Vattenfall vs. Germany Power Plant Battle Goes to International Arbitration

By Sebastian Knauer

Part 2: 'Back to the Stone Age'

In 2007, Michael Freytag left his position as minister of the environment to head Hamburg's Finance Ministry, and his successor, Axel Gedaschko, took over as the city's representative in talks with Vattenfall. According to the company, at this time, the CDU-controlled Senate led it to believe that it was "highly probable" that the company would meet the requirements for obtaining the government permits it would need to build a new power plant in Hamburg's Moorburg neighborhood. In fact, four weeks later, Vattenfall's executive board met in Stockholm and approved €2.2 billion in investments in Hamburg.

But then the campaigns began in Hamburg for the 2008 state elections, and Moorburg became a hotly contested issue. And, then, in early 2007, Chancellor Angela Merkel appointed Hamburg Mayor Ole von Beust, a member of her CDU party, to be the federal climate change commissioner.

Meanwhile the Greens teamed up with environmental-protection groups to launch joint anti-Moorburg protests across the country with the motto "Coal Kills the Climate." Christian Maass, an environmental law scholar and then candidate for the city-state's parliament for Hamburg's regional Green Party -- known as the Green Alternative List (GAL) -- also declared that "there would be sufficient legal means for stopping the power plant's construction after the election."

Following the election, the CDU and the Greens together forged the first ever state-level CDU-Green coalition in Germany. It was a novelty that would have far-reaching consequences for Vattenfall. Maass became a senior official in Hamburg's Office for Urban Development and the Environment. One of his first decisions was to conduct a thorough review of all the environmental legal restrictions on the Moorburg power plant.

Mixing Business and Politics

By 2007, Vattenfall was already being asked to make improvements. In order to not exceed the temperature that could be ecologically harmful to the Elbe, the company was instructed that it needed to release "less hot water" into the river. Likewise, the company was also told that it would have to use the most up-to-date technology available for separating, capturing and safely storing the carbon dioxide emitted from the coal the power plant would burn. However, carbon capture and storage (CCS) technology is still in the pioneer phase and is seen by energy corporations as an additional cost burden that reduces the efficiency of power plants.

Finally, in July 2008, a meeting was held in the Chancellery in Berlin in order to negotiate Vattenfall's obligations. But no solution was reached -- despite the fact that Vattenfall CEO Josefsson had a side job as a climate-protection adviser to Chancellor Angela Merkel.

According to Vattenfall's calculations, the climate-protection requirements that were being imposed on the power plant would entail "significant additional costs" for the company. In order to secure the permits it needed under water-protection laws, Vattenfall also brought a lawsuit against the city-state's Office for Urban Development and the Environment before a Hamburg administrative court. In September 2008, the office honored the court's instruction to issue the necessary permits to the company -- though not without adding some additional requirements.

In its current arguments before the ICSID in Washington, Vattenfall is claiming that the reduced amount of cooling water it will be allowed to draw from the river will force it to shut down operations "in the summer for days or weeks." The restrictions, it argues, will also cut the "normal output" of the power plant by "45 percent." Furthermore, it claims, its obligation to test for two years the effectiveness of a so-called fish ladder at the low-head dam located in the city of Geesthacht, which lies 34 kilometers (21 miles) upriver from Hamburg, would delay the power plant from going into operation by another year.

Cashflow Worries

Vattenfall is also arguing before the mediation body that the water-protection measures the city is requiring would make the power plant "uneconomical." Likewise, it argues, the environmental requirements would entail a "significant loss in the value" of the facility and that reducing the amount of energy the company can sell will reduce its cashflow.

Despite the fact that the company made the surprise announcement in early June that it will build a €200 million hybrid cooling tower, it is still pursuing its complaint. As of 2013, the tower will allow the plant in Moorburg to operate using only one-tenth of the cooling water from the river. But Vattenfall doesn't plan on applying to Hamburg officials for a permit to build the tower until the fall of 2009. The company is apparently sitting on its hands in the hope of obtaining a favorable arbitration decision from the ICSID.

Experts anticipate that the arbitration process in Washington might not be settled until the end of the year. And if the verdict goes against Germany, it would be a first. "For environmental policies, it would be a relapse to the Stone Age," says Volker Dumann, spokesman for Hamburg's Office for Urban Development and the Environment.

Preparing for the Worst

For Greenpeace expert Karsten Smid, the fact that EU environmental protection legislation is being pushed to the sidelines by an international arbitration body is "completely absurd." Greenpeace had its experts look into whether Vattenfall violated OECD environmental guidelines for multinational companies, and it is now filing a complaint with the Federal Economics Ministry.

Vattenfall spokeswoman Sabine Neumann declined to comment on the charges for this article, citing the company's policy of not commenting on pending legal matters.

Still, Germany's federal government has already taken some concrete steps. In case the arbitration body should rule against it, the government has already figured out who will pay what part of the damages. According to a paper circulated within the Federal Environment Ministry, "in the event of an unfavorable decision, there will exist the right to compensation vis-a-vis Hamburg." In other words, it's more than likely that the federal government will punt any costs for damages to Hamburg.

The fact that Vattenfall is still taking the matter very seriously can be seen by the resources it's putting into the arbitration case. To represent it at the proceedings in Washington, it has retained the services of the Hamburg office of the high-powered law firm Luther. And it's paid the $25,000 (€17,700) plaintiff's deposit, which is required for arbitration to proceed, into a New York bank account.


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