Secret deal saves coal industry

THE FUTURE of Britain's coal industry looks assured. Senior industry sources believe PowerGen and Eastern are close to signing long-term coal contracts with Richard Budge, head of RJB Mining, the company which operates most of Britain's deep-coal mines.

The announcement next week of new contracts with Britain's largest generators would suit Peter Mandelson perfectly, as he could be hailed as the saviour of the coal industry at Labour's conference in Blackpool, and prove New Labour has not lost touch with Old Labour.

Without new contracts, the core of the British mining industry would be doomed. Some 9,000 jobs at RJB Mining would go. Killing coal would be political suicide.

Mr Mandelson paved the way for new contracts last week when he announced a deal with PowerGen. The company has won permission from Mr Mandelson to buy East Midlands Electricity, a retail supplier, and become the largest integrated power company in Britain. In return, PowerGen has to sell two 2,000 megawatt coal-fired stations and accept lower "earn- out" payments from Eastern Group.

This last detail points to a secret deal. The "earn-out" payments relate to coal plants sold by PowerGen to Eastern. The market structure means the pounds 40m annual "earn-outs" Eastern has paid to PowerGen discourage Eastern from burning coal. Cutting these raises Eastern's incentive to burn coal and helps fund a project Eastern announced last week - a pounds 100m flue gas desulphurisation unit for its West Burton station, letting it burn coal more cleanly.

Senior industry figures believe a secret deal has been struck. One said: "Of course, officially, Mandelson is above wheeling and dealing. But behind the scenes, the minister is pressuring the three generators for coal contracts. We think Eastern and PowerGen may already have signed."

Mr Mandelson's deal will have come at a price. Professor Stephen Littlechild, the departing industry regulator, advised that PowerGen and National Power should each sell three large power stations or 6,000 megawatts of generating capacity. In his view, this would break the generators' stranglehold on the market and reduce prices. By letting PowerGen sell fewer power stations, Mr Mandelson has upped the generators' clout - and consumers may have to pay higher prices for electricity.

New contracts alone will not secure coal's future. The inherent market bias against coal will have to go. The dash for gas will have to be stopped to secure long-term demand for coal-fired stations - to be achieved by the Energy Review that Mandelson is due to publish within the next two weeks. With foreign gas set to account for 70 per cent of Britain's market by 2020, the review is set to argue that coal is strategically important.

Industry sources believe the moratorium on new gas-fired station permits will be extended for three years. As they take two years to build, that would guarantee coal a stable market for five years.

All three of the major power groups - National Power, PowerGen and Eastern - are expected to sign contracts with RJB Mining. A spokesman would not comment on new contracts, but said: "We await with interest the Energy Review, which has been conducted with great thoroughness."