By Michael Lundberg and Acacia Hosking
Developments in the growth of renewable energy are largely influenced by government policy. Subsequent changes in government policy to reduce state support of the renewable energy sector have led to a significant volume of investment arbitrations being initiated against states who have implemented such reforms in recent years.
These arbitrations typically involve claims, brought by investors, that a state has breached the fair and equitable treatment standard in relation to the investment and/or that the state expropriated the investment, through subsequent legislative or policy reform.
The European Commission’s 2009 renewable energy directive established an overall policy for the production and promotion of energy from renewable sources in the European Union, with a renewable energy target of at least 20% by 2020.
The directive recognised the need for national mechanisms supporting the promotion of renewable energy in order for EU member states to achieve their national targets. This led to an increase in European government incentive programs. These included fiscal incentives in production and consumption as well as incentives based on energy saving instruments that raise efficiency in energy-intensive sectors through information and communication technologies.
Programs and policies encouraging investment and the production of renewable energy in countries including Spain, Italy, the Czech Republic and Canada have resulted in increased investment and electricity generation. Such programs predominately target renewable resources such as wind and solar energy.
There are increasingly less government incentive renewable energy programs. However, cost reductions in new renewables technology have eliminated the need for such incentives and consequently, renewable energy remains a sector focus.
Governments continue to announce and implement renewable energy goals and mandates, most recently with Taiwan announcing an ambitious target of reaching 20% renewable energy by 2025 mirroring the targets set by the EU. The scale of continued investment and growth in renewable energy production will inevitably lead to further disputes, and see new developments in investor state disputes.
Energy Charter Treaty
The majority of investment arbitrations initiated against EU member states have been brought pursuant to the Energy Charter Treaty (ECT). The ECT is a multilateral treaty which was signed in 1994 and came into effect in 1998, intended to facilitate investment in and the development of the energy sector. All EU member states except Poland and (since 2015) Italy are signatories to the ECT. Relevantly, Article 10 provides (inter alia) for fair and equitable treatment of investors, while Article 13 prohibits expropriation.
Article 26 provides for alternative dispute resolution mechanisms, including international arbitration, with parties having the option to submit arbitral disputes to:
- the International Centre for Settlement of Investment Disputes (ICSID) (provided both parties are signatories to the Washington Convention);
- ICSID Additional Facility arbitration (if one party is a signatory to the Washington Convention but the other is not);
- ad hoc UNCITRAL arbitration; or
- arbitration administered by the Stockholm Chamber of Commerce (SCC).
The majority of disputes arising under the ECT have resulted in ICSID arbitrations.
In this article we set out some key developments in Europe and North America, in particular, Spain (under the ECT) and Canada (under NAFTA).
Case study – Spain
In 2004, the Spanish government began to introduce incentives to encourage investment and development in renewable energy which were expanded in 2007. The incentives included a feed-in- tariff (FIT) for a 25-year period, an entitlement for all energy generated to be distributed to the Spanish electricity grid and no limitation on the operating hours of electricity generation.
The Spanish government’s incentives resulted in exponential growth in Spain’s solar energy sector including around €50 billion of investment, which coincided with the Global Financial Crisis and culminated in an electricity tariff deficit (i.e. the difference between the regulated tariff collection and the associated real costs) of circa €35 billion by 2012.
To address the deficit, from 2010 onwards the Spanish government began to implement policy changes including ceasing the premium price guarantee after the 26th year of the solar plant’s operation, requiring certain plants to install mechanisms to protect the electricity grid from voltage dips, limiting operating hours and implementing a new charge for grid access.
Further changes in 2013 resulted in the incentives being eliminated entirely and a new regime was introduced which was much less generous than the previous one.
Around 30 investment treaty arbitrations have been filed against Spain as a result of its renewable energy sector reforms. The first award in these arbitrations was delivered in Charanne BV and Construction Investments SARL v The Kingdom of Spain, a SCC arbitration brought against Spain under the ECT by a Dutch company and a Luxembourg company which had jointly invested in Spanish solar energy generation.
The claimants contended that the reforms by the Spanish government breached Articles 10 and 13 of the ECT by violating the standard of fair and equitable treatment, denying their legitimate expectations as investors and reducing their return and expropriating part of the value of their investment.
In January 2016, the majority of the Tribunal dismissed all claims against the Spanish government. Spain’s reforms of the renewable energy subsidies were found not to breach the claimants’ legitimate expectations under the fair and equitable treatment provisions of the ECT.
To exercise the right of legitimate expectations the Tribunal held that the claimants must show that they had first made a diligent analysis of the legal framework for the investment. The materials provided to the investors in 2007 did not state that the FIT would remain in place for the regulatory lives of the solar plants. A commitment to a group of investors did not amount to a commitment to an individual investor and to find otherwise would amount to an excessive limitation on the power of the state to regulate the economy in accordance with the public interest.
The expropriation claim was dismissed on the basis that the claimants had failed to demonstrate that they had been deprived of all or part of their investment, in circumstances where the incentive program and the associated contracts remained in place, albeit with a reduced rate of return. The dissenting arbitrator was of the view that legitimate expectations can arise where states grant incentives to a specific category of persons in exchange for their investment.
The scope of the Spanish government’s reform the subject of Charanne was relatively minor, as it was limited to the 2010 amendments. The reforms to the Spanish renewable energy incentives in 2013 were far more substantive with purported retroactive application.
Therefore, while the majority of claims brought against Spain under the ECT were similarly founded on the contention that Spain’s reforms to government incentive programs breached the investor’s legitimate expectations under the fair and equitable treatment provisions of the ECT, most of the pending claims concern the subsequent and more far reaching reforms than those the subject of Charanne.
In May 2017, an ICSID Tribunal delivered the first award which considers the subsequent Spanish reforms in Eiser Infrastructure Limited and Energia Solar Luxembourg v Kingdom of Spain, ICSID Case No. ARB/13/36. In a unanimous award, the Tribunal ordered Spain to pay €128 million to the claimants, finding that the Spanish government had breached Article 10 of the ECT, depriving the claimants of fair and equitable treatment. The award is likely to impact the substantial number of investor state disputes still pending against Spain.
There are also a small number of energy and resources investor state claims brought against other European states including Italy, the Czech Republic, Croatia (concerning changes to its regulatory regime which effected a Dutch company’s investment in a biomass power plant), Bulgaria, Romania and Poland (noting that Poland is not a signatory to the ECT).
Case study – Canada
In 2016, awards were delivered in both Mesa Power Group, LLC v. Government of Canada and Windstream Energy LLC v. Government of Canada. Both cases concerned claims made pursuant to the North American Free Trade Agreement (NAFTA), regarding amendments to renewable energy incentive programs in the province of Ontario.
In October 2009, the Ontario government launched a FIT program which included 20 or 40 year power purchase agreements with the Ontario Power Authority (OPA) for projects that generated electricity exclusively from renewable energy. Those agreements provided a guaranteed fixed price for electricity delivered to the Ontario grid.
The Ontario government subsequently sought to cancel some of these programs, leading to investor state NAFTA claims.
In Windstream Energy, the Tribunal ultimately found in the claimant’s favour, awarding C$26 million. The proceedings arose out of a transaction in May 2010, when American company Windstream and the OPA entered into a FIT contract under which OPA was to pay Windstream a fixed price for wind generated power, with a total contractual value of C$5.2 billion.
In February 2011, following a policy review to develop the regulatory framework for offshore wind projects, Ontario decided to suspend all offshore wind development until further research was completed. Windstream commenced its arbitration against Canada, bringing a number of claims under NAFTA. As previously mentioned, windstream succeeded in its breach of Article 1105(1) claim, which provides for fair and equitable treatment and full protection and security in respect of a party’s investments (analogous to a breach of Article 10 of the ETC).
Mesa Power also involved a claim under Article 1105 but resulted in a very different outcome from the Tribunal. Mesa Power’s claims were dismissed and it was ordered to bear the cost of the arbitration, together with C$3 million of Canada’s legal costs.
Mesa Power had submitted several applications under the Ontario FIT program, but was unsuccessful in gaining a contract, allegedly due to inability to transmit electricity to the Ontario grid. In its claim against Canada, Mesa Power argued that its inability to acquire transmission access to deliver electricity to the Ontario grid was due to flaws in the contracting process and preferences granted to two other parties, contending that this conduct constituted a breach of Article 1105(1).
The increase in investment treaty arbitrations against states in the renewable energy sector is perhaps indicative of a wider trend where investors are now viewing investor-state arbitration as a legitimate dispute resolution mechanism, which does not necessarily preclude a continuing commercial relationship with the respondent state.
Where to from here?
Reductions to government incentive programs in the renewable energy sector in Europe have led to other markets leading the charge in the development of renewable energy. For example, the solar installation rate in the US doubled between 2015 and 2016, with 15,000 megawatts being installed in 2016.
These developments in the US have primarily been driven by solar investment tax credits, rather than FIT contracts, which have been relatively stable since their introduction in 2006. Outside of Europe and North America, the Taiwanese government recently introduced a target of 20% renewable energy by 2025. While admirable, the target is perhaps ambitious, given Taiwan’s current 5% renewable energy share and its goal of requiring US$59 billion of private capital to achieve its target (in addition to the already substantial US$41 billion to be invested by the government).
As investment increases, projects develop, and states continue to pursue their renewable energy targets, emissions targets and other plans to reduce or eliminate non-renewable energy production, it is inevitable that renewable energy related arbitrations will continue to emerge.
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