Winston clients who have made investments in the wind farm or renewable industries in Poland may have a viable claim for damages, cognizable under international law, against Poland in light of recent measures taken by the Polish government that may have unfairly interfered with such investments.
Investment Treaty Rights
Poland has concluded over 60 Bilateral Investment Treaties or “BITs” with other countries (including the United States and most European countries), and it is also party to the Energy Charter Treaty alongside most states of the European Union and the CIS. These treaties afford protections to investments owned or controlled (directly or indirectly) by investors who have made their wind energy investments in Poland through a company or companies set up in any of these jurisdictions. Investors who seek to vindicate rights set forth in these treaties are afforded the right to commence international arbitrations through well-established, neutral arbitration institutes.
Legal Basis of Arbitral Claim
The protections afforded to investors under BITs and the Energy Charter Treaty will typically include (i) the right to fair and equitable treatment of the investment, (ii) the right to receive full protection and security of the investment, (iii) the right not to be subjected to unreasonable or discriminatory measures that impair the reasonable use or disposal of the investment, and (iv) the right to fair and prompt compensation in the event of direct or indirect expropriation of the investment. Historically, international tribunals have looked at with disfavour new or intervening domestic law that upsets settled investment expectations and have awarded damages to investors whose investments have been adversely affected by such changes in legislation. In the case of Poland, it has enacted two pieces of legislation that adversely impacted investments in the renewable energy sector in Poland.
Material Change in Domestic Law Re Use of Green Certificates
Pre-2012, the production of wind energy in Poland was based on a “green certificate” system. Under this system, renewable energy producers would be entitled to issue “green certificates” certifying that the energy they produced originated from a “green” source. Eligibility to issue these “green certificates” was limited to renewable energy producers including wind, solar, hydro, geo-thermal, and pure biomass. In tandem with this, electricity distribution companies were required to purchase a set percentage of the total electricity they placed onto the grid from these “green” sources. Based on this system, wind energy producers concluded long-term “off-take agreements” with electricity companies that guaranteed a certain level of “off-take” from their wind farms at a fixed volume and over a set duration (typically 15 years). The “green certificate” regime thus enabled wind energy producers to be compensated for their higher cost of energy production as compared to conventional sources such as coal, and was the basis on which many investors decided to make major long-term capital investments to build the wind farms needed to meet the demand for “green” energy created by these regulations.
In 2012, the Polish government introduced regulations that severely disrupted this legal framework. In particular, the regulations allowed coal-fired energy producers to issue “green certificates” for the energy they produced using a mixture of coal and biomass known as “co-firing”. It has been reported that this change in regulation was aimed at providing an indirect subsidy to Poland’s domestic coal and lignite industry as Poland is a major producer of coal and lignite, and the Polish energy market has historically been heavily reliant on coal-fired power. The change in legislation resulted in a dramatic increase in the supply of “green” energy certificates on the Polish market and a corresponding dramatic decrease in market price for the purchase of wind energy. As a consequence, many wind energy producers have seen their long-term “off-take agreements” terminated by their electricity company counterparties and several have already entered litigation in the Polish courts. The change in regulation has thus left many wind energy developers with large losses and has destroyed the underlying economics of their investments.
Material Change in Domestic Law Re Distance Between Power Plant and Residential Buildings
Poland adopted in May 2016 the Distance Protection Act, which required the distance of wind turbines from residential buildings be no less than ten times the total height of the wind turbine wind power plant. The new law not only applies to future power plants but also affects existing power plants and those investors who have already expended significant sums in the regulatory approval process. Among other things, existing wind turbines that do not meet the distance criterion are expressly prohibited from repowering by change of the capacity of equipment or supply of new wind turbines, thereby severely diminishing potential output and revenue. These prohibitions do not apply to investors engaged in similar or related plants (power plants, industrial, service, transport, etc.).
Although the distance requirements standing alone might have had a price supportive effect by curtailing the ability of developers to increase the supply of wind generation capacity, the Distance Protection Act also amended the purchasing requirements on electricity companies from “green” sources. This amendment lowered the percentage of electricity companies’ total energy purchasing requirements from “green” sources from 20% to 16%. This reduction was not mandated by EU law and has put further downward pressure on market prices for wind energy in Poland.
In addition, the Distance Protection Act also extended the property tax payable by wind farm investors to the investment value of the entire wind turbine. It has been reported that this change in the tax laws will triple the tax burden on wind farm investors and will lead to a significant drop in the value of their investments. It has also been reported that this change in the tax laws has already caused some project lenders to require accelerated repayment of the loans used by the wind investors to finance the construction of the wind farms, leading to further losses.
Wind Energy Investors Initiate Arbitration
Wind energy investment in Poland currently stands at roughly €11.5 billion and much of this investment comes from foreign sources. Some investors adversely impacted by these draconian changes made by the Polish government have started the procedures necessary to initiate arbitration against Poland. Winston clients in the renewable energy sector in Poland should consider the economic consequences caused by some or all these changes in domestic law and assess their rights under the relevant investment treaties. Claimants in similar international arbitrations have received awards granting them significant compensatory damages, including lost profits.