Vattenfall vs. Germany Power Plant Battle Goes to International Arbitration

In a bizarre legal battle, the Swedish energy giant Vattenfall has brought Germany before an international arbitration body. The case involves environmental restrictions on a coal-fired power plant in Hamburg and reveals a lot about the relationship between politics and industry.

In the early stages, the tone was still friendly enough. In a letter dated Nov. 22, 2007, Lars Göran Josefsson, the CEO of the Swedish energy giant Vattenfall, thanked Hamburg Mayor Ole von Beust for the "constructive talks." But the days of such niceties are now over.

In April, Vattenfall brought an action against the German government before the International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank group based in Washington, DC. The company is charging Germany with violating the Energy Charter Treaty.

The Vattenfall coal-fired power plant is being constructed in the Moorburg neighborhood of Hamburg.

The Vattenfall coal-fired power plant is being constructed in the Moorburg neighborhood of Hamburg.

Foto: Getty Images

The conflict revolves around the issue of the coal-fired power plant being built along the Elbe River in Hamburg's Moorburg neighborhood. The plant's construction is a hotly contested issue in Germany's second-largest city. The company is accusing Germany of illegally standing in the way of its investment plans. Now the international court of arbitration is to rule on the dispute. More than €1 billion ($1.4 billion) is at stake.

In its 27-page complaint, Vattenfall is asking the arbitration body to rule:

  • that by approving the construction of the power plant, the Hamburg Senate acted in a way that was "incompatible" with international treaties;
  • that Germany must pay Vattenfall compensatory damages for investment delays of "€1.4 billion plus interest";
  • and that the German government must assume responsibility for paying all legal and court fees.
  • In bringing the case, Vattenfall hopes that the international arbitration body will overturn the significant environmental restrictions that have been imposed upon its contested power plant.

    The charges have enraged German politicians. "It's really unprecedented how we are being pilloried just for implementing German and EU laws," says Michael Müller, Germany's deputy environment minister and a member of the center-left Social Democratic Party (SPD).

    Vattenfall is also currently facing political heat over a recent accident at its Krümmel nuclear power plant  in northern Germany.

    Germany in the Dock -- Next to Turkmenistan

    Vattenfall's opponent in this legal face-off is formally the German federal government, which will be represented by officials from the Federal Ministry of Economics. To represent its interests, the German government has retained the services of a law firm based in Paris. Citing the "confidential nature of the proceedings," German Economy Minister Karl-Theodor zu Guttenberg has refused to comment on the legal standoff in Washington.

    But things are a little less tight-lipped in Germany's Foreign Ministry, where people haven't been shy about voicing their bewilderment. How can Germany of all places, they ask, stand accused of being an unreliable business partner for investors? And the fact that Germany is suddenly sitting in the dock with countries like Turkmenistan and Zimbabwe doesn't make things any easier to swallow.

    The legal complaint, which has not been made public, is officially known as a "request for arbitration." It is an explosive document. For example, it reveals how an internationally active major corporation evaluates a particular German city government. And it shows just how helplessly and hesitantly city officials can react in their implementation of environmental restrictions.

    A Tortured History

    The story goes like this: In 2004, after having purchased HEW, Hamburg's long-established electricity provider, from the city, Vattenfall began making plans to build a new coal-fired power plant in Hamburg. At first, the company had planned to build a smaller power plant for heat and energy production on the grounds of an aged gas-and-oil power plant in the city's Moorburg neighborhood.

    To the surprise of Vattenfall executives, Hamburg's then-Environment Minister Michael Freytag, a member of the center-right Christian Democratic Union, and Herlind Gundelach, a senior ministry official, suggested that the company build a power plant that was twice as large and that had two generating units putting out approximately 1,600 megawatts of power. As it says in the legal complaint: "Vattenfall accepted Hamburg's suggestion."

    Gundelach, who has since gone on to become Hamburg's minister of science and research, disputes Vattenfall's claims and says that plans for a mega-power plant were "jointly" developed with Vattenfall executives. As she remembers it, politicians in Hamburg involved in environmental policies were trying to further expand the district heating network as well as to quickly shut down the antiquated coal-fired power plant in the town of Wedel, which lies just 17 kilometers (11 miles) west of the city.

    At the time, the fact that even modern coal-fired power plants emit climate-damaging carbon dioxide was not an issue high on the list of priorities for CDU politicians. But two years later, in 2006, the 700-page Stern Review on the Economics of Climate Change was published  and the UN released startling new figures on the environmental effects of global warming. Climate-change skeptics in the CDU and in industry were shocked. All of a sudden, the power plant planned for Moorburg looked like a relic of a bygone age.

    All the same, Vattenfall felt that it had the city's tacit approval for the massive project. In the fall of 2006, the company filed the necessary applications relating both to air pollution, as regulated by the Federal Emissions Control Act, as well as to drawing 64.4 cubic meters per second of cooling water out of the Elbe River in accordance with water-protection laws.

    '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.