Domestic incentives for renewable energy production
To combat climate change, several States have created so-called ‘renewable energy incentivization schemes’ because they feared that private investors may otherwise not be willing to invest in this industry. Compared to other sectors, renewable energy investment usually requires significant upfront capital investment, while returns may be unsure and take a longer period to materialise.
Renewable energy incentivization schemes typically provide for a secure power price, buy-out options, government-supported loans, etc. By offering feed-in tariffs, for example, the host State commits to buying the generated green power for a certain period of time (25 years or even longer) at a fixed rate, regardless of the real market price.
Some States seem to have been unprepared for the success of these incentivisation schemes and have difficulties in fulfilling the financial aspects of their own schemes. Combined with the budgetary problems caused by the financial crisis and/or a reprimand from the European Commission, which was of the opinion that some of these stimuli formed prohibited subsidies (State aid) under EU law, States have amended or terminated their programmes. Some have even sought to reclaim the sums already transferred to investors.
In the wake of the changes in these renewable energy schemes, there has been an upsurge in investor-State arbitration proceedings initiated by foreign investors. More than 40 cases concerning renewable energy, such as wind, photovoltaic (PV) and thermal solar energy, have been brought by private investors against States (especially Spain and Italy) under the Energy Charter Treaty (ECT) alone. Similar proceedings were launched against Canada under North American Free Trade Agreement (NAFTA).
In these cases, investors have argued that, even though the initial incentivization schemes may have been set up as voluntary domestic policies (not mandated by the Kyoto Protocol or other international rules), concrete promises were made to companies should they consent to investing in the renewable energy industry. Now that these investments have been made, the claimants demand that the States provide the subsidies that were allegedly promised at the time the investment was made. The outcomes of these cases have varied: of the eighteen cases decided as of yet (and available in the public domain), six were won by the State, while twelve were won by the investor (but with considerably lower amounts of compensation than claimed).
Five decisive factors
As the majority of these disputes still remains to be adjudicated, any conclusions based on the already rendered awards necessarily remain speculative. Nevertheless, five factors can be identified that are commonly addressed in these awards and that have proven to be at least partly determinative of the outcome of the case. No tribunals have, as of yet, found any (indirect) expropriation violations: all awards have turned on the existence or otherwise of a breach of the fair and equitable treatment standard.
- Deference to the regulatory power and margin of discretion of the host State
The first factor is that tribunals have consistently shown considerable deference to the regulatory power and margin of discretion of the host State (e.g., Novenergia v. Spain, para. 688; Blusun v. Italy, para. 315; 9REN v. Spain, para. 65 and 254 ff; Cube Infrastructure v. Spain, paras. 305 ff), as long as its actions are in the public interest (e.g., Cube Infrastructure v. Spain, para. 409), such as further scientific research on offshore wind projects (e.g., Windstream v. Canada, para. 376), genuine fiscal need (e.g., Blusun v. Italy, para. 319), or protecting consumers against rising electricity costs and implementing safety measures concerning voltage (e.g., Charanne v. Spain, para. 535; Wirtgen v. Czech Republic, para. 383).
Investors cannot expect that no regulatory change will occur, particularly when the rules regulating the incentivisation scheme already announce that updates and modifications will take place (e.g., Mesa v. Canada, para. 620). Tribunals do apply a proportionality test: when investors can demonstrate that the stability of the entire legal and business environment has been transformed and altered (a ‘total and unreasonable change’, ‘radical and fundamental changes’) (e.g., Eiser v. Spain, paras. 362-3; Novenergia v. Spain, paras. 678-681, 695; Antin v. Spain, paras. 531-532), the scales will turn in their favour.
- Not what the State has done – but how
The second factor relates to the ‘sweeping nature’ of the regulatory changes, the ‘drastic character’ of the new measures, whether the changes were abrupt, radical, retro-active, unprecedented, continuous etc. (e.g., Eiser v. Spain, paras. 369 and 387; Novenergia v. Spain, paras. 695-697; Cube Infrastructure v. Spain, para. 425). This shows that Tribunals often do not have a problem with what the State has done, but with how it implemented changes. States that can show that changes were based on objective and non-arbitrary criteria, communicated in a timely and transparent manner, and allowed for due process, are likely to win their case (e.g., Charanne v. Spain, paras. 471-472 and 534).
- The investor’s due diligence obligations
The third factor puts the onus on the claimant: Tribunals have frequently enquired as to whether the investor has complied with its own due diligence obligations (e.g., Masdar v. Spain, paras., 357-369; 9REN v. Spain, para. 273; Cube Infrastructure v. Spain, paras. 304 and 394 ff; NextEra v. Spain, para. 595), and where it could be shown that an investor knew or should have known that certain changes were impending, no violation of legitimate expectations will be found (e.g., Wirtgen v. Czech Republic, para. 388-391; Blusun v. Italy, para. 329). In this context, companies who invested early in the renewable energy industry stand a better chance of winning their case, as they established their investment before any major reforms had been announced. Investors who joined the fray at a later date, were in the words of the one Tribunal ‘opportunistic’ as they should have known that the incentivisation system was unsustainable and due to be modified (e.g., Antaris v. Czech Republic, para. 366; Isolux v. Spain, paras. 793-798).
- Explicit representations
The fourth factor is an old favourite in the fair and equitable treatment debate: the question of whether the State has made any explicit promise vis-à-vis the investor, thereby creating legitimate expectations at the outset of the investment (e.g., Charanne v. Spain, para. 490; Masdar v. Spain, para. 520; NextEra v. Spain, paras. 582 ff). Such explicit representations are not a mandatory prerequisite (in the framework of renewable energy incentivisation schemes, domestic legislation and official statements have been considered sufficient) (e.g., Eiser v. Spain, para. 377-380; Antin v. Spain, paras. 543-554; Antaris v. Czech Republic, para. 431) but without any representation, the threshold of proof favours the State.
- Impact of the measures on the investor
The fifth and final factor relates to the impact of the measures on the investor: if an investor’s profitability has remained unaffected, if its losses are not significant, or if they are, but no causal link with the changed policy is demonstrated, the investor is likely to lose its case (e.g., Isolux v. Spain, paras. 810-811; Blusun v. Italy, paras. 375-394; Cube Infrastructure v. Spain, paras. 399 ff.). The reverse is true when the regulatory changes have destroyed the value of the investment or caused a substantial deprivation (e.g., Eiser v. Spain, para. 387; Novenergia v. Spain, para. 695; SolEs Badajoz v. Spain, para. 462).
The combination of these five factors may help to explain why Spain has lost nine cases and Italy only one, while the Czech Republic has not lost any (as of yet). In Spain, the regulatory and legislative framework governing the subsidization of the PV solar sector by means of feed-in tariffs was gradually circumscribed through the adoption of a series of increasingly drastic amendments between 2010 and 2014. These four cases were brought by investors who had invested early (establishing their legitimate expectations in tempore non suspecto and fulfilling their due diligence obligations) and were complaining about sudden and unprecedented measures which entirely and continuously changed the applicable regulatory regime. Investors such as Charanne who based their claims largely on pre-2010 changes, did not win their case. These five factors also explain why the Government of Ontario (Canada) could win one dispute concerning its renewable energy policy (Mesa – focusing on foreseen changes to the general admissibility criteria for new applications) (Mesa v. Canada, para. 620), while losing another (Windstream – related to the indefinite suspension of a contract already granted to one particular investor) (Windstream v. Canada, paras. 376-382).
Need for a structural solution reconciling climate change and investment objectives
Renewable energy incentivisation schemes aimed at meeting ‘green goals’ by encouraging private investment, as envisaged by the Kyoto Protocol and subsequent instruments, will invariably risk entailing a number of disputes between investors and their host States. The existing investor-State arbitration system may not be best-suited to adjudicate these disputes as its main focus is on the enforcement of investment law while other relevant fields of law, such as international environmental law and EU (State aid) law, thus far seem to have been left almost entirely unaddressed.
Future tribunals may well wish to approach these disputes in a more ‘holistic’ manner so as to reconcile all relevant rules involved, but, due to the ad hoc character of investor-State arbitration, any such approach will depend on the preferences (and abilities) of individual tribunal members. It would therefore be preferable if a structural solution, providing for a dispute settlement mechanism that reconciles climate change and investment objectives, could be developed at the multilateral level.
[For further analysis, see: Baetens, F., ‘Combating climate change through the promotion of green investment: from Kyoto to Paris without regime-specific dispute settlement’, in: K. Miles [Ed.], Research Handbook on Environment and Investment Law (Edward Elgar 2019) 107-130]