The death of King Coal

The UK coal industry once employed 1.2 million people. Now, two of the last three underground mines are about to close. What went wrong? Matthew Partridge investigates.

What's happening?

Two out of the three remaining underground pits in the United Kingdom are scheduled for closure in the next two years, with the planned loss of 1,200 jobs.

UK Coal, which currently runs the mines at Kellingley in Yorkshire and Thoresby in Nottinghamshire, as well as six surface pits, argues that in addition to the closures, it will need an extra £10m from the government to survive.

It blames a fall in energy prices caused by cheap coal imports from the United States, displaced from their own market by the shale gas revolution, and the strong pound. The National Union of Mineworkers, which has called on the government to keep the mines open, admits that such a plan would cost at least £50m.

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However, it points out that UK Coal is getting a £10m loan to help with the costs of closure, since the pits will have to be filled in. Adding this to the estimated lost taxes and national insurance could push the cost of closure to £30m, which would narrow the difference between the two plans.

Should the government intervene?

The Department of Energy & Climate Change has claimed that injecting cash on the scale needed to keep Kellingley and Thoresby open would breach European rules on state aid. But the TUC believe that this is just an excuse and say that the EU has already confirmed to them that such aid would be permitted.

They note that at the moment, most of the 2.3 million tons of coal mined at Kellingley goes to the power station at Drax. They warn that if the closure goes ahead, Drax may be forced to turn to Russian sources of coal, at a time of rising geopolitical tensions.

Finally, they argue that the pit still has enough coal reserves to last until at least 2019. Indeed, just before these plans were announced UK Coal took on several apprentices. But this isn't the first time the pit has been in financial trouble: last year it was bailed out by the Pension Protection Fund.

Why did the British coalindustry decline?

Total coal production in the UK peaked at 270 million tons in 1913, with total employment reaching its zenith by 1920. By 1947, when it was taken into state ownership, production had fallen to 200 million tons as substitute fuels and international competition ate into demand. This decline was sped up by a wave of pit closures in the 1960s.

Inefficient management and poor industrial relations also left it ill prepared to compete with North Sea oil. The first imports of cheap foreign coal began in the 1970s. There was a round of rationalisation in the mid-1980s (prompting the miners' strike) and early 1990s.

Even a return to private ownership from 1994 onwards and the injection of a constant stream of government funds couldn't halt the decline, especially when restrictions on gas plants (which could provide energy more cheaply) were removed. The final blows came from many coal seams running out and the increased costs of complying with regulations.

Is this a good thing?

Environmentalists, such as Justin Guay of the Sierra Club, argue that the end of the coal industry is "a great sign for our health, our climate, and our planet". In his view, "burning coal emits toxic pollution into the air that leads to health problems like asthma and cancer. It also releases toxic mercury that rains down onto rivers and streams and contaminates the fish that we eat".

Harvard Medical School estimates the cost of coal-related pollution in the US could be as high as $345bn. At its peak, coal mining was also incredibly dangerous. According to the Coalmining History Resource Centre there were nearly 85,000 combined deaths and injuries in British mines in the first half of the 20th century, and over 164,000 since 1700. However, modern safety procedures dramatically cut the accident rate.

How is the industry doing globally?

According to the US Energy Information Administration, coal consumption in Britain has declined by nearly 55% from 133 million tons in 1980 to 60.9 million in 2011. Global consumption has nearly doubled to 812.4 million tons in the same period, with around 80% of this attributed to a near-sixfold increase in Chinese demand to 398 million tons.

This has contributed to severe environmental problems: all but three cities in China breach international air quality standards. A World Health Organisation study in 2010 estimates that poor air quality contributed to the early deaths of 1.2 million Chinese citizens.

The Chinese government has promised to invest in other, less polluting, energy sources, such as nuclear power. Due also to sluggish demand elsewhere, coal prices fell and are now at $75 a tonne, compared to $130 three years ago.

A possible future for coal?

Conventional coal mining in Britain may no longer be economic, but underground coal gassification could be a game-changer. It involves drilling into deep-buried coal seams. Gas and oxygen is then pumped into them, setting them alight. This produces gas, which exits from another hole.

One of the benefits of this approach is that harmful vapours can be captured and stored underground, while toxic waste, such as mercury, doesn't reach the surface.

Tycoon Algy Cluff and geologist Eric Craig argue that this process could be used to access the coal in the North Sea, which they estimate to be the equivalent of four billion barrels of oil. The government has already granted 14 firms licences to start offshore drilling. Cluff's consortium Cluff Natural Resources got five licences.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri