The White Paper on energy sources for electricity generation, issued in October, set out the Government's plans to "level the playing field" for coal-fired power generation (ENDS Report 285, pp 40-41 ). But implementation of this policy is proving far from straightforward - and has exposed tensions between the Government's desire for greater competition in generation and its environmental objectives.
Stations for sale
The main element of the White Paper was a "temporary" moratorium on new gas-fired capacity, with exemptions available for combined heat and power (CHP) projects, while the electricity trading market is reformed. The Government also wanted National Power and PowerGen to sell off more modern coal-fired plant in order to strengthen competition and increase potential coal burn by making way for new entrants.
However, these divestments are taking place against a backdrop of great uncertainty - particularly in terms of future environmental constraints which will determine the output, and hence sale value, of the stations.
The first constraint was introduced by the White Paper's statement that "each major generator should be encouraged to have at least one FGD-equipped plant." It is far from clear how this condition will apply to the rejigged power market once station divestment has been completed.
The second environmental constraint is the level of acid gas emissions which will be permitted from the industry - and the need to carve up emission limits equitably between existing and new entrant generators. The Environment Agency is currently reviewing its policy on these emission limits - and its decisions will have considerable financial implications for the generators and the UK coal industry.
A tale of three generators
The three existing coal-fired generators in England and Wales have responded in very different ways to these environmental pressures. The combined effect may be to yield a large-scale FGD programme - of the sort originally envisaged at the time of electricity privatisation.
PowerGen is seeking to sell off two 2GW power stations, Fiddler's Ferry and Ferrybridge C, by mid-1999. Trade and Industry Secretary Peter Mandelson has accepted these plans - and in return has decided not to refer the firm's £1.9 billion acquisition of East Midlands Electricity to the Monopolies and Mergers Commission.
In November, PowerGen revealed that over a dozen prospective purchasers have come forward - but complained that the sale was being delayed by the Agency's review of future emission limits. In December, a spokesman told ENDS: "We have now been given assurances by the DTI and the Agency which should give some comfort to people looking at buying the plant." But he would not reveal details of these assurances - nor say what assumptions about emissions underpinned the £800-1,000 million price tag for the two stations.
PowerGen plans to retain its 2GW Ratcliffe-on-Soar station - the only one in its portfolio equipped with FGD. This will allow it to fulfil the White Paper's policy on FGD, and will enable the company to meet SO2 emission limits while maintaining a relatively high coal burn. In December, PowerGen signed a £1 billion contract with RJB Mining, the UK's main coal producer, to take up to 35 million tonnes of coal by March 2003.
But PowerGen seems to have escaped its commitment to fit FGD to Ferrybridge C. In 1993, DTI officials told the Public Accounts Committee that the project's cost - an estimated £250 million - was met by the public purse when the company was privatised (ENDS Report 241, pp 6-7 ). In 1995, the Labour Party promised that in office it would hold an inquiry into the issue. ENDS understands that Deputy Prime Minister John Prescott urged other Ministers earlier this year to require PowerGen to fit FGD to the station. Despite this, the Government now appears to have dropped the matter.
National Power's surprise move
National Power has taken a very different route. The company has long resisted Government pressure to shed capacity. But in late November, it surprised many observers by announcing plans to sell its 4GW Drax plant. The station is the UK's most modern and efficient coal-fired plant, already fitted with a £640 million FGD plant, and is likely to be a handsome earner for many years.
National Power's decision to sell the "jewel in its crown" has two explanations. Firstly, the company appears to be raising funds to reposition itself as a vertically integrated utility - as witnessed by its £180 million move to acquire Midlands Electricity's retail supply business.
Secondly, it believes that by selling Drax for more than £2 billion it can achieve "full value" for its shareholders. The FGD plant means that Drax has a secure long-term future regardless of future constraints on SO2 emissions - making the station relatively easy both to value and sell.
But the loss of Drax will leave National Power with six coal-fired stations - none with FGD. The company told ENDS that because its market share will fall from 21% to just 12%, it hopes to escape the White Paper's requirement for "major coal-fired generators" to have at least one FGD-equipped plant. The company is still in negotiations with RJB over coal purchases beyond 2001.
However, ENDS has learned that the Department of the Environment, Transport and the Regions has pressed the DTI to require National Power to retrofit one of its remaining stations with FGD. The 2GW Eggborough plant in Yorkshire is a leading candidate.
Eastern firms up on FGD
Eastern Group, the third generator, is not under pressure to sell off any of its five coal-fired stations. The main threat to its future use of coal comes from SO2 emission limits - particularly because it currently does not possess an FGD-equipped station.
However, in September Eastern unveiled plans to fit FGD to its West Burton station in Nottinghamshire (ENDS Report 284, p 5 ). Its plans have been reinforced by the White Paper, and Eastern expects to apply to the DTI in January for consent for the FGD project. The company is likely to use conventional limestone/gypsum FGD technology with a 20-year design life, with commissioning due by 2003.
The project has allowed Eastern to sign long-term coal supply contracts with RJB Mining. In December, it agreed to take 28 million tonnes of coal to 2003. A further 21 million tonnes will be bought from 2003 to 2009, conditional upon successful commissioning of the FGD plant.
The power industry is buzzing with rumours that the Government has persuaded PowerGen to help pay for Eastern's FGD project - in partial compensation for its failure to fit FGD to Ferrybridge. However, PowerGen denies that such a settlement accompanied the termination of complex "earn-out" arrangements under which it had leased stations to Eastern. Eastern declined to comment.
A form of sulphur trading
Overall, the sell-offs bring between one and three new players into the market for coal-fired generation. British Energy has already signalled a strong interest - although any bid may run into concerns about competition as the company's nuclear reactors already give it a market share of 25%.
If a single company buys all three of the stations up for sale - including Drax - then the question of further FGD retrofits will not arise. But if a new entrant buys only PowerGen's stations, it may, as a "major coal-fired generator", come under strong pressure to retrofit FGD.
Potential new entrants may also have to negotiate a crude form of sulphur emissions trading. National Power and PowerGen currently operate within company-wide SO2 emission "bubbles" - and will effectively sell a proportion of their bubbles along with the actual power stations.
A new entrant could buy a large emissions allocation at a relatively high price - and would then be able to run its station(s) at a relatively high load factor. A small allocation would attract a lower price tag - but would require the new entrant to operate at a low load factor, fit FGD or rely on low-sulphur imported coal. The latter option is likely to carry the least commercial risk, but would undermine the Government's attempts to prop up the UK coal industry.
It remains unclear whether the Environment Agency or the Government will seek to intervene in the sale and purchase of emission allocations. The only precedent is Eastern's 1996 deal to acquire stations from PowerGen and National Power - under which the transfer of emission allocations was left entirely to the generators (ENDS Report 278, p 30 ). But it is debatable whether such a laissez faire approach is consistent with the requirement on operators to use the "best available techniques not entailing excessive cost."
Agency in the hot seat
In the meantime, the Agency is faced with deciding the size of the overall SO2 emissions bubble for coal-fired power stations. The complexities arising from the power station sales have not made this task any easier.
In early 1998, the Agency proposed tighter limits than those set by its predecessor HM Inspectorate of Pollution (HMIP) in 1996 (ENDS Report 276, pp 14-16 ). However, the White Paper has put strong pressure on the Agency to scrap these proposals. Notably, the Government gave explicit support only to HMIP's proposed SO2 limit of 365,000 tonnes by 2005 - a figure which the Agency had wanted to achieve by 2001.
The Agency is expected to consult on revised proposals early in 1999, taking account of the issues raised by the White Paper. Indeed, the regulator may feel justified in sticking to its tougher proposals. These were based on the assumption that only the gas-fired stations which already had consent under the Electricity Act 1989 at the time would be built.
The Government's moratorium has changed this position only slightly, and will stop only a handful of these projects which also need consent under the Energy Act 1976. Indeed, in December the Government granted consent to one such project. Intergen's 750MW gas-fired station in Essex was approved, with limits on its gas utilisation, because of "the unique circumstances and their impact on the interests of the developer."
The Agency may also stick to its argument that the generators could comply with the tougher limits by burning higher sulphur coals in stations fitted with FGD. Such a strategy would be a bold move - and could bring the regulator into direct conflict with the Government.
Decisions taken in the coming months will determine the shape of the UK's generating industry into the next decade and beyond. Indeed, it seems that the sector is in danger of severe overcrowding. Some 9GW of gas-fired capacity has all the necessary consents, and will enter a market in which a growing number of generators with FGD-equipped coal-fired plant will be battling for market share. The chances of "clean coal" technology finding a toehold in such a competitive marketplace appear remote (see box ).
Somehow, the Government must also find room for a major increase in renewables and CHP capacity if it is serious about its targets in those areas. The danger is that these technologies - together with the Government's aspirations to drive down emissions of acid gases and carbon dioxide - may be squeezed out by a short-term desire to protect the UK coal industry.