Law may block golden handshake for German lignite owners – new legal analysis

28 October 2019

Media release

Lawyers have warned Germany’s coal companies not to bank on big payoffs for closing their lignite operations down, in a new legal analysis published today.

State aid experts at environmental law charity ClientEarth say that any government money lignite operators are hoping to receive for taking their plants offline in keeping with the German coal phase-out timetable will be subject to several layers of legal scrutiny – and that large payoffs are unlikely to prove legally justifiable.

Companies like RWE have been demanding up to €1.5bn per gigawatt (GW) closed, after the ‘Coal Commission’ recommended that compensation for operators should form part of the phase-out negotiations with the German government.

Germany is home to around 47GW of hard coal and lignite plants, meaning that RWE is arguing for the industry to receive tens of billions of Euros for the coal exit.

ClientEarth energy lawyer and report co-author Ida Westphal said: “Out of the 14 EU Member States that have agreed on a phase-out so far, no other country has resorted to voluntarily paying coal companies to face up to the inevitable.

“The decline of coal – for economic and climate reasons – has been foreseen for some time now. Coal operators are trying to fleece the government by asking for such staggering sums to take their assets offline – and companies banking on those payoffs may be in for a nasty surprise when the law rules them out.”

To be legally paid out, any so-called ‘compensation’ for plant closures would have to be proven to be constitutionally required under German law, and designed in a way that complies with EU State aid law. If it does not meet State aid requirements, the European Commission would block or reverse any payoff.

But according to ClientEarth experts, it is unlikely the huge ‘golden handshake’ sought by RWE would meet either of these legal requirements. And if the aid is paid without Commission approval, it is liable to be paid back if the Commission decides it is not compatible with the law.

ClientEarth lawyer Sam Bright, the report’s other co-author, said: “To qualify for payoffs under German law, companies would have to be able to prove they would suffer significant financial hardship due to the closures. And to meet EU State aid criteria, operators receiving the money would have to prove they were not being given an unfair, market-distorting advantage.

“Given the dismal and rapidly deteriorating financial state of Germany’s lignite fleet, justifying major payoffs will be extremely hard from a legal perspective.”

According to economic analysis, the German lignite fleet lost around €664m in the first half of this year alone – ten times what it lost in the same period a year earlier. The market value of major player RWE currently includes a valuation of negative €4bn for its conventional power generation assets.

Moreover, most of Germany’s coal plants have already been operating for over 25 years – long enough for owners to have benefited from their initial investments.

All evidence suggests that far from being rewarded to close down their operations, coal companies actually owe it to their investors to do so, because of the risk keeping them open poses. The report notes:

“The fact that lignite plants are already making losses, and certainly no significant profits, is a strong indication that their operators cannot be considered likely to be exposed to an exceptional burden or undue hardship for being forced to close their plant. Quite the opposite – closing down the plants potentially averts future losses.”

If payoffs are agreed and then notified to the European Commission to be assessed as State aid, the ensuing decision will be influenced by the fact that no other country phasing out coal is proactively planning payoffs for coal companies.

An official draft of Germany’s long-awaited coal phase-out law is expected within a month.

ENDS

Notes to editors

Read ClientEarth’s report: “No money for old lignite”.

Germany’s ‘Coal Commission’ recommended that the phase-out could be achieved through a combination of company-to-government negotiations, tender procedures and legally ordered closures. It also recommended that the phase-out might entail compensation for plants asked to close.

The report concludes that large amounts of compensation are unlikely to be required under Article 14 of the German constitution – meaning the European Commission would be unlikely to approve them as State aid.

The report also notes that, in a hypothetical world, given RWE’s current market valuation, it may actually be cheaper for the German government to buy its entire fleet – coal and lignite – and close the plants itself.

ClientEarth recently alerted Germany’s federal financial regulator to potential market manipulation by RWE, after the company said that a court ruling temporarily preventing it from clearing the Hambach Forest would be catastrophic – claiming to shareholders that it would result in a “low-three-digit-million [Euro]” negative impact on earnings each year.

At the end of September, RWE announced a new ‘clean’ image, with the goal of going carbon-neutral by 2040. On the same day, villagers from the Garzweiler region launched a legal campaign to save their homes from a mine expansion which would see their homes and communities flattened. The ‘new RWE’ is still intent on completing this project.

ClientEarth – Anwälte der Erde and Greenpeace Germany published a draft coal phase-out law in May this year. This law promotes a full coal phase-out by 2030 – the scientific deadline for a full European coal exit to avert the worst of climate change – or 2035 at the very latest.

About us:

ClientEarth is a charity that uses the power of the law to protect people and the planet. We are international lawyers finding practical solutions for the world’s biggest environmental challenges. We are fighting climate change, protecting oceans and wildlife, making forest governance stronger, greening energy, making business more responsible and pushing for government transparency. We believe the law is a tool for positive change. From our offices in London, Brussels, Warsaw, Berlin, New York City and Beijing, we work on laws throughout their lifetime, from the earliest stages to implementation. And when those laws are broken, we go to court to enforce them.

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