One Coal Industry

1. One Coal Industry

I am here today to speak on behalf of the coal producers, both surface and underground. From the smallest producer to UK Coal with its portfolio of surface and underground mines we all have the same customers and face the same challenges.

There is no conflict between surface and underground mining. The one supports the other and visa-versa in terms of costs, quality and rates of production. If you claim to support the coal industry it must be the entire coal industry, not a part of it.

We are approaching our critical mass. If the industry gets any smaller it will be unable to invest or attract investors and maintain the skills sets necessary for a vibrant and effective industry.

We have closed too much capacity because of political dogma, and because our policy makers and advisors have consistently got their projections wrong on coal demand.

Coal is a major contributor to the security of energy supply, diversity in the generation portfolio and can provide a hedge against high gas prices if its share of electricity generation is maintained around present levels.

Contrary to the PIU Energy Review and current thinking in some DTI circles the Coal Producers believe that security of supply is substantially enhanced by indigenous coal production.

Today we will examine, briefly in the time available:

• The current markets for Coal
• The projected market for Coal to 2010 and beyond
• Our production aspirations and capabilities having regard to: -
• Cost of production
• Environmental constraints - planning and power station emissions
• Economic constraints
• Investment
• Government Support
• Cleaner Coal Technology

2. The Current Market for Coal

In 2001 we consumed 65mt of coal. 51mt was used in power stations for electricity generation, the remainder being used in the steel industry and for other industrial and domestic applications.

The producers in the UK mined 32mt, some 17mt from deep mines and 15mt from surface (opencast mines) mines.

The remaining Coal was imported from: -

• South Africa
• Australia
• South America
• Poland
• Russia
• USA
• China
• Indonesia

Why did we need so much coal?

Because gas began to look very expensive for power generation, nuclear power stations had a second poor year, and electricity imports from France fell away as wholesale prices plunged under the new electricity trading arrangements.

But coal has proved to be:-

• Competitive at 1.5 per kWw/h
• Reliable
• And able to load follow, and today provides one third of all our electricity.

Coal is the cheapest generator of electricity from fossil fuels. With current gas prices, it costs 2.2p/kWh to produce electricity at gas-fired power stations, and apparently, modern CCGTs are unsuited to being turned off and on! Neither have they achieved the levels of efficiency originally claimed.

Renewable energy will not be competitive in the short to medium term and with the rundown in nuclear capacity coal burn will enhance both diversity and security and maintain competitiveness.

3. The projected market to 2010 and beyond

If there was no change to oil, gas or coal prices to 2010 then the use of coal would (with no other constraints) stay the same or more likely increase.

Environmental constraints will cap the amount of coal burnt rather than economic factors. The EU Large Combustion Plant Directive comes into full effect in 2008 and may have an impact on the operation of non-abated stations before then.

Fitting additional FGD to these stations would enable coal burn to be maintained beyond 2008 at present levels.

However there are environmental implications. If we continue to burn at existing levels we can easily achieve our Kyoto target, but not the 60% reduction in CO2 called for by the Royal Commission on Environmental Pollution, and maybe not the Government's more immediate 20% ambition for 2010. It should also be noted that if we shut all fossil fuel power stations without addressing Transport which is the major contributor to greenhouse gas emissions we will still not achieve the Royal Commission's target.

On conservative assumptions we could burn 40mt of coal pa to 2010 in power stations.

The bigger question is how much can we / how much do we want to supply from our own indigenous production?

4. How much can we / how much do we want to supply?

We currently produce 32mt pa

It is clear the customer - the Electricity Generators want to burn more. Why should this not be supplied from indigenous production?

There are only two reasons, namely:-

• Cost
• Quality

However we believe that maintaining a production level of over +30mt is essential if we are to maintain anything like a critical mass.

The mix of coals produced is also important. So again the producers are promoting the status quo - that we maintain a deep mined output in excess of +17mt and a surface mined output of +15mt. The coals so produced would meet the quality criteria required by our customers and, with FGD, would meet environmental emission limits set by the Environment Agency in England & Wales and SEPA in Scotland.

5. Can we compete?

Whilst the producers may aspire to maintain current levels of production, unless the coal produced is competitive the electricity generators are not going to purchase it. This may appear obvious but it is worth pointing out that we are not looking to mine coal at any price (as is the case in Germany, Spain and France) but to compete on a level playing field with both international coal and other sources in the UK generating markets.

Looking at the international coal market it must be pointed out that none of this coal is produced specifically for the UK market. Major mine projects are set up with an end user in mind - such as a mine mouth power station, a primary steel production unit or a significant export market such as Japan. We in the UK import those coals which most closely match the quality of the UK coal for which our power stations were designed.

If demand for energy continues to rise, particularly in India, the Far East, China, Africa and Indonesia there will be a substantial increase in demand for local coal in these areas. Look at China for example - currently mining 1 billion t.p.a but wants to increase production to 2 billion by 2020. This coal is to satisfy local demand, export is secondary.

Whilst the Electricity Generators currently enjoy a spot market for coal where supply exceeds demand, a small increase in local demand could radically alter this in terms of both price and availability.

Demand patterns, exchange rates and freight rates can all change in a relatively short timescale. However the simple answer to "can we compete?" is yes we can.

If we could not compete we would not be here now. Since privatisation in 1993 the industry has had to compete to survive and it has.

Clearly the Operating Aid Scheme introduced some 18 months ago was welcomed by the industry who were competing against very low international prices resulting from over-production, the high pound and low sea freight rates. The scheme has undoubtedly preserved the industry and the Government must be commended for recognising the industry's plight and for rapidly reacting by instituting the Operating Aid Scheme.

The medium to long-term viability of many of the deep mines has been secured as a result of the scheme and we have a competitive industry.

However the industry will continue to contract unless we urgently address the issues facing us and we will lose a substantial number of both direct and indirect jobs which the industry currently supports.

To put it in perspective we have an industry employing some 12,000 in both surface and deep mines, and as many again in support industries.

We contribute over £1 billion to the balance of payments on the positive side. Out of the £1 billion we are paying out over £250 million in wages - with its resultant income and indirect taxes, a contribution of over £100million.

In addition we pay corporation tax, business rates, fuel tax, royalties, VAT on all we do in supplying the coal.

These contributions are far in excess of the amount being paid under the State Aid scheme, which is providing a good rate of return on the investment.

6. How do we continue to supply at existing levels?

To maintain the industry at above the +30mt level there are two main requirements.

On the surface mining side what the industry requires is certainty in the planning system, which we currently do not have.

Surface mining is the only mineral extraction process where there is a Presumption against the granting of planning permission. You can extract anything else - limestone, granite, salt, sand, gravel, gypsum or clay, and even export these materials. The planning system has a presumption in favour of doing all these, but not for coal. Why this blatant discrimination?

Coal extraction is no more damaging to the environment than other mineral extraction. Indeed it is a transitory activity when compared with the quarrying of aggregates.

Coal sites can be readily restored and often derelict and degraded land can be improved.

The reason for the presumption against surface mining is political. There has always been a campaign by a few, ill-informed supporters of the coal industry that surface production somehow threatens the deep mine industry. Nothing is further from the truth, the surface mining industry has always supported the total coal industry by being low cost and producing those quality coals to compliment deep mine production.

The producers acknowledge that even the combined surface and deep mined output cannot satisfy annual demand and we call on all our supporters, suppliers and the workers involved in our industry to recognise the same.

Turning to deep mining industry we have the following:-

• Pits which are viable, compete against imported coal and have a long-term future
• Pits which are exhausting economic reserves and are at the end of their productive life
• Pits which could access new or additional reserves and compete with imported coal.

For example, any pit wishing to access say a 10-year reserve, with a £20m access cost to produce an additional 1mt p.a., cannot pay this back over the first one/two year's production and therefore cannot finance the proposal.

The producers are therefore calling upon the Government and its Ministers to support a new Investment Aid Scheme for the coal industry.

The current Operating Aid Scheme ends on the 23rd July 2002 along with the ECSC Treaty.

A new EU Regulation on State Aid will shortly be approved by the EU Parliament and the Council. Yesterday the EU resolved to adopt the new regulations on State aid to the coal industry unamended.

In essence this will extend existing rules to 2010 with a review in 2007 to ensure the French, German and Spanish coal industries to either close or substantially reduce their capacity.

As an interim measure these EU countries will extend their existing schemes from 23rd July 2002 to 31st December 2002 to enable schemes under the new regulation to be approved by the EU and implemented on the 1st January 2003.

The Coal Producers in the UK ask that our Government adopts the same approach, namely :-

• To extend the existing Operating Aid Scheme to 31st December 2002.
• To lift the cap applied to UK Coal plc under the current Operating Aid Scheme.
• To adopt a new scheme from 1st January 2003 to support the industry and secure its long-term viability and competitiveness.

Time is very short. If a new scheme were agreed then the detailed proposals would have to be submitted to the EU by October 2002 to enable any scheme to start in January 2003.

We do not have many remaining deep mines.

All the operators have identified where investment could maintain production or access new reserves. Proposals could be subject to independent audit via The Coal Authority and the DTI to identify and quantify where Investment Aid would be appropriate.

This is not a blank cheque for the Coal Producers.

Under the current proposed EU Regulation any Aid paid in the years after 2002 must be less than paid in previous years, so the amount is capped.

This exercise should be completed as a matter of urgency and all the producers are ready to participate.

7. Cleaner Coal Technology

Finally, we should look further into the future. The world will continue to increase its demand for energy, particularly electricity, and up to 40% of the world's electricity will continue to be generated from coal to 2050 and beyond. This will take coal burn from 3.5 billion tonnes per annum to nearer 5 billion tonnes per annum.

If we are to control the amount of greenhouse gases we emit we will have to address the carbon dioxide emissions from coal on a global scale, not just in the UK or EU.

We should support the urgent demonstration of carbon dioxide capture, sequestration and long term storage. This will require the absolute involvement of the two largest coal producers - the USA and China - if the issue is to be properly addressed.

Cleaner coal via integrated gasification combined cycle processes offers the best way forward in the long term by providing a near zero emissions process which will provide an alternative to CCGT gas stations, contribute to diversity and security, and provide a cap on electricity prices as gas becomes an increasingly expensive resource.

8. Conclusion

The Coal industry in the UK is viable but declining.

The decline can be halted by:-

• Removal of the planning presumption against surface mining to allow a rolling programme of annual production totalling around 15mt.
• Adopting an Investment Aid Scheme to maintain production at existing mines and to enable new reserves to be accessed. This scheme should be implemented on 1st January 2003.
• Extending the existing Operating Aid Scheme from 23rd July 2002 to 31st December 2002 and at the same time, remove the cap placed on UK Coal Plc under the scheme.
• Schemes to be brought forward under Investment Aid should be agreed between the producers. The Coal Authority and the DTI as a matter of urgency.