Is the UK coal industry turning a corner?

These are fascinating times for the UK coal industry. Over several decades, production of coal from an industry that once employed hundreds of thousands was in steep decline. The nadir appeared to be the early 1990s when an accelerated pit closure programme was introduced as the UK turned decisively towards gas a major energy source. The result was the end for deep-mine activity for thousands of miners, high levels of structural unemployment and major economic and social problems for local communities.

UK coal production has stabilised in recent years albeit at a fraction of former levels. But there are real hopes that a multi-billion pound investment in clean coal technology - specifically the building of leading-edge carbon capture and storage plants (CCS) could transform the industry.

Already Britain’s electricity generators are planning to build several coal-fired power stations utilising CCS. The main drawback of burning coal to produce electricity is that it results in damaging carbon dioxide emissions which speed up climate change. The European Union carbon emissions trading scheme now puts a price on carbon for each tonne emitted and should - in theory - move investment away from fossil fuels such as coal.

But the price of carbon permits has collapsed during the recent European-wide recession and as a result of an excessive supply of carbon permits. One of the consequences of this is that generating electricity using coal becomes more economically attractive. The high price of natural gas and concerns about the reliability of future gas supplies into the UK is another reason why coal may be on the threshold of a comeback.

Many hope that carbon capture and storage (CCS) technology become more attractive as economies of scale are exploited from the new technology. And if the average costs of generating energy using clean coal technology can fall, this means power generators can turn back to home-produced coal supplies and reduce the UK’s dependency on imports.

But critics argue that coal remains a dirty fuel and that investment in CCS will hit the money available for investment in alternative - renewable - sources of energy such as wind, tidal and solar power. They argue that a carbon tax is needed - setting a specific price on each tonne of C02 emissions - as a way of incentivising capital investment spending in renewable energy sources.

World coal prices have been volatile in recent years. The price of coal is not determined in the UK market but by the balance of demand against supply in the world market. Prices have been driven high by strong and rising demand for coal in the emerging market countries including China. Coal supplies over two thirds of China’s energy needs. Some 40% of the coal mined on the planet is dug out of the ground in China.

Because of most of the UK’s coal needs are now imported, the value of the sterling exchange rate against other currencies plays an important role in the price of the coal used by households, businesses and power generators.