Generator looks to coal

The chief executive of National Power, the company most closely associated with the "dash for gas", believes coal should make a comeback early in the next century. But, according to Keith Henry, unless the economics change drastically new coal-fired power stations will be built only if the government tilts the market to subsidise coal-generated power.

Mr Henry was speaking as National Power, Britain's biggest generator, was struggling with its greatest challenge since privatisation. On Wednesday, Ian Lang, Trade and Industry Secretary, blocked its attempt to buy the regional electricity company Southern. The premature revival of this bid on Monday was widely regarded as a "poison pill" move to fight off a threat from an American utility, also called Southern.

PowerGen, whose bid for Midlands Electricity was also blocked, is considering a legal challenge to the Government.

Mr Henry said National Power's existing coal stations will start coming to the end of their economic lives early next century. "In about 10 years a lot of the big coal stations will have gone, and people will realise gas won't be there for ever," he said.

"The pressures will be there to build a new coal station, but they will not be acted on unless the government intervenes."

With current technology a new 1,000-megawatt coal station with the latest anti-pollution equipment would cost about pounds 1.2bn to build. By contrast Didcot B, National Power's latest 1,320MW gas-fired station, cost less than pounds 400m.

Even though there is research into new "clean coal" technology - National Power is a partner in the Elcogas project in Spain - and gas prices may rise, it is unlikely that a coal station will be commercially viable. "The Government has to be involved in a balanced way," Mr Henry said. "We ought to get extra for coal-generated power."

A distortion of the power market in favour of a particular fuel has many precedents. The non fossil-fuel levy has in effect subsidised nuclear and renewable energy at the expense of coal, oil and gas-fired power.

Analysts remain sceptical about whether the judicial review called for by PowerGen - at which a court would decide if Mr Lang's decision was legally acceptable - will take place. A source close to the company said "they don't happen too often, but we must look at everything, for our shareholders".

Meanwhile, shares in the sector remain in turmoil, as uncertainties about the position of the Government, and the regulatory framework for the market, remain unresolved.

Mr Lang's decision to overturn the Monopoly and Mergers Commission recommendation to wave the mergers through has yet to be explained.

It has meant a hectic ride for electricity shares. After a general collapse after the decision was announced, many shares subsequently rocketed back up, on the belief that foreign bidders would emerge. Midlands Electricity had already received one informal approach before PowerGen stepped into the frame. This week, it was keeping quiet about any possible future developments. "If there is a bid or a merger to announce, we will announce it at the time. Everything else is speculation," a spokeswoman said.

The spotlight has also swung to Hanson, whose plans to buy generating plant from PowerGen now appear under threat. PowerGen has said it will withdraw from the pounds 450m deal because it will be unable to balance the loss of income from the plants without the proposed gain from Midland.

If the two bids had been allowed, although the MMC said they were against the public interest, the first full-scale vertical integration of the industry since privatisation would have begun.

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