Britain in Crisis: Who killed King Coal?

STAFF at Hobart House, British Coal's headquarters behind Buckingham Palace, have had a new name for the building for a while now. They call it Chateau Despair. Even by the standards of that sorry place, last Tuesday's news was very bad indeed.

Not that British Coal's intention to close 31 of its 50 pits came as a surprise. There had been enough leaks to sink a battleship. First, a year ago, the Rothschild's report said that only 12 pits could survive privatisation. It was greeted with stunned disbelief. These, it was thought, must be the rantings of neanderthal City thugs.

This year the persistent trickle of information has prepared us for ever greater gloom, but if the leaks were meant to soften us for the final shock, they did not succeed. When last Tuesday came, nothing could disguise the biggest redundancy announcement ever made in Britain. By March there will be 18 deep mines in England, one in Wales and one in Scotland. In 1984, there were 170. The number of miners will have dropped from 170,000 to 25,000.

And if it is a disaster for the mining industry and the villages and towns that depend upon it, it has become no less a one for the Government. Against a background of deepening recession and turmoil over economic policy, the closures have proved a lightning rod for resentment and outrage, not least on the Tory back benches. John Major, Michael Heseltine and the rest of the Cabinet have been left reeling.

How has this come about?

IT IS a cruel fact that the story of the final collapse of the British coal industry is not about coal at all, but about electricity.

To be sure, coal has been on a downward path for years. A key date was 1911, when Winston Churchill decided to convert the Royal Navy from coal to oil. For the next 50 years, coal was in retreat until by the Sixties - when British Railways phased out steam locomotives - the National Coal Board relied to a large extent on a single customer, the Central Electricity Generating Board. Mines could send their coal to nearby power stations relatively easily; and as the NCB and CEGB were owned by the state and had no interest in making life difficult for each other it was a convenient marriage. The CEGB made some attempts to reduce its dependence on coal - AGR nuclear power stations, oil-fired stations, then PWR nuclear stations - but none was very successful, and coal kept its hegemony.

The oil crisis in the early Seventies allowed coal an Indian summer. Cheap oil and gas suddenly disappeared, and every government looked for alternatives. In Britain, hundreds of millions of pounds were poured into coal.

By the beginning of the Eighties, however, things were going awry. The first warning came when British Steel began to import coal through its iron ore terminals. This stripped the NCB of one of its few remaining non-power customers, and left it with an embarrassing problem of over- production. Pit closures and the fear of more brought the strike and the miners' defeat. Then came the painful years of productivity improvements, desperately low morale, vast reductions in the workforce and the introduction of an aggressive and entirely new management style. And all the time, closures.

But the industry's death warrant took an unexpected form, which mocked all the productivity gains. In the 1987 Conservative election manifesto, the Thatcher government said it would privatise the CEGB, which had been little more than a machine for converting coal into electricity. Privatisation would change the ground rules.

First, the CEGB was to be broken up. After the experience of selling off British Gas and British Telecom, when the Government was accused of converting public sector monopolies into private sector ones, the Secretary of State for Energy, Cecil Parkinson, was determined that his privatisation would be different. The CEGB was to be split into two companies, PowerGen and the much bigger National Power (Scotland was to have two companies that acted as both generators and suppliers). It was an odd arrangement: the explanation was the need to accommodate nuclear power. Only a company as big as National Power, it was argued, could possibly absorb the hugely complex nuclear industry.

In 1989 a fuse blew. The Magnox reactors at Britain's oldest nuclear power stations were approaching the end of their careers, and it emerged that the cost of winding them down and making them safe was astronomical. National Power would not touch them, so they were hastily withdrawn from privatisation. The question was then asked: if National Power took on any nuclear stations, would it have to foot the huge bill for decommissioning them? John Wakeham was installed as Secretary of State for Energy with a brief to clear up the mess. The scale of the costs of the nuclear programme astounded him and he soon withdrew the whole industry from privatisation, preserving it as a state company, Nuclear Electric.

This decision had a direct bearing on coal. The rationale for having only two generating companies, one bigger than the other, had been removed, yet it was too late to turn back. Instead of creating a real market in electricity generating, the Government had produced a wonky duopoly. Ultimately this would encourage the fatal 'rush for gas', as the power distribution companies - which buy the electricity from the generators and deliver it to the kettle and the television - sought to protect themselves from the Big Two.

Coal would be affected in other ways, too. Margaret Thatcher was not only an enemy of coal; she was a nuclear enthusiast. When the huge unseen costs of nuclear power were discovered, her government's unusual reaction was to devise a special levy to subsidise it. The cost was passed on to the electricity consumer.

This subsidy had to be negotiated with the European Commission, and the result was a trade- off. Germany's coal industry was subsidised, so non-governmental support to the British nuclear industry could be permitted as well. The principle was established that each member state could be allowed to support one power-generating industry; in Britain it was nuclear; in Germany, coal. Perversely, Britain now imports German coal.

Most important of all, privatisation transformed the electricity industry. Not only were the generators being pushed into the private sector, so were the distributors - the regional electricity boards. Hitherto, this business had not been one to attract bright young things or thrusting entrepreneurs; now, with monopolies or near-monopolies all over the place, serious money could be made. Managers understood well that their job was to increase profits, and they could not do that by trundling along in the old ways of the CEGB. The generators in particular pointed out that they were bound to buy the cheapest possible fuel, and it was no secret that imported coal was cheaper.

Wakeham, however, did not completely abandon coal. Contracts had to be negotiated for its purchase, and observers recall Wakeham laying down the law. The problem was not solved but postponed. The contracts were agreed for three years, enough to cover the crucial period leading up to the next general election. There would be no coal calamity on the eve of polling. Almost as soon as the deal was struck, the generators began manoeuvring to make sure that the next contract would be much more favourable to them.

In the meantime coal had acquired another enemy: environmental regulation. EC rules insisted on the gradual reduction of sulphur dioxide emissions to set levels, and the effect was to increase the cost of burning coal. Emissions could be curbed by fitting special equipment, as had already been done at three power stations, at a cost of about pounds 350m each. The generators, now privatised, made clear that they would do everything they could to avoid fitting more. By this they meant burning less coal.

THE 'dash for gas' began almost by accident. A company called Lakeland Power, prompted by a government declaration that it wanted to encourage independent power generation, decided to buy and re-equip one of the smaller power stations that the CEGB was closing. It chose Roosecote in Cumbria, and announced its plans in January 1990. It also saw that British Gas had a surplus in its nearby Morecambe Bay gas field.

British Gas was happy to offer a 15-year contract at 16.6p per unit, a price that, Lakeland realised, would enable it to undercut coal-burning stations. Roosecote has been operating for a year and the Lakeland managers can look forward to a very well-heeled future.

British Gas saw this as a one- off way to offload a little excess production and thought no more of it. The gas industry regulator, James McKinnon, took a different view. He ruled that if British Gas was going to sell in this way, it must publish a tariff for all to see. The company duly obliged.

In no time at all, and to its considerable surprise, British Gas had companies pounding at its door demanding to sign up. Most were offshoots of regional electricity companies, but before long PowerGen and National Power jumped on the bandwagon. They wanted to build highly efficient, environmentally clean and relatively cheap stations known as combined cycle gas turbine stations. Some regional companies took the view that it would be worth buying independence from the two big generators, even - as became distinctly possible when British Gas put the price up - if the electricity cost more.

Government approval was willingly given. Every application to build a gas-powered station was approved, and there were many. So many, indeed, that if they were all built, their combined capacity would be equivalent to more than half the country's present total capacity of 50GW - far beyond our needs. It will not come to that, but most commentators say that about 10GW will probably be built.

This was quite enough to set alarm bells ringing. Very roughly, 10GW of gas generation would displace 30 million tons of coal. National Power and PowerGen are currently buying 65 million tons from British Coal. This was the last straw. The generators were already burning more foreign coal (up from 2 million tons a year to 7 million); they were already buying more electricity from Nuclear Electric (its market share rose from 16 to 22 per cent in three years); they had increased their purchases of French electricity by the equivalent of 2 million tons of coal. All the elements of the coal disaster were in place.

IN THIS doom-laden atmosphere, Rothschild, the merchant bank, was asked by the Government to look at ways of privatising British Coal, an objective that had been announced in 1988. The study came to the conclusion that British Coal would have to shrink from 60 to 12 pits before it could be sold. Its report was ridiculed by experts. UK Coal Review said that 'if it was presented as a final year project by an undergraduate, we would give it gamma minus'. But the generators drew a different conclusion. If the Government's pet bank thought such cuts were needed, then the Government itself was on weaker ground defending British Coal in contract talks. What was more, British Coal's stocks were growing at a million tons a months; its bargaining position could hardly have been weaker. The generators resolved to turn the thumbscrews.

The negotiations began last autumn and are still not complete. Remarkably, the worst was almost avoided: a new, five-year contract entailing a much more gradual slowdown of the industry was nearly agreed. 'If the election had been in May, a new contract would have been signed,' said one of those involved. This could have produced a solution that was more politically palatable.

The post-election reshuffle, however, completed the work begun by the Rothschild report. The Department of Energy was merged into the Department of Trade and Industry, placing the negotiations in the hands of a junior minister. The generators took it as a sign, if not a deliberate signal, and they insisted on starting the whole contract negotiation process again. The job was left to Tim Eggar, a minister of state, and by all accounts he was vigorous in trying to persuade the industry to set a higher target for coal use, but his urgings fell on deaf ears. Michael Heseltine, President of the Board of Trade, came in at a later stage but was no more successful. The parameters of the new deal were soon clear: the generators would buy first 40 million then 30 million tons a year. There would have to be about 30 pit closures, accompanied by compulsory redundancies on an unprecedented scale.

British Coal's chairman, Neil Clarke, met Heseltine and Eggar at the DTI on 3 June in a last-ditch attempt to press the case for coal, but made no progress. Although the Government was beginning to see the impact of the dash for gas, it would not mitigate its effect on the coal industry. Further, it would not cease to approve new gas power stations: in August, two new licences were granted.

In July, Eggar wrote to selected ministerial colleagues to tell them about the pit closures. The Government, he said, would need to produce some employment initiatives to help the affected regions, and he wanted ideas. 'The exact timing of announcements is uncertain: it could happen during August but certainly seems likely to be before end September.'

The contract negotiations with the generators were dragging on, but their outcome for the pits was now beyond doubt. All that remained was to win approval for the closure package at the highest level. This was to take longer than Eggar had expected.

John Major chaired at least two Downing Street meetings on the subject. We can assume that no government would knowingly have plunged itself into a crisis of the kind we now see, so something obviously went wrong. What was it?

As he hinted in Birmingham, Major hesitated over the decision at the first time of asking and made clear he wanted the arguments rehearsed thoroughly once again. At the next meeting, Heseltine made a new presentation and satisfied his colleagues that there was no alternative.

There was one last meeting, in Brighton 10 days ago, on the morning before the Prime Minister's speech to the Conservative Party conference. Here the final touches were put to the announcement, including the detailed redundancy terms.

A small ad hoc committee was involved, which included three pivotal ministers outside the Treasury: Heseltine, who had scored a signal success with a conference speech promising intervention in industry; Kenneth Clarke, not only a Nottinghamshire MP but also a miner's son; and Wakeham. All three signed up for the plan. All three, it is true, were also on the public spending committee now in almost continuous session; Heseltine and Clarke had also been members of the inner group that had jointly taken the decision to pull Britain out of the exchange rate mechanism. Both, along with Major himself, had every reason to be exhausted. Nobody, however, has ever accused either Heseltine or Clarke of lacking mental or physical stamina.

There may be a more important reason why, in the words of one Tory backbencher, they took their 'eye off the ball'. There was a ferocious battle over redundancy terms for the miners. The Treasury characteristically demanded that the miners should get no more than the statutory minimum entitlement. Clarke and Heseltine, and by most accounts, Wakeham, set about a ferocious Whitehall battle with the Treasury. That they secured a scheme worth nearly pounds 1bn was a signal victory, particularly in the present climate. But once it had been won, they failed to return to first principles and question whether the whole enterprise was politically sustainable at all, given the depth of the recession.

And why the hurry? A sub-plot as last week's events unfolded concerned the question of how it was that the plan was not put to the full Cabinet. There was certainly irritation over this among some of Heseltine's colleagues, who were taken aback by the speed and scale of the closures. It is true that on Tuesday morning Heseltine told the overseas committee of the Cabinet - very nearly a full meeting of the Cabinet - of his imminent announcement, though he did so as a fait accompli.

British Coal certainly wanted to proceed quickly. There was a case for pre-empting the call to arms that Arthur Scargill was expected to make - the announcement of the redundancy terms, coupled with the threat to withhold them from miners who walked out, was obviously worth announcing as quickly as possible. But coal industry sources deny that British Coal dictated the timing of the announcement. That choice, they insist, was Downing Street's.

Whatever the truth, the Thursday Cabinet discussion, two days after the announcement, was a tense one. Gillian Shephard, the Secretary of State for Employment, who had not been in the inner group that had taken the decision, was particularly fierce. Shephard is by all accounts frustrated by the Treasury's apparent unconcern about unemployment and her intervention appears to have been instrumental in securing Major's promise that further training help for redundant miners would be announced by Heseltine in Parliament tomorrow.

Shephard's success behind closed doors went unnoticed, for by that evening the overt backbench revolt was up and running. A backbench revolt that reflected anger at a decision that has tarnished Heseltine's reputation as the friend of productive industry; that almost certainly panicked the Government into a 1 per cent cut in interest rates that may herald an unmistakeable shift in economic policy; and that now threatens Major with a humiliating parliamentary defeat.

(Photograph omitted)