Leading Article: A fair market for coal

IT WAS a climb-down, but it was the very least the Government thought it could get away with. Whether that calculation is correct must await the verdict of the division lobbies tomorrow. The chances are that once the whips have gone to work, enough of the Government's supporters will grumpily come back on side. That said, Michael Heseltine's statement was profoundly unsatisfactory because of its abject failure to address the central issue: how to create a genuinely market- based UK energy policy.

The Government's policy towards coal has been widely interpreted as an example of the failure of market-led economics. The truth is the reverse. The policy - flawed in conception, inept in presentation - stems directly from earlier attempts to rig the electricity market that have artificially swung the balance of advantage away from British coal.

The catalogue of errors is instructive. When the electricity industry was privatised, the Government hoped to include the nuclear power generators. But nuclear power carries large liabilities for the decommissioning of power stations and the disposal of waste. The Government sought to make these acceptable to investors by dividing generation in England and Wales between two giant groups, National Power and PowerGen, giving nuclear power to the larger, National Power, on the grounds that the monopoly profits from the conventional side would offset the risks from the nuclear. The proposition failed, for the investment community would not take on the nuclear liabilities. Nuclear power was withdrawn from privatisation. But by this stage it was considered too late to reshape the industry. The duopoly, plus a state-owned nuclear industry, went ahead.

The regional electricity companies have been alarmed at facing such a duopoly. They have supported the building of new gas-fired power stations as a way of diversifying risk - and partly for environmental reasons. New technology makes these stations flexible and efficient, but their medium-term competitiveness will depend on the price of gas, which seems likely to rise as reserves are depleted. Meanwhile, the nuclear power industry continues to receive large subsidies.

Thus the coal industry was caught in a pincer movement. On the one hand it is competing against subsidised nuclear power, on the other against gas stations that are being built largely to introduce the competition which privatisation failed to do. Add legitimate environmental concerns about burning coal, the availability of cheap imports, and, it must be admitted, the dangers of an interruption in coal supplies from a strike: the market signalled that most of the British coal industry could not compete.

If markets are fed the wrong information, they will give the wrong signals. The Government's belated review of the industry's prospects must level the playing field so that it can give the right ones. It is not practicable in the time available to introduce the sort of competitive structure that should have been put in place four years ago. It is, however, possible to correct the distortions that have been imposed. The underlying economics of the gas-fired stations need to be scrutinised. The terms of the contracts between the gas generators and British Gas need to be examined for their realism. A calculation must be made of the likely share of nuclear power under a no-subsidy regime, towards which the nuclear industry must have moved by 1998. British Coal's excellent performance at improving its productivity needs to be projected forward. Some allowance must also be made for the fact that British coal can be delivered at a known real price for many years to come, whatever happens to world energy prices.

Once these calculations are made, the market can give its signals and the Government can respond in an ordered way. The result will probably be some further contraction of the coal industry, but with three main provisos. One would be that contraction should not be so overwhelmingly irreversible. As much mining capacity as possible must be maintained into the next century, when oil and gas supplies will inevitably become tighter. Next, the human and social costs of closing mines must be taken into account, and not just by handing out redundancy money. Finally, the Government and the industry regulators must press on with the process of introducing something closer to a real market in electricity supply, and not the rigged one that led to this debacle.