Can fossil fuel clean up its act

As Britain faces up to an energy crisis in nine years' time and nuclear power and wind farms seem unlikely to provide the answers, the unfashionable fossil fuel could be the new black if it manages to clean up its act
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UK Coal, the UK's only publicly quoted coal miner, had some rare good news last week. But the announcement - which helped the shares close up 44 per cent on the week - had nothing to do with the fossil fuel. Instead, long-suffering investors rejoiced when the company said its land bank could be worth £800m, compared with the previous estimate of £274m. For years, UK Coal's real value has lain not in its mines, but in a 50,000-acre land bank and its potential worth to developers.

But now there could also be a light at the end of the tunnel for the fossil fuel itself. A new generation of coal-powered plants - once dismissed as dirty, expensive and "old economy" - may be set for a comeback to fill the UK's looming energy shortfall.

Last week Centrica, the owner of British Gas, announ- ced a £1bn joint venture with Progressive Energy, a specialist "clean energy" company, in the race to build the UK's first coal-fired power station for over 30 years. The plan is that carbon created by the proposed Teesside plant won't be emitted into the atmosphere but instead siphoned off and pumped into an empty North Sea oilfield for storage.

This anti-pollution measure is known as carbon sequestration and storage (CSS). The Teesside project is one of six "clean coal" initiatives - involving CSS or other new, efficient technologies - that have been announced in the past year by operators such as the German companies E.ON and RWE. But these are all still in the planning stage and depend on as-yet uncertain government support to get off the ground.

It is clear new capacity is needed, and far more urgently than many seem to realise. The Government is working on its Energy Review, which will report early next year and frame policy for the next 50 years and beyond. Last month, an official on the Energy Review team at the Department of Trade and Industry (DTI) gave a bleak presentation on the generation gap that the UK will face in 2016.

If no new plants are built, the UK will be short of 20GW (just under a third of existing capacity), he told a worried audience. The closure by the end of 2015 of 8GW of old coal plants that don't meet stringent pollution standards accounts for some of this shortfall, along with the planned shutdowns of old oil and nuclear power stations (5.3GW). The other 7GW is accounted for by predictions of a 1 per cent rise each year in demand for electricity.

Debate on the Energy Review has been dominated by the question of whether new nuclear reactors will be built. But according to industry executives involved in the review, it has only recently dawned on officials that they cannot be built in time. Nuclear may be the answer in the medium term, but capacity will have to come from somewhere else in the meantime.

Of course, other types of generation are also being planned. In the next seven years, says the National Grid, 20GW of new plants - mainly wind farms and gas - could come on stream. But such forecasts are notoriously unreliable. One industry planner says: "Guessing how much new capacity will be on the grid in five years' time is a bit like sticking your finger in the wind."

The economics, particularly of offshore wind, are not proven and there is no guarantee that developers will press ahead with these projects.

But the economics of coal remains challenging. The International Energy Agency (IEA) estimates that it costs around £450m to build a 1,000MW "combined cycle gas turbine" (CCGT) plant large enough to power a city the size of Birmingham - and around twice that for conventional coal stations. Operating costs are also much higher. According to DTI figures, an efficient new coal plant is some three times as expensive to run than a standard CCGT plant (based on coal and gas prices roughly equivalent to today's prices).

The "carbon cost" is also far higher, as coal produces more carbon for each KW of electricity generated than gas. Because dirtier generators are penalised for higher emissions by trading schemes and other government legislation, this has been an added disincentive to building coal plants. CSS could offset the carbon costs, but the technology, despite being lauded by the Government, is a long way from fruition and its cost is unknown.

Brian Count, chairman of Progressive Energy, says the joint venture wants to be rewarded for reducing emissions but admits there is no framework in place yet for this to happen. "We are looking for the Government to support the concept of CSS and for support to deal with early technology risk," he says.

But there are other factors that are starting to weigh in coal's favour. Increasingly, generators are becoming cautious about building too many gas plants, because of high and unpredictable prices. The UK gas price for delivery last winter rose to a record high of over 90p per therm, although it is cheaper for the coming months.

Security of supply is also starting to count against gas as the pipelines, the main method of transportation, have to pass through often-unstable countries. Coal, by contrast, is shipped.

If gas plants replace all the old stations, the UK would be dependent on gas for over half its power generation. As Mike Farley, director of technology policy liaison at engineering firm Mitsui Babcock, says: "All generators are now looking at coal."

But that does not mean the UK coal industry is a happy ship. With the Government committed to reducing emissions, the operators feel they have been unfairly targeted as dirty generators. UK Coal chief executive Gerry Spindler wants the Government to extend the life of the old coal-powered plants that have been ordered to close by 2016. "I don't think replacement capacity will be built in that time ... There will be destructive, distressing shortages."

UK Coal has a financial interest in extending the life of these stations, not least because the company supplies then.

But planned "clean coal" plants will be built on the coast so the carbon can be pumped out to sea, which also means they will be able to import cheaper coal from overseas. UK Coal, which has to transport coal by land across the UK's creaking rail infrastructure, will find it harder to compete.

So coal may make a comeback - if the Government gets its act together - but a golden age for UK mining isn't certain.