Long term planning for coal

Long Term Planning for Coati Sir Derek Ezra National Coal Board*

The Interim Report of the Coal Industry Examination was published in June 1964, representing the result of Tripartite discussions between the Government, the National Coal Board and the unions. One of the principal conclusions of this report was that the government endorsed the Board's long-term "Plan for Coal" as a broad strategy for the industry. It is perhaps appropriate, therefore, to review at the present time the kind of considerations which needed to be taken into account in drawing up a long-term "Plan for Coal'.

OBJ ECTIVES

A

PRE-REQUISITEFORLONGTERMPLANning of an organization is a review

of basic objectives. The terms of reference of the National Coal Board are, in fact, set out in the Nationalisation Act of 1946 which requires the Board to make 'supplies of coal available of such qualities and sizes, and in such quantities and at such prices, as may seem to them best calculated to further the public interest in all respects'. There is, however, considerable difficulty in defining the public interest, and there is inevitably some conflict between short and long term considerations and between financial and non-financial considerations. What is clear, however, is that the Board's objective is not to maximize profit, but to operate within the constraints of a financial framework. In this regard, the Board has been in discussion with Government on the costs which are to be regarded as properly to be covered in prices, and on the principles of pricing policy. The main issues here are the extent to which the industry should bear the burden of certain 'social' costs, and what means may be found of mitigating the effect of greatly increased capital charges arising from the proposed expansion of the Board's investment programme. Subject to the resolution of these difficulties, the Board's basic objective will be to make as large a contribution as *Sir Derek Ezra is Chairman of the National Coal Board.

DECEMBER, 1974

possible to meet the energy requirements of the country on a continuing basis, within the financial limits laid down. THE ENERGY M A R K E T

The energy market represents the business environment of the Board, and consideration of future energy developments is a vital ingredient in the coal industry's long term planning, particularly in relation to the markets for coal. We have studied in some detail what appear to us to be the principal external factors which will influence the future demand for coal. These are: (a) the growth in total energy requirements, and in particular the balance between the effect of economic growth and increased efficiency of energy use; (b) the future availability of natural gas, bearing in mind not only new discoveries, but the depletion policy to be adopted; (c) the nuclear power station building programme; (d) the prices and availability of oil, and the extent to which this will be conditioned by North Sea developments. All these factors are subject to a very considerable degree of uncertainty, but our broad conclusion has been that, by the mid-1980s, the total energy requirements of the United Kingdom will have increased by about 100m. tons of coal equivalent, and that the additional contribution of natural gas and nuclear power is unlikely to be sufficient to meet this increment of additional demand, so that the total market for coal and oil will continue to rise, albeit rather slowly. Within that total market, the contributions of coal and oil will be determined to a very large extent by their relative prices. Under present relativities, clearly the demand for coal will be high-in all probability in excess of current levels of production. ENERGY POLICY

Given the inevitable uncertainty in the main elements of the energy situation, and given the fluctuation of circumstances, it

will clearly be unrealistic for energy policy to be based upon rigid forecasts and plans. On the other hand, the development plans of the energy industries, with their longlead times and advanced technologies, cannot realistically be determined purely by the operation of market forces. Some guidelines of policy to give stability in planning are therefore required, and the Board have advocated this as part of their planning process. In the Board's view, the energy policy for the U.K. needs to be based upon the complementary development of all indigenous energy resources, with prices of the various fuels determined not only by production costs, but also by relative value in relation to international oil. In more specific terms, energy policies advocated by the Board would develop as follows: (a) Nuclear power would be developed in line with the increased base load electricity generation requirements, but not to an extent that would lead to premature obsolescence and under-utilization of fossil fuel power stations. (b) North Sea gas should be developed with a view to avoiding excessive depletion and to concentrate on premium use. (c) North Sea oil would be used primarily to displace imports and at the same time the pattern of oil uses would be towards the 'lighter' end of the barrel. (d) Coal would take a large share in the bulk steam-raising load, and would meet the greater part of the requirements of the steel industry. Over the years, from time to time there would inevitably be imbalances between supply and demand of particular fuels, so that the system would require certain 'regulators' to provide the necessary measure of flexibility. In a very real sense, the practical operation of any energy policy is represented by the use of these regulators. The Board have emphasized to Government the difficulties of using the coal industry as a short term regulator. Clearly, some flexibility is provided by 21

stocks, but collieries once closed cannot be re-opened, and there are heavy costs involved in a policy of 'stop go' on primary capacity investment. The Board therefore welcomed the statement by the Secretary of State in the Coal Industry Examination Interim Report that 'it will not be the government's intention that the industry should be at the mercy of short term fluctuations in the prices of competing fuels'. MARKETS A N D UTILIZATION

Having considered the energy background, the next stage in drawing up a long term plan forthe coal industry is an analytical study of the various markets. While the markets for coking coal and for coals for the domestic and general industrial markets are of great importance to the Board, it is clear that the crucial market during the next decade at least will be the market for power station coal. Indeed, possible variations of coal sales in this market account for virtually the total variation of the overall demand for coal in this period. In turn, the demand for power station coal is critically dependent upon three factors, namely: (a) future growth of electricity sales; (b) the building programme of new power stations (particularly nuclear); (c) the relative prices of oil and coal. To assess the impact of these variables, the Board use computer models designed to simulate the generation systems of the CEGB and SSEB which take into account such factors as the age and efficiency of individual stations, and the delivered prices of fuels. These studies have been of considerable value to the Board in drawing up their plans. In the longer term, the Board have considered the extent to which new technologies to convert coal might become viable. They have come to the view that if options are to be taken up in the period beyond 1985; it ~is not too soon for serious research and development work to be undertaken at pilot plant scale. They have therefore proposed to the government a programme costing some £40m. over the next 5 years, comprising (i) a fluidized combustion unit of 20 MW to improve the efficiency of electricity generation using coal; (ii) a gasification plant designed to produce synthesis gas from coal as the basis for hydrogen manufacture, substitute natural gas or methanol; (iii) pilot pyrolysis units for producing gas and oil simultaneously from coal; (iv) liquefaction plants using liquid and gaseous solvents to make coal extracts and hydrogenated liquids; 22

(v) a gasification plant to make lowBtu fuel gas from coal; (vi) production and testing of special metallurgical fuels. Practical studies in the coal conversion processes would be supplemented by feasibility studies developing integrated combinations of these processes in some form of 'Coalplex'. PRODUCTION

If the new circumstances of the energy market are to present a new opportunity for coal, clearly this cannot be realized unless production plans are adequate to meet potential demand. Here, our starting point has been a pit by pit survey to determine the trend in output which would materialize if the investment policies of recent years were continued. In this respect, it has to be remembered that coal is an extractive industry. The depletion rates are not so dramatic as those for individual oil and gas fields; nevertheless, coal output cannot be sustained without and adequate flow of investment in primary capacity. During the 1960s, at a time when imported oil was cheap, not only were a large number of collieries closed, but also the investment in major projects fell to around 1/10th the level a decade previous. The average age of existing colleries is about 80 years and, given the minimal investment in primary capacity during the last decade, clearly a continuing policy of minimal investment would lead to progressive losses through exhaustion of capacity--the Board estimate this at some 3 to 4m. tons per annum during the next decade. The task of stabilizing deepmined coal production at around 120m. tons per annum (and if possible increasing it) therefore represents a formidable task and will require a large and sudden increase in the level of investment. To replace losses through exhaustion, the Board have drawn up an investment plan designed to provide (a) 9m. tons a year from life extension of pits which otherwise would exhaust; (b) 13m. tons a year from major schemes at existing pits; (c) 20m. tons a year from new collieries, including up to 10m. tons from the Selby coalfield. In addition, the Board will seek to increase opencast output from the present level of 10m. tons a year up to 15m. tons a year. The implementation of this programme will itself require detailed planning. In particular (a) the exploration programme (particularly for new collieries) is being intensified in order to prove new reserves for development;

(b) the necessary changes in organization and procedures are being made; (c) further discussions will be required with Government on the limitations to the Board's borrowing powers and possible alternative methods of financing to the extent to which borrowings will exceed self-generated funds; (d) feasibility studies are being carried out on the measures required to provide the necessary manpower, particularly at new and expanded collieries. Increased investment must be associated with higher productivity, which is crucial if coal's competitive position is to be maintained. While improvements in productivity will result directly from the investment proposed, and by increasing concentration of output at the most productive collieries, substantial operational improvements will also be required at the 'continuing' collieries. In the 10 years to 1972/1973, output per manshift increased by some 4 per cent p.a. The Board consider that forward increases of this order are perfectly feasible and should if possible be exceeded. Progress will be achieved by a combination of proven techniques, integration of recently developed ideas, and the development of new equipment and systems. For example, measures will be taken to extend retreat working where appropriate, continue stable elimination, develop mechanized ripping and packing, and improve manriding and materials transport. A substantially increased mining research programme is being put in hand and one of its main objectives will be to extend automation, and hence improve efficiency and safety, throughout the range of mining operations. However, the Board recognize that the necessary advances in productivity can be secured only with the full cooperation of the work force. Clearly, the long term plan for the coal industry, such as is provided for in the Board's 'Plan for Coal', needs to be sufficiently 'robust' to avoid being put at risk by changes in external circumstances For this reason, the Board are concentrating their investment in the development of the lower-cost reserves, since there is much untapped cheap coal still to be won. The Board believe that the projects for increased output at existing pits or new collieries will be capable of generating coal at significantly below the average cost of the industry. They firmly believe that if at any time the size of the industry needs to be adjusted to correct a chronic imbalance between supply and demand, after taking account of reasonable levels of stocks, this should be achieved by the closure of the highest-cost short-life LONG RANGE PLANNING

collieries rather than by any restriction of investment in low-cost capacity. The investment programme, therefore, should not be used as a regulator. Furthermore, it needs to be emphasized that the Board will not anticipate closure decisions--these will take place under a clearly defined Colliery Review Procedure which has been agreed with the unions. The successful implementation of any

DECEMBER, 1974

long term plan requires that it should be understood by both the management in the field and by the unions and workmen. On the management side, the Board has a comprehensive system of corporate planning involving an annual Long-Term Investment Plan, based upon a dialogue with the producing areas on the prospects of individual collieries. On the union side, not only have national officials been in-

volved in the tripartite discussions of the Coal Industry Examination which endorsed the Board's Plan, but this has been also discussed at the Joint Policy Advisory Committee, and the summary of the Plan has been distributed to all Colliery Consultative Committees. The Board are convinced that only by involving the whole of management and the work force can its long term plans be met with success. •

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