Germany faces action over power plant

Germany could be forced to pay more than €1bn compensation to a state-owned Swedish power company after Green politicians slapped restrictions on a new coal-fired power plant in Hamburg.

Vattenfall is seeking arbitration at the International Centre for Settlement of Investment Disputes, a World Bank tribunal in Washington, claiming the German government has breached an international energy treaty.

Although the size of the potential compensation was not disclosed, delays to the €2bn ($2.7bn, £1.8bn) project are already thought to have cost the company hundreds of millions of euros.

Vattenfall declined to comment on the details of the case, but said: “We are submitting a request for arbitration. We are doing this to get clarity on the prerequisites for the construction.” The German economics ministry declined to comment as the case was ongoing.

The case is embarrassing for Germany, which is keen to appear open to foreign investment. It could shine a light on the vulnerability of other west European governments to similar lawsuits.

Both Germany and Sweden are signatories of the Energy Charter Treaty, a legal framework established after the fall of the Soviet Union that was intended to provide greater investment protection for western energy companies.

The treaty is designed to protect these companies from nationalisation and other forms of political interference, and is being used by a growing number of energy groups to challenge government decisions that affect their businesses.

“The treaty is quite tough in a way and perhaps states have been a little bit surprised [by the cases brought against them]. Now they are grasping the reality of this,” said Neil Melvin, senior adviser at the Energy Charter Secretariat.

Former shareholders of Yukos, the oil company, are using the treaty to claim billions of dollars in compensation from the Russian government, alleging expropriation of their investment.

“Until now, the Energy Charter Treaty has been used to protect investments in politically risky parts of the former Soviet Union,” said Luke Peterson, of Investment Arbitration Reporter.

“But, as the Vattenfall claim makes clear, western European governments are also exposed to hefty damages claims from disgruntled foreign investors.”

International arbitration is only the latest stage in a long dispute between Vattenfall and the city-state of Hamburg, whose government gave the preliminary go-ahead for a new plant in November 2007. The project was thrown into doubt last year when state elections failed to produce a clear victor, forcing the conservative Christian Democrats to form an uneasy coalition with the Green party, the first pairing of its kind at state level.