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Coal industry wins a stay of execution

New energy policy offers little hope for miners in the long-term. By Michael Harrison
WHEN THE history of British coal comes to be written, will yesterday's rescue package be remembered as a turning point in its fortunes or the last gasp of a dying industry?

Brave and defiant though the words were from the pit communities, it is hard to see the measures announced in the Commons by the President of the Board of Trade, Margaret Beckett, as anything more than the most temporary of reprieves.

Torn between its old Labour instincts to defend an industry that has deep roots within the movement and its new Labour desire to appear pro- competition and pro-consumer, the Government has contrived something that will spare its blushes. But will it save the miners?

The generators will buy some more coal - but at nothing like the levels seen in previous years - in return for which ministers will make it more difficult for new competition, in the shape of gas-fired power station operators, to enter the market for the next three years. At the same time, the wholesale electricity market, or "pool" as it is known, will be reformed with the aim of creating a more level playing field that does not discriminate against coal.

Those hoping to see the Government guarantee coal a set share of the energy market, compel the generators to sell some of their coal-fired capacity to rival operators and block all new gas-fired stations will have been disappointed.

After six months of deliberations, numerous drafts and a last-minute reprimand from the Prime Minister, Tony Blair, Mrs Beckett and the other architect of yesterday's statement, the Paymaster General, Geoffrey Robinson, have backed away from anything that smacks of dirigisme, prescriptive intervention in a free market.

They have also concluded that forcing the generators to dispose of coal- fired plants to others is no guarantee of a bigger market for coal. Three years ago PowerGen and National Power sold 6,000 megawatts of capacity to Eastern, the former electricity company, since when the market for coal has continued to contract, while pool prices have not come down.

Finally, they were deterred from imposing a blanket ban on gas by the prospect of a judicial review by gas station developers and the negative signals such a move would send out to inward investors.

For these reasons, there are precious few bones on the Government's energy policy; rather it is a statement of intent. Generators will be free to negotiate how much more coal they will buy, and only then provided it is supplied at world competitive prices. They will not be obliged to dispose of plant.

Mrs Beckett and Mr Robinson have concluded that, as Mrs Thatcher once observed, you cannot buck the markets. That market has been moving slowly against coal for 20 years, but in the past five the pace has accelerated at an alarming rate.

In 1992 "old king coal" still commanded two-thirds of the electricity generating market, against a measly 1.4 per cent for gas. By last year coal's share had dropped to a third, while gas was pushing 30 per cent.

The seeds of the coal industry's demise lie not so much in Mrs Thatcher's victory over the miners in the early Eighties but in the manner in which her administration chose to privatise the electricity industry seven years later.

By allowing generation to be sold off as a duopoly between National Power and PowerGen, it gave the regional electricity suppliers every incentive to build their own generating capacity so as not to be held to ransom. This they did with gusto, erecting cheap gas-fired stations with abandon and ensuring that they ran by bidding them into the wholesale electricity market at zero price.

Today there are 13,000 megawatts of gas-fired capacity in service. And enough new capacity will come on-stream in the next five years to extinguish another 25 million tonnes of coal burn and take gas's share of the market to well over 40 per cent.

What the new energy policy is designed to do is prevent that share from rising to 60 per cent by 2010 and 75 per cent by 2020.

The key to this will be the reform of the electricity pool. Instead of a system whereby generators simply bid in prices - giving them an incentive to keep prices higher than they need to be - electricity will operate like other markets for goods and services, with generators posting the prices at which they will sell and suppliers the price at which they will buy.

The theory is that coal plants with low marginal costs will be called on more often, producing a bigger market for coal and cheaper electricity. But this process will take up to three years to bed down, during which time the Government will sacrifice the environmental benefits and boost to competition that more gas-fired stations would bring. Only gas-fired plants which operate as combined heat and power stations are likely to be viewed kindly under the new licensing regime.

Ministers, miners and MPs all knew that when the long-term coal supply contracts between the generators and the coal producers, principally Richard Budge's RJB Mining, came to an end this spring, there would be a gaping hole to fill. By a series of short-term fixes, the Government staved off the threat of Mr Budge announcing up to eight pit closures and 5,000 job losses in the run-up to last Christmas.

Today, Britain has the bones of a new energy policy. But nobody is betting that yesterday's fudge will save Budge in the long- or even medium- term. Those 5,000 miners' jobs may not disappear tomorrow. But many of them are likely to be gone in the next 12 to 18 months.

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