Salmond's proposals to restore king coal may not be as simple as he thinks

COAL is king! With this rhetorical flourish, Alex Salmond put coal back on the agenda in the energy debate. He went on to say: "I have called an old energy technology into existence to redress the balance of nuclear." Is he right?

Coal has largely faded from the public imagination in Britain, following the defeat of the miners' strike in 1985. But in the rest of the world, coal has never been in greater demand. Coal is now the world's fastest-growing energy source and will remain so through to 2030, regardless of what you may have heard about renewables.

The essence of the revival of coal is that it is (relative to other fuels) dirt cheap; there is no shortage of supply; you can get it from places that don't hate the West; and the infrastructure to mine and deliver it in bulk is already in place. Major US coal producers such as Peabody have recently been posting 30 per cent hikes in share prices on a tide of market optimism about coal's future.

Now for a reality check: cheap coal comes from giant opencast mines in places such as South Africa and Australia. It is very difficult for deep-mined coal to compete on a cost basis, because sinking and operating a deep mine is far more expensive than using a bulldozer on the surface. Restarting deep mining in Scotland will therefore depend on how the financial numbers stack up.

World coal prices are hovering above $50 a metric tonne at the moment. To that you have to add the cost of shipping. Burgeoning demand for access to cargo boats means you have to add on $25-$30 per tonne to get imported coal to the UK, depending on how far it is travelling.

UK coal can compete with foreign imports - currently coming from South Africa, Russia, Columbia and Poland - but mainly because it is from cheap opencast sources. However, Britain is a small island and most folk don't want to live near an opencast mine. As a result, getting planning permission to open new opencast mines is very difficult indeed. The current Executive planning guidelines (SPP 16) presume against new opencast permissions except under highly restrictive conditions. That, I suspect, is why Salmond is promoting deep-mined coal rather than the surface approach.

Nevertheless, despite the difficulties, several Scottish companies have been investing in opencast mining. The Scottish Resources Group (SRG), based at Castlebridge Business Park near Alloa, through its Scottish Coal subsidiary, is the second-largest coal producer in the UK, supplying over 4 million tonnes a year to domestic markets. SRG took over the assets of the privatised British Coal back in 1994.

However, with an average turnover of between 100m and 150m, SRG is a small fish in the volatile international energy business. The company posted a loss in 2005-6, partly because it was locked into fixed-term contracts that took no account of rising costs. Earlier this year, its long-time chairman, the lawyer Ross Harper, retired. Yet SRG seems to be responding optimistically to the return of coal, and has welcomed Salmond's statement. The problem may be that SRG is too small, and too under-capitalised, to get into deep-mining.

One Scottish company with an interest in coal which does not suffer from a lack of cash is the Miller Group, which has just broken through the magic 1bn turnover barrier. As well as being Britain's eighth-largest house builder, Miller has recently taken a turn to opencast coal mining in search of bigger margins and sustained growth. Last year, the company finally won planning permission to develop a huge opencast mine in South Wales. It plans to supply the near-by Aberthaw power station, owned by the German energy utility, RWE. Miller's new Welsh mine could generate 500m in sales over a ten-year lifespan.

But can deep-mined coal be profitable in the UK? There are only eight deep mines left in Britain, but none in Scotland. The last Scottish deep mine, Longannet, was closed by SRG in 2002, after 17 million gallons of water suddenly flooded the underground workings.

Deep coal mining in Scotland is fraught with commercial hazards as a result of the peculiar local geology. Scottish coal seams are typically very thin and interspersed with rock. The seams are also fractured. This means you can invest millions of pounds installing robotic cutting machinery only to find a seam disappears suddenly and you have to start over again. Besides, dragging coal along miles of underground conveyor belts - which snap - and getting it up a narrow shaft to the surface is expensive.

There are technologies emerging which would allow you to liquefy coal in situ and pump it up, or even turn it into steam underground. If those could be made commercial, Scottish coal would become a major energy source. The Scottish Executive could think about encouraging more research in this direction.

That said, Britain's first new deep mine to be opened in 30 years is nearly ready to start production in June, thanks to the rise in global coal prices. It is at Cwmgwrach (pronounced Kumrak) in the Neath Valley in South Wales. Annual coal output at Cwmgwrach is scheduled to be one million tonnes. Gerwyn Williams, the chairman of Unity Power which owns Cwmgwrach, is so confident of the viability of coal that he is already planning to open four other mines in South Wales.

Note two catches. First, Cwmgwrach is a drift mine - the shaft is being driven horizontally into a hillside rather sunk vertically. This makes the operation a lot cheaper. New drift mines would be possible in Scotland to access the deeper seams. For instance, you could drive them under the Forth from the old Seafield mine workings in Fife. The second catch is that it is a long time since we did deep mining so there is a shortage of skilled labour. Cwmgwrach may recruit Polish miners.

Nevertheless, with both Miller and Unity investing, the coal industry in Wales is reviving using private capital. Can Salmond achieve the same result here?

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