169. I have to say to you that even any brief
study of the history of the British generating industry is littered
with bright ideas which if Britain just took to the point of production
we would somehow transform the world. If a country like the US,
with the resources it has poured into clean coal technology and
the size of their coal burning industry, have not picked it up,
why should our scheme with a Union Jack wrapped round it be that
much more attractive? I am being the Devil's advocate here, but
we have chasedI do not want to use the expression Philosopher's
Stonethis for some time with conspicuous lack of success.
(Mr McPhie) We have gone for higher environmental
standards here than they have in the US generally and that is
perhaps the driver.
(Mr Godfrey) A second factor is that they have very
low energy prices in the US. These technologies favour higher
energy price regions of the world. If your energy price is low
then energy efficiency does not pay back particularly well. If
you are in a region of the world like North West Europe where
energy prices are higher then there is more incentive for improving
thermal efficiency that you will get through clean coal technology.
170. I do not want to be too negative but your
job is to dig and sell coal. It is not to generate electricity.
With respect, it is the people who generate electricity who should
be telling us that this is the greatest thing since sliced bread.
We do not seem to be getting that message across yet.
(Mr McPhie) No, because each of the generators will
have nuclear, gas, coal or wind and they will arbitrage happily
between one and the other. None of them really has a vested interest
in coal or any other form of generation. They will all sit quite
happily with the existing status quo because any new generation
form will be more expensive and why change. Let us wait to see
what the regulator or government does to encourage movement in
any particular direction. You will not get that from the generators
because they will happily move to whatever the rules of the game
171. You mentioned carbon sequestration. Are
there not problems? The way you put it sounded quite neat and
tidy, but are there not problems with carbon sequestration which
perhaps you could tell us about?
(Mr McPhie) The technology is proven. Existing plant
is running in Canada. You would take the carbon dioxide and you
then look to capture it and probably the best use currently would
be to use it for enhanced oil recovery perhaps in the North Sea.
That would involve building a pipeline from wherever the carbon
dioxide was sequestrated to feed those fields. The technology
is proven, it is a question really of putting the technologies
together to build a demonstration plant. There are existing plants
which have been fully worked up and designed and costed at Wansbeck,
for example; we have a plant ourselves at Kellingley where we
had worked the prices through. The final step as to where you
would place the sequestrated carbon dioxide is probably the last
bit to be dealt with.
172. Are there no problems with it escaping?
(Mr McPhie) No.
Sir Robert Smith
173. You said you had worked up some of the
costs. What is the sort of energy efficiency of that system?
(Mr McPhie) Existing coal fired plant operates at
about 38 per cent efficiency across the piece. The existing gas
fired plant is working at about 44 per cent. New clean coal technology
power plant would operate at about 15 per cent additional efficiency
to the 38 per cent, so you are looking at about 44 per cent efficiency
again and that would be expected to improve as you go. That is
174. Producing no carbon output, if you store
(Mr McPhie) That is a clean coal technology plant.
What you do is take the coal, gasify it, take out carbon dioxide
and you are left with hydrogen which you then use for clean burn
and then you sequestrate the carbon dioxide.
175. May I explore this issue of dependency
on gas? Do I understand correctly that you are saying that if
we carry on then we will have far more transportation costs and
greater risk of supply if we allow the gas in? Are you asking
government to intervene into the market forces, that you are against
liberalisation of markets as such?
(Mr McPhie) No.
176. That is the impression I am getting from
what you are saying. You are trying to protect your own corner
and saying very clearly that you want government to intervene.
(Mr McPhie) The status quo is a satisfactory
one for coal burn. Any intervention can move that market one way
or another. If we are looking at long term and we are saying we
want an environmental intervention, then a clean coal obligation
would allow us to maintain the market balance and generate clean
electricity. With the cost of gas, the IEA have produced a curve
which shows the increasing costs of gas as we increase the volumes
and go further and further afield, which we included in our memorandum.<fu1>
Above a price, which the market will determine, clean coal technology
power stations will become more viable than CCGTs. Perhaps we
are not so far off that position; eight years, ten years.
<fo1> Not printed.
(Mr Godfrey) We are not particularly
arguing that we need to move away from the market principles.
What we are highlighting is an over-dependence upon imported gas
and that therefore there needs to be critical review made not
just of what security of supply and diversity of supply mean.
If you look at the gas which is being imported into Europe over
the last decade and certainly looking forward as we have to triple
our imports of gas into the OECD/Europe area, you find a greater
concentration of supply in Gazprom and in the whole imported gas
market than you saw within the UK electricity market. Twice in
the last decade we forced coal fired generators, National Power
and PowerGen to sell stations because there was too much of a
concentrated ownership. Now we are moving ourselves into a situation
where we are dependent upon suppliers which are outside EU competition
law and UK regulation, yet there is a much greater concentration,
greater risk of market abuse. Somewhere along the way critical
consideration needs to be given to whether or not that is in the
best interests of the UK and what the risks are of disruption
to supply. The market itself may not be the best people to assess
disruption to supply. That may be a role for an all-embracing
regulatory function rather than the industry itself. As you said
this morning, when the lights go out it is the politicians who
will get the blame.
Sir Robert Smith
177. In your submission you say that in the
light of the petrol crisis security of energy supply must be safeguarded
before we can look to delivering environmental benefits. Earlier
I think I heard the words, "We mustn't be boxed into an environmental
corner". Given that the Government has signed up to the Kyoto
commitments, is it really realistic to try to address security
separately from environmental factors?
(Mr Godfrey) If you look through the last decade we
have had very much abundant energy at low prices and energy security
and diversity have been really non-issues and the environmental
issues have dominated. We now have a commitment to emissions reductions
at Kyoto where we need to ensure that we embrace all the technologies
which can help us to achieve it and sustain those reductions.
We do believe that there is a very significant role for coal to
play within that. If you over-tighten the environmental regulation
then you could force coal out of the equation with the knock-on
impact on security and diversity of supply. That is really what
we are arguing against.
178. You are arguing that if the market were
set up right to say that those forms of energy which reduced carbon
emissions were attractive and there was a market, the benefits
you are talking about of modern types of clean coal and so on
would not respond to those markets?
(Mr McPhie) Yes, it would within the bands. If the
clean coal obligation were one which
179. If the Government are saying they want
environmentally friendly energy, should it really be so prescriptive
as to say which kind of environmentally friendly energy or should
it not let the market decide?
(Mr McPhie) It is prescriptive at the moment, is it