British Coal's demise has been accelerated by the Government's drive to privatise the coal industry, but more so by the recent privatisation of the electricity companies on whose custom British Coal depends to survive.
It was a leaked report by N M Rothschild, the merchant bank advising on the coal sale, that first warned that British Coal might have to shrink to as few as 14 pits to survive. Yesterday's announcement leaves 19 mines. There are fears that may not be the end of the story.
The electricity generators have been forced in the past to buy British Coal under government- imposed contracts which expire early next year. Now, freed from Whitehall shackles, National Power and PowerGen intend to buy more imported coal, which is cheaper and often cleaner than UK coal. More important, however, is the sudden trend to the use of natural gas for power generation.
The 'dash for gas' was hailed by the Government as a way of promoting competition in the electricity generation market. Stations using Combined Cycle Gas Turbine (CCGT) technology can be built more quickly and cheaply than their coal-burning counterparts and run with one-tenth of the staff. They produce less carbon dioxide and virtually no acid emissions. The theory was that they also produced electricity more cheaply than coal-fired stations.
Plans for about 25 CCGT projects with a total of 21,000 megawatts of generating capacity have already been notified to the National Grid Company. This compares with a total generating capacity of 60,000 megawatts in England and Wales.
The National Grid Company says that if all the projects go ahead, the UK will have 60 per cent too much generating capacity within a few years. Both National Power and PowerGen are among those building CCGTs and to cut capacity they will close mainly coal-fired and oil- fired plants. The rush to burn gas for electricity is in spite of a recent sharp rise in gas prices for electricity generation, which is likely to make some of the planned CCGTs more expensive power producers than modern coal-fired plant.
The prices were increased by 30 per cent last year by British Gas because it believed it could not meet the unexpected surge in demand in the mid 1990s and beyond. In spite of that, the Government's advisers assume that within five years, the UK will have at least 11,000 megawatts of electricity from CCGTs. That is the main reason why the market for coal will be squeezed. British Coal fears that the gas burn will be higher still.
Even if more expensive, the electricity from gas-fired plants will be bought by the regional electricity companies, most of which have already signed 15-year contracts for the supplies. These deals mean that the gas stations will squeeze even modern coal- fired plant off the electricity system, irrespective of price. Under their licences, the regional electricity supply companies can pass costs related to electricity generation on to customers.
Dieter Helm, the director of Oxford Economic Research Associates, says that the age of existing coal fired plants and the cost of replacing them makes the decline of the coal industry inevitable. But he also says the surge of gas projects has made the rundown far too fast.
'The dash for gas has brought a lot of capacity on to a market where there was a glut. Both the Government and regulators are protecting the gas plant in the interests of competition. That's the mess,' he said.
Since the regional electricity companies are also partners in the gas projects, it is in their interests to make sure the CCGTs are a success.
As a result of the dash for gas, the balance of demand and supply facing the coal industry was devastated. This year, British Coal is supplying 65 million tonnes to National Power and PowerGen. But ministerial advisers believe that the market for coal for power generation will have shrunk to around 40 million tonnes by 1996-7.
Some of this total will be met by imports, and both National Power and PowerGen have been expanding their import facilities.
The market outside electricity generation is no more than 15 million tonnes for domestic and industrial use. It is largely offset in the 16 million tonnes from British Coal open-cast mines, worked by contractors. There is also the problem of existing UK coal stocks, which overhang the whole market, standing at an estimated 47 million tonnes.
The Government's advisers are also assuming a slight increase in the amount of electricity generated by Nuclear Electric, which is applying to extend the lives of its ageing Magnox reactors as well as building the Sizewell B pressurised water reactor. Nuclear Electric is subsidised by more than pounds 1bn a year. In addition, government advisers assume some use of orimulsion, an oil-based emulsion which environmentalists say is the dirtiest fuel on earth.
Of the 40 million tonnes of coal burnt, the share of British Coal or its privatised successor depends on the coal price and whether new five-year contracts currently under negotiation with the electricity industry are ever signed.
The pit closures announced yesterday were supposed to coincide with a secured coal deal. They do not take into account the implications for coal if the electricity industry refuses to sign.
Under the contracts being negotiated, British Coal will sell to the generators next year at about 150p per gigajoule, decreasing thereafter. This compares with 185p at present.
But foreign coal is still produced far more cheaply thanks to extensive open-cast mining in Australia and elsewhere. Coal imports can be landed at the Thames Estuary for between 100p and 120p, with prices at inland power stations increasing according to transport costs. The five-year deal is intended to give British Coal a breathing space to allow it to bring prices to world levels, but no deal is yet in sight.
Commentary, page 23