Coal Phase-Out in Germany: Legal Discussion about Compensation

Germany is in the midst of fundamentally restructuring its energy sector. The country wants to close the last nuclear power plant by 2022 and simultaneously phase-out coal by 2038 at latest. Both processes are laborious, but while discussions and expropriation claims surrounding the nuclear phase-out have been largely settled, similar discussions about financial compensation for owners and operators of coal fired power plants in Germany gather pace. Now the government is pushing ahead with settling compensation - but not via a law but via a public law contract. This blog entry provides background information on the decision and critically reflects upon it.

The cornerstones of the German coal phase-out have been discussed earlier on this blog. Electricity production from coal shall end in 2038 at latest in Germany. However, some power plants could theoretically run longer than that and the owners of such plants would make a loss, as they based their investments on the assumption that the issued permits would remain valid for the entire technical life-span of the plants. 

Background: International Energy Law & Compensation for Coal Phase-Out

Under international law such compensation claims could be based upon article 1 First Protocol of the Convention for the Protection of Human Rights and Fundamental Freedoms (hereinaft er: Article 1 First Protocol) in which the protection of property is regulated, and article 13(1) Energy Charter Treaty (hereinafter: ECT), which aims to improve (international) collaboration between authorities and companies regarding energy by protecting investments in the energy sector.

Particularly article 13(1) ECT could be relevant for investors from non-EU countries investing in German power plants and for investors from certain EU countries. The possibility to bring a claim on this basis depends on the country of origin of the investor. For non-EU investors in German coal-fired power plants coming from countries that are parties to the ECT this could theoretically be a possibility. There are also investors from other EU countries (e.g. Swedish Vattenfall in Germany). For these cases 22 Member States signed an agreement to make the ECT inapplicable intra-EU. Nevertheless, investors from Sweden, Hungary and other Member States that did not sign the agreement, might still be able to use this basis in the ECT to get compensation when closing a coal-fired power plants, but this will depend on the circumstances of each individual case. 

Comparison: Dutch Coal Phase Out

It might be worthwhile to take a brief look at how the Netherlands are organizing their coal phase out. By the end of 2019 the country put an end-date to electricity production from coal in the Netherlands via the Law“ Prohibiting the Use of Coal in Electricity Production”. All four remaining coal fired power plants in the country shall be phased out by 2030. This was based on the earlier Climate Accord, which has also been discussed on this blog. However, German company Uniper threatened, in 2020, to take legal action in front of international arbitration fora to challenge the law. The company is seeking €1 billion Euros in compensation under the Energy Charter Treaty (ECT), according to news reports.

Germany: Law or Contract?

Germany would like to avoid similar compensation claims being made with a view to the German coal phase-out. That is why the government decided to embark on a slightly different legal route. Compensation shall not be settled by a law, but amicably with the companies via a public-law contract. In total more than 4 billion Euros shall be paid out in compensation to companies RWE and Leag via this public law contract between the companies and the German government. The idea behind this course of action is obvious: if big companies now sign-up to an amicable settlement, they could not complain further down the line that compensation was inappropriate or unfair.

This, however, has two main setbacks. First, it is not entirely clear that the companies actually would not be entitled to compensation - in case the date of the phase-out is changed. The German coal-phase out is relatively flexible concerning its end-date. 2038 is the ultimate point in time when the phase-out shall be accomplished, but the government will make efforts to achieve an earlier date. The public-law contract now provides that no compensation needs to be paid out to individual power plants even if their end date would be rolled back in the future. This, however, is subject to the caveat that the date is a maximum of three years earlier than the date in the contract and that the new end-date is published at least five years before. Only under these conditions does the government have flexibility concerning the end-date.

Second, the contract has been agreed between German companies and the German government. But what about foreign investors in German coal fired power plants? According to some legal experts they could theoretically still claim compensation under ECT provisions, albeit at a confined scale. The discussion about compensation for the German coal phase-out seems to be far from over. For additional background information see: Lolke Braaksma and Ruven Fleming `Chapter XIII Phasing Out Coal-Fired Power Plants in the European Union: Examples from the Netherlands and Germany´ 261-287 in Martha M Roggenkamp and Catherine Banet `European Energy Law Report XIII´ (Intersentia Publishing, 2020).