Coal contracts

[Wheldale]

With the recent announcement that Kellingley and Thoresby will be closing, a lot of people are saying its because of cheap imports. Can anyone explain how the coal contracts work between supplier and generator? My understanding is that the Generator says I want x million tonnes at a cost of £X a gigajoule spread over a number of years?

Now are UK coal coming to the end of a contract, is a new contract being negotiated were the price the generator is wanting is too low?

OR

Is the contract between UK Coal and the Generators tied to the price of coal whereby the price of coal goes up or down in relation to market prices?

[Minutor]

It has been a while since I looked at this but my recollections are that contracts with UK coal suppliers were based on the "API 2" benchmark price, I know Drax have varying length of contracts, some are fixed and some are variable prices but unlikely to be more than 12 months. UK coal producers tend to be "price takers" as there is no viable way of exporting their coal so power companies tend to buy at a price discounted from API 2. Power companies will also only source part of their coal from the UK (one of the problems being sulphur levels of UK coal). Power companies have a complex array of contracts, derivatives and hedges to mitigate pricing risk for them and any coal company should have the sense to do something similar. However whilst this may help in the short term it doesn't solve the problem of falling coal prices, coal supply is in surplus, the USA are exporting more than they have done for many years as shale gas has an impact, also production from Indonesia and Australia has increased and Asian demand hasn't grown fast enough to absorb the excess.

It isn't a happy space at present and high cost production like the UK won't be able to compete.