King Coal makes a return as dirty man of Europe goes green

Coal is being lauded suddenly as the commodity that can wean us off a dependency on energy supplies from the volatile Middle East and even save the earth from global warming.

This most old-fashioned source of energy, traditionally associated with horrendous working conditions and spewing out vast amounts of pollution, is undergoing a transformation.

Richard Budge, the businessman dubbed "King Coal" for his involvement in the industry, has just announced he has raised enough money - from a Russian investor - to reopen a colliery at Hatfield in South Yorkshire. He also wants to build an £800m carbon capture and storage power plant on the site. Two German energy giants, RWE and E.ON, have unveiled plans for similar "clean coal" power stations in the UK.

In Britain, coal seemed to be finished after the decimation of the domestic coal-mining industry in the 1980s and the "dash for gas" in the 1990s, when the electricity generation industry built lots of gas-powered stations to take advantage of the cheap gas available.

Even as recently as the 2003 White Paper on energy, coal did not feature as a major part of Britain's future energy mix.

But gas is cheap no more and Russia, the world's biggest gas exporter, terrified the world about security of supply after it cut off the Ukraine in the winter. In recent months, about half of the UK's electricity was produced from burning coal, up from a third usually taken from the commodity.

Mr Budge says: "This fuel isn't dead. If it was, your lights would have gone out this winter.... This country needs an energy policy that recognises coal. Market forces do not value security of supply."

One main reason why people are excited about coal is technological developments, which allow coal-fired plants to be more efficient, plus the emergence of projects that would bury the environmentally harmful carbon dioxide produced from burning coal.

President George Bush admitted this year the US is "addicted to oil". That means it is looking more enthusiastically at other energy sources, including coal.

Not only can the carbon dioxide produced from burning coal be neutralised by burying it, but one of the processes used in "carbon capture" - gasification - produces hydrogen, the much-trumpeted clean energy source of the future.

Further afield, industrialisation in China and India will inevitably depend heavily on electricity produced from coal-fired stations, throwing massive amounts of carbon dioxide into the atmosphere. Given the apocalyptic concerns about global warming, many believe it is vital that new, cleaner coal technology is developed.

A full-scale carbon capture and storage power plant does not exist in the world. But there is a good chance Britain could build the first, through a $600m (£340m) project BP and Scottish & Southern are working on in Peterhead, Scotland. It would use gas rather than coal, but the principle would be the same. The scheme would see natural gas that is pumped in from a North Sea field split into carbon dioxide and hydrogen, with the hydrogen burned to power the plant. The carbon dioxide would be pumped back into the North Sea, where it would be stored in a depleted oil reservoir.

Jim Watson, an energy expert at Sussex University, says that while this technology was yet to be proven, it was promising. "For me the rationale would be to demonstrate it, not so much for the UK, as showing it works to India and China."

BP has been open about the fact the Peterhead scheme would require "substantial" public subsidy to go ahead. The plans for carbon capture power stations from E.ON and RWE, in Lincolnshire and Tilbury respectively, are even more ambitious but would take much longer to be in operation. The BP scheme could run by late 2008. All such plants would need taxpayers' money because they are much more expensive to build than conventional coal-fired generators.

The industry believes the Government seems serious about carbon capture, with the Treasury conducting an investigation of the issue.

The deadline for submissions to the Government's Energy Review closed last week, and the document will be published in the summer. While the headlines are likely to focus on what it says about nuclear energy, the coal supply and generation industry hopes the Government will come up with policy pronouncements and incentives for the sector.

Mr Budge, for one, is fed up with the talk about renewable sources of energy such as wind power. "You can never rely on wind farms. They only work one day in three. It's stupid to think they'd provide a major share of our energy requirements."

Another sign of the renewed health of coal was the stock market listing last year, of Drax, Britain's biggest coal-fired power plant. The shares have soared and Drax is on the cusp on entering the FTSE 100.

Britain produces about 20 million tonnes of the 50 million tonnes of coal it consumes each year.

Melanie Wedgbury, at Drax, says the industry needs to see a meaningful demonstration of carbon capture in action. She adds it also needs a better policy framework for burning biomass materials, alongside coal, and evidence of a long-term policy that justifies massive investments for making existing power stations more efficient.

Integral to this point is a requirement for a firm government vision for the next 15 or 20 years to allow companies to invest with confidence. Some say they need a more predictable price for carbon. Others say beyond 2012, there is no carbon policy for Europe, and that is not long enough to base multibillion-pound decisions on.

While the Government is likely to provide goodies for the coal sector in the Energy Review, it is helpless in the face of the bigger picture. Even sticking just to Europe, there is no sign of a legally binding environmental policy to take us beyond 2012.

Coal is back, but its long-term future is still uncertain.