A New Future For Coal?

David Brewer, director general of Coalpro, assesses the markets and production prospects for UK surface and deep-mined coal

For the first time in many years the economic situation is looking brighter for Britain’s coal producers. International coal prices have doubled over the last 12 months and indigenous coal production now has a profitable future and is capable of making a decent return on the investment that coal producers have been making to maintain access to reserves and to apply state-of-the-art technology.

At the same time, rising energy prices generally mean that coal is maintaining its competitive edge in the key electricity-generating market. In 2003 coal burn was at its highest level since 1996 and more electricity was generated from coal than from gas for the first time in a number of years. While there are threats from environmental legislation and the European Union’s Emissions Trading Scheme to the overall level of coal burn, this is likely to remain significantly higher than the likely level of UK coal production.

The challenge for UK coal producers is to produce as much as possible to meet this strong market demand. As far as the deep mines are concerned, there is always the risk that severe geological difficulties will limit output. At worst, this can result in premature closure. For opencast producers the main issue is gaining access, through the planning system, to the abundant reserves that remain. Reserves with planning consent are becoming limited in both England and Wales; the position in Scotland is better.

The market for coal

In 2003 the UK consumed 63 million tonnes of coal. By far the largest proportion of this — some 53 million tonnes — was used in power stations for electricity generation, the remainder being used in the steel industry and for other industrial and domestic applications. Coal consumption at power stations was at its highest level since 1996. From a low point of 41 million tonnes in 1999 power station coal burn has increased by almost 30%. Coal once again became the main fuel for electricity generation in 2003, marginally exceeding generation from gas.

The UK needed to burn this level of coal primarily because gas has become very expensive, particularly in the winter months. While coal prices also increased significantly in the latter half of last year, the simultaneous increase in gas and oil prices meant that coal retained its competitive edge.

To supply this market, 28 million tonnes of coal were produced in the UK, with 16 million tonnes from deep mines and 12 million tonnes from surface mines. The rest had to be imported from a number of sources including South Africa, Colombia, Australia, Indonesia, Poland and Russia. While the Selby deep-mine complex will close this year, the UK should be capable of producing about 25 million tonnes a year for the rest of this decade at least. The main issue for the opencast industry is whether the planning system will place limitations on the ability to access the abundant remaining reserves.

Unfortunately, coal has become something of a dirty word in certain government circles, although the industry has recently been heartened by evidence of greater support from the Department of Trade and Industry. European environ- mental legislation will have some impact on the market for coal as a whole but it is still likely to be substantially in excess of likely levels of production from the UK.

First, the Large Combustion Plant Directive (LCPD), which takes effect from 2008, will place strict limits on emissions of sulphur dioxide and nitrogen oxides, particularly from power stations. Modern emissions-abatement techniques, such as flue-gas desulphurization (FGD), exist and are being deployed at a number of power stations. Overall, therefore, the LCPD is not likely to restrict the level of coal burn until at least 2016 when the limits for nitrogen oxides become even stricter.

Against this overall background, UK producers face some difficulties in that the average sulphur content of UK coal is double that of international coals. The difficulties are greatest for the English deep mines; the position is less difficult, but still challenging, for opencast producers in Scotland and Wales, where the average sulphur content is lower. This means that UK-produced coal will have to be burned almost entirely in power stations equipped with FGD. However, the actual and expected amount of generating capacity fitted with FGD is likely to be more than sufficient to accommodate all the coal that the UK can produce. UK producers will have to gain a relatively high share of this more restricted market but, based on present price trends, they will be more than capable of doing so.

There are two ways in which the UK Government can implement the LCPD: by a National Emissions Reduction Plan (NERP), which limits the total amount of sulphur dioxide that a plant can emit; or by Emission Limit Values (ELVs), which limit the concentration of sulphur dioxide in the flue gases. The NERP would discriminate against higher-sulphur UK coals whereas ELVs would not, as power stations equipped with FGD can meet the concentration limits even when burning UK coals. The Government originally selected the NERP method but after listening to strong arguments from UK coal producers has now decided to opt for ELVs for larger plants, including power stations. This approach has yet to be approved by the European Commission.

Secondly, the European Union’s Emissions Trading Scheme (EUETS) will come into effect from the beginning of next year and is designed to limit the EU’s carbon dioxide emissions in line with its obligations under the Kyoto agreement both for the EU as a whole and for the individual member states. As coal is the most carbon-rich fuel, the EUETS is likely to result in a reduction in the level of overall coal burn. It will not, however, discriminate against UK coals compared with imports.

Under the EUETS, the Government of each member state has to produce a National Allocation Plan (NAP) allocating a limit on carbon dioxide emissions to each plant. The allowances can be traded. Under the UK Government’s provisional NAP, the allowances to the coal-fired power stations will permit 38 million tonnes a year of coal to be burned (before allowance trading) for the period 2005 to 2007 inclusive. The position beyond this period is uncertain.

While 38 million tonnes a year of coal burn at power stations is a significant reduction on recent levels of coal consumption, it is only marginally below the 1999 level of 41 million tonnes and is substantially above the likely level of UK output of 25 million tonnes a year. UK producers will therefore have to win a larger share of a smaller market in order to be able to sell all of their output, but, on present price trends, they are well placed to do so.

UK coal production will, therefore, still have a large market provided it can remain competitive with imports. International coal prices are very high at present and all UK production can be sold at prices significantly above long-term production costs. UK producers accept that these high prices will not continue at this level but believe that there are fundamental changes in the international market and that long-term prices will still be well above costs. First, demand from China has increased dramatically and the US is now importing coal. Secondly, there has been a degree of consolidation among international producers that will allow them to resist pressure for lower prices.

UK production potential

Thus, despite the environmental constraints, the market for UK coal production is fairly robust in terms of both volume and price. The challenge for UK coal producers is to maximize their output to take advantage of this robust market.

Following the closure of the Selby coalfield, deep-mine production should settle down at about 13 million tonnes a year from 2005 onwards, occasional severe adverse geology permitting.

The prospects for opencast output, however, are somewhat uncertain, not because of any shortage of economic reserves, but because of the difficulty in gaining planning consent to work these reserves. There are probably over 500 million tonnes of coal in the UK that can be economically extracted from the surface, however production has been falling in recent years, as indicated in table 1.

It can be seen from the above that while overall production has been falling, the position in Scotland has been relatively stable. It is in England, and to a lesser extent Wales, that the drop in output has occurred.

This has arisen because mineral planning guidance in England contains a ‘presumption against’ coal output. This is in direct contrast to the situation for most other minerals, in respect of which mineral planning authorities are required to maintain a ‘land bank’. There is no environmental justification for this as surface coal production represents a temporary use of land whereas the extraction of other minerals normally takes place over much longer periods.

It may be that the ‘presumption against’ came about as a result of political pressure from deep-mining communities concerned that opencast coal production would threaten deep-mine jobs. However, with total UK production now well below the available market, this can no longer be true by any stretch of the imagination, if it ever was.

Fortunately, this absurd situation has now been publicly recognized by the Department of Trade and Industry, who are now engaged in discussions with the Office of the Deputy Prime Minister in an attempt to alleviate the position. Unfortunately, at the same time, mineral planning guidance in Scotland is under review with the possibility that the ‘presumption against’ will be introduced there. If so, the impact on overall UK production could be potentially devastating.

It can only be hoped that, both north and south of the border, common sense will prevail.

Summary

The economic outlook for Britain’s coal producers is better than for many years. Market demand is strong and will remain significantly higher than UK output despite environmental regulation. International coal prices have increased dramatically and, while they are likely to fall back, they may well settle down in the longer term at levels which will substantially exceed UK production costs.

The challenge is to take advantage of this improved market position. This depends more than anything else on the ability of the surface-mining industry to gain access to reserves through the planning system.