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The abdication of king coal

Britain’s centuries-old reliance on coal is at an end, creating an uncertain future for its bulk terminal ports and operators.

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You need to delve back before the Romans to trace the emergence of the use of coal in Britain. But the British Isles’ still abundant fossil fuel, which powered an industrial revolution, overseas empire and more recently a nation’s energy needs, is set to become a footnote of history within a decade. Prime Minister Theresa May’s government confirmed in November that it would deliver on energy policy plans put forward by the previous Conservative government and shut down the last of the nation’s eight remaining coal-fired power stations by 2025.

 

The decision follows the recent demise of deep coal mining in Britain. The UK’s last large shaft collieries, at Hatfield and Kellingley in Yorkshire and Thoresby in Nottinghamshire, shut in 2015. (Opencast mine operations continue in England, Wales and Scotland, however,with applications for a new site in Northumberland). UK coal production in the third quarter of 2016 was 1 Mt, which was 28% lower than the same period in 2015. Deep mine production fell by 99% to a new record low of 5,000t (just seven small deep mines remain open), although surface mine production, up 1.8%, made up the 1Mt.

 

Falling demand from the UK power sector has triggered the plummet in UK coal imports. Britain’s coal terminals have experienced a steady decline in volumes of coal in recent years, from 49.3 Mt in 2013, its highest level since before the financial crisis, to 42.2 Mt in 2014 and 24.2 Mt in 2015. But in 2016 the slide went into freefall. Imports of coal in the first half of the year fell by three-quarters, from a year earlier, to 3.9 Mt, and in the third quarter were down to 1.7 Mt. Fullyear figures released in March are expected to have crashed well below 10 Mt.

Fires go out

The pattern of declining coal demand and imports looks set for 2017 and beyond. In November, Greg Clark, the minister for the new Department of Business, Energy and Industrial Strategy (DBEIS), reasserted his commitment to decarbonisation in the wake of the 2015 Paris climate change agreement. Clark says the biggest contribution Britain can make to cut energy sector emissions is to replace coal power, with the 2025 deadline a “clear signal” to investors in new capacity, including gas, renewables and nuclear.

Without substantial spending, most of the remaining coal-fired stations are likely to close in the next few years, says Clark. A Whitehall paper in November deemed these plants, with an average age of 47 years, inefficient and in need of investment (only the Drax power station is not operating beyond its original design life). “In current market conditions, the owners of coal-fired power stations are finding it increasingly difficult to justify the case for such investments,” officials note. Faced with tougher rules and policies, many are expected to close, rather than invest in emission-reduction technology.

Coal has been in retreat for decades, but 2016 will go down as the year in which it collapsed. Accounting for two-thirds of UK energy in 1990, coal’s share of the mix was 30% by 2014 and 22% the following year. The closures in 2016 of Longannet – Scotland’s last remaining coal-fired power station – Ferrybridge C in Yorkshire, and Rugeley in Staffordshire further reduced demand. Power sector consumption of coal in the third-quarter of last year was down 76% to a record low of 1.2 Mt, with overall UK demand down 62% to 2.6 Mt. Coal contributed just 4% of UK electricity over the period, compared with 17% a year earlier.

Death knell

Scottish and Southern Energy (SSE) put the closure of Ferrybridge C down to environmental legislation and rising costs. SSE projected a loss of £100M over five years, making the 2 GW plant unsustainable”. The death knell for Scottish Power’s 2.4 GW Longannet coal-fired power station, the second largest in the UK and third largest in Europe, came when it missed out on a contract to supply the National Grid. French utility Engie closed the 1 GW Rugeley plant, claimed as the most efficient in Britain, in response to “deteriorating” conditions in the coal power market.

Regulation

Nine British coal-fired stations with 9.1 GW of capacity have shut since 2012, leaving eight with 13.9 GW, amid Westminster low carbon initiatives and tighter regulation from Brussels. The EU Industrial Emissions Directive has lumbered operators with estimated compliance bills of £50M-£75M per 500 MW unit, DBEIS reports.

A Transitional National Plan allows older plants to meet emission limits via an annual allocation within a shrinking UK quota. But, by July 2020, stations must meet the limit, close down or run either for only 1,500 hours a year at a higher limit or opt for 17,500 hours operations to 2023 and then close down.

All coal-fired power stations in Britain will close by the end of 2025, unless they are “abated”, or fitted, to capture and store emissions. However, the UK government’s earlier enthusiasm for Carbon Capture and Storage (CCS) technology has cooled, with expense a factor. Instead, a regulatory mesh has made coal uneconomic, spelling earlier shutdowns by 2022 – although low coal prices could shunt this to 2030. Renewable energy is set to receive £730M this Parliament, with the lion’s share expected for offshore wind farms. DBEIS contends that early action on coal poses no risks to electricity supplies.

Britain’s coal-fired stations can compete until 2021 in capacity auctions, which support generators and offer fixed amounts of power to the grid to guarantee supply. Last year, SSE decided to keep its 2 GW Fiddler’s Ferry plants in Cheshire open at least to March, reversing plans to close in 2016, after winning a National Grid standby contract for this inter. However, Martin Pibworth, managing director wholesale at SSE, concedes the site’s longer-term future remains uncertain. Fiddler’s Ferry was unsuccessful in capacity rounds for 2019-21, after securing a 2018/19 contract for three of its units in the first government auction.

The 2 GW Eggborough coal-fired station in North Yorkshire, which was to close last March, stayed open after the National Grid awarded an emergency power contract for this winter. Elsewhere, RWE is set to downgrade its 1.5 GW Aberthaw plant in April to only operate during peak demand, such as during winter. RWE is also investing in technology to expand the range of coal used at Aberthaw, reducing by 30% its nitrogen oxide (NOx) emissions, although this could impact on opencast mining in Wales, including Tower Colliery. RWE says it wants to keep the site near Cardiff running into the 2020s.

Others remain sanguine despite the drumbeat from Westminster. EDF Energy has capacity market contracts for West Burton A and Cottam facilities in Nottinghamshire for 2018/19. Across the Irish Sea, AES has invested in emission scrubbing devices to keep Belfast’s Kilroot plant, which serves the all-Ireland market, open until at least 2020. German utility Uniper has no plans to close its 2 GW Ratcliffe-on-Soar plant in Nottinghamshire. “We want to run it for as long as possible,” chairman Felix Lerch told Reuters. “The UK needs to balance its objectives of reducing carbon emissions with the equally important goal of ensuring security of supply.”

Import freefall

Britain’s decarbonisation policies and the loss of capacity and demand from its power sector have brought on the collapse in coal imports. Grounds for optimism in the coal supply chain have evaporated along with imports. Westminster’s decision last year to double its Carbon Price Floor (CPF), a minimum price tax, is widely seen as the trigger. In 2013, the new CPF was introduced on top of the EU Emission Trading System (ETS) rate, forcing coal plant closures. In 2016, the CPF increased to £18 per Mt of CO2 , in addition to the EU ETS, at €5 per Mt of CO2 , forcing up costs, and leading to further closures and falling demand.

In 2014, Russia, the US and Colombia, the UK’s main coal suppliers, were shipping 17.9 Mt, 11.2 Mt and 9.7 Mt, respectively, to UK coal terminals, with the longer tonnage-mile routes a boon for the struggling dry bulk shipping sector. By 2015, the volume had halved, with the big three exporters down to 9.2 Mt, 5.3 Mt and 7.1 Mt each. Third-quarter coal imports in 2016 fell 56% from a year earlier to 1.7 Mt, and continue to plummet. US steam coal exports were at just 4,000t in the third quarter of 2016, compared with 700,000t a year earlier, and it did not export any steam coal to the UK in the first quarter of 2016.

Nigel Yaxley, managing director of the Association of UK Coal Importers and Producers, views the “catastrophic collapse” as a direct consequence of the CPF, coal-fired power station closures and low running levels at those that remain. The Baltic and International Maritime Council (Bimco), the shipping association, says bulk shipping members have been “hugely affected” by plummeting UK coal imports. Broadly, Peter Sands, chief analyst at Bimco, believes the UK will struggle to meet peak demand, and will need to import European electricity.

Bimco has also raised the alarm that, if CPF is adopted elsewhere, non-UK coalfired power plants could be forced to close, posing more disruption for bulk shipping. Likewise, Ian Adams, CEO of the Association of Bulk Terminal Operators (ABTO), the recently formed body for the international sector, is concerned that other nations could introduce price floors. France dropped a plan for a CPF of €30/t of CO2, amid lobbying from its coal power sector, but Germany and other European countries could follow the UK lead. “The government does need to consider how this is implemented fairly, effectively and efficiently so that bulk terminals can remain viable in a decarbonised future,” adds Adams.

Knock-on effects

The collapse in coal demand has had knock-on effects for UK rail and port infrastructure, as well as its remaining opencast mines, says Yaxley. Bulk-related jobs are being lost in railways and ports, as are skills from the supply chain and investment. In October, Hans-Georg Werner, CEO of DB Cargo (UK) Ltd, talked of “tough decisions” following a £123M pre-tax loss in 2015. The German rail freight operator plans to axe 900 jobs, downsize its train fleet and close depots in the UK in response to the “rapid and unprecedented changes” in the coal and steel transport market.

As power stations switched to biomass, wood pellet imports had been expected to offset dwindling coal. Drax has converted three of its six units at Selby in Yorkshire, and initiated the development of biomass handling infrastructure across the north of England. But Westminster diffidence has hamstrung investment. “The drop-off in coal imports has not been replaced with biomass on the scale required to support the UK’s bulk terminal operators,” says Adams of ABTO. “The promised uptake of biomass as an energy source has failed to happen on the scale that was first anticipated.”

However, the UK is the world’s largest wood pellet importer, taking delivery of 6.5 Mt in 2015, up from 0.5 Mt in 2012. More than half of this trade is shipped from the US South. (The world’s number two, Denmark, handles 2 Mtpa). In August, US pellet manufacturer Enviva struck a 15-year deal to supply 375,000 Mtpa of biomass to MGT Power’s Teesside Renewable Energy plant from 2019. Enviva is also supplying 0.8 Mtpa of biomass to Lynemouth Power Station, which Czech group EnergetLFNì D 3UśP\VORYì +ROGLQJ (EPH) bought last January from RWE Npower. The 390 MW plant near Newcastle will burn 1.4 Mtpa of biomass, with conversion work due for completion later this year.

EPH’s investment has already delivered for GB Railfreight (GBRf) and the Port of Tyne. In December, GBRf won the tender to supply Lynemouth with 27 trains and 37,000t of biomass per week from Tyne’s docks. John Smith, managing director of GBRf, says the deal comes at a “critical time” for rail freight. Wagon manufacturer Astra and leaser Nacco will supply GBRf with 50 highcapacity hoppers. GBRf already moves 1.5 Mtpa of biomass from Tyne to Drax, and, until decommissioning in 2015, handled a similar volume to Ironbridge from Liverpool. GBRf ran coal services to Lynemouth until April 2015.

Drax’s ambition to convert more of its units to biomass has been fraught. In December, Brussels finally approved a UK subsidy, known as a Contract for Difference (CfD), to convert its third unit to fully fire on biomass, after an almost year-long state-aid probe – the £100 per MWh subsidy runs until 2027. In 2014, Drax successfully challenged the government’s decision not to support the second unit’s conversion under the CfD price scheme, which replaced existing direct payments. The UK government chose to remove subsidies for further conversions from 2015, frustrating Drax’s intentions to switch all units to biomass.

Grains of hope

Amid the uncertainty over biomass, UK ports are looking to other bulk trades. Peel Ports has invested in the Port of Sheerness for Glencore, including loading facilities and a warehouse to hold 12,000t of grain. In October, the Medway port loaded its largest bulker so far with 30,000t of wheat for North Africa.

PD Ports has a three-year deal with Glencore for Teesport to become the northern distribution hub for animal feed. In November, Teesport handled a 54,000t soya feed shipment from Argentina. Jerry Hopkinson, PD Ports’ managing director of bulk, says the deal supports a strategy to handle a more diverse range of commodities.

Associated British Ports (ABP) is investing in its agribulk capacity and port infrastructure, allowing for a number of its port terminals to handle larger bulkers. Ipswich’s Orwell Bulk Terminal opened in 2015, with a £2.2M bulk store due for completion this April. ABP invested £5.4M in Ipswich last year, including £1.6M for cargo handling equipment, as it looks to build its status as a leading export facility for UK agriculture. In December, the terminal handled 10,500t of rice from Texas on board the tweendecker DIJKSGRACHT, which is the largest vessel ever to call at Ipswich, and the AMAZONEBORG carrying 11,000t of bulk fertiliser from Egypt for trader Nidera.

ABTO’s Adams says port operators’ investment in agribulk is a positive development, as are new technologies that allow for more terminal efficiency and profitability. But agricultural throughput in UK ports this century has remained at around 13-15 Mtpa, including 9-11 Mtpa of imports. In 2015, UK ports handled 13.2 Mtpa of agricultural products, with 4.4 Mt of exports helped by a weak pound which offset a weaker 2016 harvest).

“Of course, any increase on grain imports or exports will be beneficial to UK terminal operators, many of whom have struggled in recent years,” says Adams. “Whether we will see a repeat of last year, which resulted in increased exports, will remain to be seen.”

Steely plans

The closure of UK steel mills has added to the uncertainty, although the sector may have turned a corner in 2016. Investor Greybull bought the Tata group’s Scunthorpe plant last year. Although the renamed British Steel Ltd has slashed production, the group has recently worked with rail group Freightliner on upgrading its Immingham Bulk Terminal and Ore Blending Plant to improve raw material flows to its Scunthorpe plant. British Steel ended 2016 in profit too, having secured orders for the construction of Hinkley Point nuclear power station and rail projects in Italy and Algeria.

Indian conglomerate Tata gave the Port Talbot steel plant a lifeline at the end of last year with a £1B, 10-year investment plan for its UK business, following earlier attempts to sell the loss-making British operations. The new lease of life for the group’s South Wales complex, which makes half of Britain’s steel, holds out hope for bulk ports in South Wales and elsewhere in the UK. Tata also sold other parts of its business in Britain to Liberty, the UK industrial group, which has taken on two Scottish steel mills and is looking to buy Tata’s Yorkshire based specialty steel business.

Steel demand is strong from UK construction, including the HS2 and Crossrail railway projects. High-value steel and recycling products offer potential for port terminals. Recycler Ward Bros last summer hired DB Cargo to rail scrap from Sunderland to the Celsa steel works in Cardiff for processing, including products for the construction sector. The weekly trains are the first out of Sunderland’s docks since 1998. However, Adams sounds a note of caution that a stream of big infrastructure projects is needed to generate iron ore import volumes that could prevent UK bulk terminals closing or looking for other trades. With the demise of coal, those alternatives are pressing.

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