German energy firms win big as court rules country's nuclear fuel tax is illegal

It has been a rotten few years for Germany's big energy companies, including RWE (IOB: 0FUZ.IL - news) and E.On, but they have now received a major boost.

Germany's constitutional court in Karlsruhe, the country's highest court, ruled that a nuclear tax imposed by the country's government between 2011 and 2016 was illegal.

The ruling means the pair could be in line for tax refunds of more than €6bn (£5.2bn).

The tax was first proposed by Angela Merkel in June 2010 as a way of reducing Germany's budget deficit.

Her government argued the tax could be justified because, as their power stations are low carbon, nuclear energy producers had been enjoying windfall gains following the introduction of the EU's carbon trading scheme several years earlier.

Others saw it as a cynical way of extracting money from nuclear energy producers in return for agreeing to extend the lives of their plants - although the government later insisted that energy companies would have to hand it 60% of all profits created by those extensions.

The tax caused outrage among German business leaders, who mounted a campaign against it, winning support from, among others, former international footballer Oliver Bierhoff.

Their arguments that the tax would hit investment fell on deaf ears and, at the beginning of 2011, the levy was introduced.

But circumstances changed when, in March 2011, the disaster at the Fukushima plant in Japan prompted Mrs Merkel into a u-turn.

She (Munich: SOQ.MU - news) announced that Germany would phase out nuclear power by 2022. It prompted the energy companies to sue the government but with little success.

In the meantime, as the German government introduced a moratorium of lifetime extensions and ordered the closure of seven of the country's oldest nuclear plants, both RWE and E.On were pushed into the red.

E.On last year reported a record loss of €16bn (£14bn).

Adding to their woes was the so-called Energiewende - Germany's dash away from fossil fuels and towards renewable energy sources, which created a glut in power production that forced down wholesale energy costs, hitting profits further.

Ironically, though, German households did not benefit because the cost of renewables subsidies were, as in Britain, added to domestic bills.

The energy companies were forced into restructurings.

E.On, for example, demerged its older coal and gas-fired power stations into a separate company called Uniper (Swiss: UNIPE.SW - news) .

RWE, the owner of Npower in Britain, hived off its renewables, network and retail businesses into a separate company called Innogy. It also sold its oil and gas production arm to the Russian billionaire Mikhail Fridman.

The court ruling, which overturns a ruling last year from the European Court of Justice, benefits not only RWE and E.On, but also a third German nuclear energy producer, Energie Baden-Wurttemberg.

It is the second major court victory for the industry during the last year. In December last year, the same court ruled the German government must compensate the nuclear industry for insisting that they close their power plants early, on the basis that the decision would deprive them of profits that they would otherwise have made.

The industry is not out of the woods yet. It is still haggling with Berlin over the cost of a fund to pay for the storage of nuclear waste, for which the bill could be as much as €23bn.

But this ruling, which also requires the German government to pay interest to the energy companies as well as refund their nuclear tax payments, does mark a turn in the road.

RWE and E.On, whose share prices have risen by around 4.5% apiece, will see their balance sheets restored to health after years of losses and may now even be tempted to pursue possible mergers and acquisitions.

For Mrs Merkel, though, the ruling is nothing short of an embarrassment.