Three beige towers of a power plant

Major court win shows power of corporate law to fight climate change

ClientEarth has scored a major win in Poland, which puts the future of planned coal-fired power plant Ostrołęka C in question.

The plant was set to be Poland’s last, a €1.2bn, 1GW coal project. Polish energy and financial market experts have been expressing deep concern over the plant for a long time. We took a novel shareholder lawsuit against the project’s co-owner Enea, on the basis that the investment posed major financial risks to the company and its shareholders.

Coal in Poland is a financial risk

“Companies and their directors are legally responsible for managing climate-related risks and face potential liability if they fail to do so.”

The project still lacks over PLN 3bn in financing, but Enea and its joint venture partner Energa have been doggedly pushing ahead regardless. The companies had even set a date to lay the foundation stone for the plant.

But the District Court in Poznań has held that the company resolution authorising construction of the power plant was legally invalid. We believe this should prompt a major rethink by the companies and their boards, and could spell the end for Ostrołęka C.

ClientEarth lawyer Peter Barnett, working on the case, said: “This is an excellent result for Enea’s shareholders and for the climate. The plant is a stranded asset in the making, facing clear and well-documented financial risks.

“Companies and their directors are legally responsible for managing climate-related risks and face potential liability if they fail to do so. Enea and Energa should lay this project to rest before it incurs any further costs to the companies and their shareholders.”

Enea and Energa’s shareholders have been raising questions about the financial and environmental risks of the project for a long time. The €1 trillion global asset manager Legal & General Investment Management, which is invested in both Enea and Energa, expressed “serious concerns” about Ostrołęka C and wrote to the two companies along with four other major institutional investors last year.

The cost of renewables is plummeting and the price of carbon is rising significantly. Since late 2016, when the plans for the plant’s construction were resumed, EU carbon prices have soared fourfold from below €6 to nearly €30 per tonne. The plant is highly exposed to these risks.

The plant has been the subject of fierce debate in the Polish media for years, as Polish energy market experts try to understand how the project could possibly be financially viable.

Shareholders question coal investment

Energa had its general meeting in June this year, and shareholders took it to task once again over how the plant could possibly make sense from a financial perspective. Energa admitted that “the scale of the investment poses a significant challenge to the closure of its financing” – but still insisted that it was financially viable.

The company also confirmed concerns about delays. Enea and Energa won contracts for Ostrołęka C under the capacity market and this is a major source of the project’s income. But the plant will face at least eight months of financial penalties for failing to deliver the electricity it has committed to providing on time.

While our case has been ongoing, key players in the Polish energy industry, including Tauron and PGE, have been looking into alternative and cheaper avenues of producing energy – like wind power.

Marcin Stoczkiewicz, head of our Polish office, said: “This is a clear signal and major opportunity for the companies, and for the industry at large. Pursuing this project puts an unnecessary burden on the state and taxpayers and is in no way necessary for national energy security.

“Enea and Energa need to look at what the future of energy is in Poland. There is vast employment potential in cheaper, domestic renewables.”

The Ostroleka C case: the legal grounds

ClientEarth challenged the resolution on the grounds, among others, that: (i) it was an impermissible instruction to the management board of the company and therefore legally invalid and (ii) would harm the economic interests of the company and should therefore be annulled.

The Court found in favour of ClientEarth on the first ground – i.e. the resolution consenting to the construction of the plant was legally invalid. This made unnecessary to proceed to determine whether it would harm the economic interests of the company based on climate-related financial risks.

ClientEarth was represented by KARASEK & WEJMAN in the Polish court proceedings and pro bono by litigation specialist firm Boies Schiller Flexner as international counsel in the dispute.

The written judgment from Wednesday’s hearing will be released in the coming months. Enea will have the option of appealing the judgment.

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Andre Moura