Wind and solar companies and investors backing their projects have filed a large number of  claims against the governments of Spain and the Czech Republic after the governments  scaled back feed-in tariffs and other subsidies for renewable energy. Italy is also facing arbitration after making similar changes to its regulatory policies.

All of the companies relied on the subsidies and feed-in tariffs to build projects that are  now either uneconomic or less profitable than expected after changes in government  policy.

A US renewable energy company with two solar thermal plants in Spain filed the latest  case in late May.

The companies charge that the policy changes breach various investment protections and  amount to illegal expropriation of their projects under a multilateral treaty called the Energy  Charter Treaty and under various bilateral investment treaties.

The Energy Charter Treaty establishes a legal framework for energy trade and investment.  The treaty came into force in 1991 to promote cooperation in the energy sector after the  end of the Cold War and is intended to encourage and protect energy-related investments, trade, the environment and energy  efficiency.

Bilateral investment treaties are treaties between two countries that provide certain protections to investors from one  country from actions (or inactions) by the country hosting the  investment, with the goal of fostering foreign investment by  helping to manage sovereign risk.

There are now at least 16 treaty arbitrations pending against  Spain and the Czech Republic and at least one arbitration  pending against Italy.

Bulgaria and Germany may be next.

Treaty Protections

The Energy Charter Treaty and most bilateral investment treaties provide protection against unlawful expropriation and  require countries to give “fair and equitable treatment” to  foreign investors, meaning countries must be transparent,  reasonable and respect investors’ legitimate expectations.

Both sets of treaties are notable because they not only establish substantive protections for foreign investors against a  country, but also give qualified investors the right to bring international arbitration claims directly against the country hosting  the investment. These claims may be brought under the arbitration rules of certain institutions, such as the International Centre  for Investment Disputes — known as “ICSID” — or ad hoc arbitration tribunals governed by arbitration rules chosen by the  parties, such as the United Nations Commission on International  Trade Law Arbitration Rules — known as the UNCITRAL rules.

In 2007, Spain offered subsidies and feed-in tariffs as an  incentive for developers to build wind and solar projects.  However, in 2010, in the wake of the global recession, Spain  imposed an annual cap on the number of hours of electricity  such projects could sell at the feed-in tariff. Since then, Spain has  rolled back incentives further, including additional curtailments  of feed-in tariffs and a 7% tax on power generators’ revenues in  what are essentially retroactive cuts in operating revenues, and  a reduction in subsidies for renewable energy producers, all set  to go into effect this year.

Spain also plans to make producers of solar energy pay a fee  for electricity they generate and use, a measure opponents have  characterized as a “sun tax.”

Similarly, since 2010 the Czech Republic has taken steps to  reduce the incentives it put in place to attract foreign investment in the renewable energy sector. These include the repeal  of a guarantee that feed-in tariffs could not decline by more  than 5% from year-to-year, legislative changes that provide projects coming on line after January 1, 2013 will not receive the  same benefits provided to similar plants before that date, and  the introduction of a retroactive tax on revenues generated by  certain solar photovoltaic plants  that was later declared unlawful  by the Czech constitutional  court.

In 2013, the Czech Republic  adopted additional measures,  including the end of feed-in  tariff support for all types of  renewable energy effective  January 2014 and the imposition  of a retroactive tax on certain  solar PV plants.

Italy has followed the same  pattern.

As a result of these changes, foreign investors in Spain, the  Czech Republic and Italy lost subsidies and feed-in tariffs that  had been guaranteed for almost a decade. In response, they  have begun to file arbitration claims against the governments of  these countries alleging the changes to the renewables regimes  violate their rights and protections under one or both of the  Energy Charter Treaty and various bilateral investment treaties.  The investors filing claims include investment funds, banks, and  renewable energy companies that have invested in solar and  wind projects. To date, at least 17 arbitrations are pending.

In a rare event, 14 different groups of foreign investors  (reportedly totaling 88 claimants) filed a collective action  against Spain on November 17, 2011 in an UNICTRAL proceeding arising out of the Spain’s revocation of subsidies for solar  PV plants.

Since 2013, five additional foreign investors have filed claims  against Spain before ICSID and at least three more have filed  before the Stockholm Chamber of Commerce. These investors  allege they relied on incentives when making their investments  and that the subsequent changes in the tariff regime are in  breach of the Energy Charter Treaty, amounting to an unlawful  expropriation of their investments.

While a group of foreign investors failed in its attempt to  bring a collective action against the Czech Republic earlier this  year, separately at least seven individual investors have brought  claims before UNCITRAL tribunals under the Energy Charter  Treaty and bilateral investment treaties between the Czech  Republic and the Netherlands, Germany, Cyprus, Luxembourg  and the United Kingdom.

Although Spain and the Czech Republic bear the brunt of  renewable energy claims, one claim was filed earlier this year  against Italy before ICSID. In that case, three investors argue that  cuts to feed-in tariffs are a breach of an earlier promise by Italy  of long-term price support. The claim is not yet public, and it is  unknown whether the investors are bringing their claim under  the Energy Charter Treaty or one of Italy’s many bilateral investment treaties.

Outlook

The number of claims against Spain, the Czech Republic and  Italy is expected to grow as the full effect of the changes in regulatory and fiscal policy takes hold. As other countries reevaluate their renewables policies, these types of claims are unlikely  to be limited to these countries.

Earlier this year, for instance, Bulgaria imposed a new fee on  wind and solar energy producers and limited the amount of  renewable energy that can be purchased at feed-in tariff levels.  Further cutbacks are expected.

Meanwhile, Germany recently proposed measures that will  scale back renewables subsidies and limit the expansion of  onshore wind and solar capacity. The German government also  intends to apply a surcharge to consumers who use renewable  energy to cover the costs of feed-in tariffs.

Arbitrations of this kind usually take two to three years to  reach a resolution. The oldest renewable energy case against Spain or the Czech Republic has been  pending for two and a half years.

Since a government cannot be ordered to reinstate subsidies  for foreign investors that it has eliminated for all renewable  energy companies, the potential outcome, if a treaty violation is  found, is a damages award.

The number of claims filed under investment treaties has  grown exponentially in recent years. In 2013, at least 57 known  investment arbitration cases were brought under investment  treaties, almost half of which were filed against European countries. Notably, the number of claims filed under the Energy  Charter Treaty has almost doubled in the last three years.  Damages awards in favor of a injured investors are common,  and because the awards are binding under international law and  there are reputational risks to failure to honor them, governments have generally paid.

There are some signs this may be changing. Outside of  Europe, several countries are moving to withdraw from investment treaties, reportedly as a result of either claims decided  against them or the risk of future claims. For example, since  2013, both South Africa and Indonesia announced that they  would not renew their bilateral investment treaties with the  Netherlands and suggested that they intend to terminate all  their remaining investment treaties. Similarly in 2008, Venezuela  terminated its bilateral investment treaty with the Netherlands  and eventually withdrew entirely from ICSID in the face of a  series of investment claims. In each case, the actions are prospective and do not affect claims that are brought before the  “sunset” provisions in the treaties expire.

So far, there is no indication that European countries will  follow suit, although the European Union has expressed concern  over including investment dispute settlement provisions in  future economic unions such as the proposed transatlantic  trade and investment partnership with the United States.