This briefing discusses the recent retrospective legal changes affecting the photovoltaic (“PV”) solar sector in Italy and potential remedies that aggrieved investors may be able to pursue against Italy under international treaties.
Background: The incentives that Italy offered investors to invest in the PV sector in Italy
With a view to meeting its commitments under EU treaties and the Kyoto Protocol, Italy introduced in 2005 a number of measures to incentivize investment in the renewable PV electricity sector. The legal framework for these measures is often referred to as “Conto Energia”.
The principal incentive contemplated by Conto Energia takes the form of a feed-in tariff (“FiT”): a guaranteed subsidy paid on the basis of the amount of solar electricity fed into the grid. Under Conto Energia, the amount of the specific guaranteed FiT is determined on a case-by-case basis considering a number of specific criteria in relation to each PV power plant (including, for example, whether the installation is ground-fixed, rooftop, integrated, or non-integrated).
Beyond the specific amount of FiT to be paid to the owner of a given PV power plant, the FiT scheme under Conto Energia has the following characteristics:
- The relevant FiT level applicable to a specific PV power plant is guaranteed for 20 years from the date of connection of the PV power plant to the national grid;
- FiTs are paid, on a monthly basis, in direct proportion
to the amount of energy generated by the PV power plant and fed into the national grid;FiTs are to be paid by Gestore dei Servizi Energetici S.p.A. (the “GSE”) (a state-owned company whose remit consists of promoting and supporting renewable energy sources in Italy);
- PV energy producers conclude an agreement with the GSE which, among other things, guarantees the relevant FiT level for 20 years.
Italy Reduces FiTs on PV Power Plants
From 2010 onwards, the incentives set out in the Conto Energia scheme have been reduced through several government decrees (in particular, the so- called “Terzo Conto Energia”, the “Quarto Conto Energia”, and the “Quinto Conto Energia”). Although these measures had an impact on the PV sector, importantly, they did not affect the level of FiT that was guaranteed to a PV power plant at the time of connection to the national grid.
The situation, however, has changed due to the latest measures contained in a decree issued by the Italian government on an urgent basis on 24 June 2014; the so-called “Decreto taglia bollette” (D.L. No. 91, published in the Italian Official Gazette No. 144/2014 25 June 2014) (the “Decree”). Departing from earlier amendments to the FiT scheme, broadly speaking, the Decree reduces the FiT levels guaranteed to PV power plants already connected to the national grid and that were subject to agreements between PV electricity producers and the GSE. In this sense, the measures contained in the Decree are retrospective in nature.
More specifically, in respect of specific PV power plants with a nominal capacity exceeding 200kW, the Decree provides for a reduction in FiT in a range between 17 per cent to 25 per cent, which applies on a sliding scale depending on the amount of years of FiT remaining (PV power plants that have a capacity of 200kW or fewer are not affected by FiT cuts under the Decree). Under this sliding scale, PV power plants that had the lowest possible amount of years of FiT remaining (12 years) will see a 25 per cent reduction. At the other end of the spectrum, PV power plants that have 19 or more years of FiT remaining will suffer a reduction of 17 per cent in FiTs. These reductions are set to apply from 1 January 2015 onwards. With a view to assuaging PV electricity producers, these cuts are coupled with a four-year extension of the 20-year FiT scheme. However, this extension of time is unlikely to offset the loss arising from the FiT cuts, particularly in relation to the older PV power plants that will suffer the heaviest reductions.
Under the Decree, owners of PV power plants with a nominal capacity exceeding 200kW, may prevent the application of the 17 per cent to 25 per cent FiT reduction discussed above by forfeiting the four- year extension discussed above and agreeing to a reduction equal to eight per cent on the FiTs they currently receive from the GSE. This option is to be exercised by 30 November 2014 (Section 26, point 7 of the Decree). This reduction is also set to apply from 1 January 2015 onwards.
In addition, the Decree changes the mechanism under which the GSE pays the FiTs to PV electricity producers. From the second semester of 2014, the GSE will only remunerate the owners of PV power plants (irrespective of their size) with fixed monthly instalments equal to 90 per cent of the PV power plant’s estimated annual electricity production, based on GSE’s historic records.
The balance between the PV power plant’s estimated annual electricity production and the actual production in a given calendar year will be paid by GSE by 30 June of the following calendar year (Section 26, paragraph 2 of the Decree). This will have an obvious impact on the cash flow of the owners of the affected PV power plants. This, in turn, may prevent owners of PV plants from complying with relevant loan agreements.
While the Decree entered into force with its publication in the Italian Official Gazette, because it has been issued on an urgent basis, it is subject to ratification by the Italian Parliament. This process should be completed within 60 days from the Decree’s date of publication in the Official Gazette. While the Italian Parliament can amend the Decree during ratification, no major revisions are anticipated at this stage.
International investors may be entitled to redress
The measures in the Decree, in particular the retrospective application of reductions in FiT, may entitle aggrieved international investors that invested in Italy’s PV sector to obtain redress (including compensation) under some international instruments, in particular the Energy Charter Treaty (the “ECT”) and relevant bilateral investment treaties (“BITs”).
The ECT was signed by Italy on 17 December 1994 and entered into force on 16 April 1998. In addition to Italy, there are other 51 ECT member states which include, amongst others, Cyprus, Germany, Luxembourg, Switzerland, and the UK.
The ECT is a multilateral investment treaty that establishes a legal framework for the protection of investments in the energy sector. Among other things, it permits qualifying investors to file arbitration claims directly against a host state for violations of their protections under the ECT.
To qualify for protection under the ECT, in general, an investor has to have the nationality of an ECT member state.
Further, the investor has to have a qualifying investment for the purposes of the ECT. The definition of the term “investment” in the ECT is broad: it means every kind of asset, owned or controlled directly or indirectly by a qualifying investor. In particular, as set out in the ECT, “investment” includes all types of property and property rights; a company, shares, stocks, other forms of equity participation, bonds, and debt; claims to money; amounts derived from or associated with a qualifying investment; and any right conferred by law or contract or by virtue of any licences and certain permits to develop activities in the energy sector.
Some of the protections in the ECT include the obligation on the host state to accord fair and equitable treatment (“FET”) and full protection to investments, the prohibition to discriminate, and, in general, to expropriate. A number of arbitral tribunals have also concluded that the FET protection contains the obligation on the part of the state to protect an investor’s legitimate expectations and provide a stable legal environment. The ECT also contains a provision under which the breach of an agreement between an investor and a host state may amount to a breach of the treaty (a so-called “umbrella clause”).
Investors from ECT member states that made investments in the Italian PV sector allured by the incentives offered by Italy—now significantly and retroactively reduced—are likely to be entitled to commence arbitral proceedings against Italy with a view to obtaining potentially significant compensation.
Prior to commencing ECT arbitral proceedings, an investor should give Italy notice of the dispute and request amicable settlement of it. If the dispute is not settled within three months from notice (often referred to as a “cooling-off period”), an investor will have three options to pursue arbitration against Italy; namely, (a) arbitration before the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”); (b) ad hoc arbitration (this is, an arbitration not administered by an institution) under the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”); or (c) arbitration before the Arbitration Institute of the Stockholm Chamber of Commerce.
Italy has signed dozens of BITs. More than 70 of them are currently in force. These BITs have been concluded with countries from all parts of the world, including Hong Kong, India, and South Korea.
Although in general the level of protection accorded by different BITs may vary, many of them allow investors to commence proceedings for violations of guarantees similar to those in the ECT, such as FET, full protection and security and freedom from discriminatory treatment.
For example, the Italy-Hong Kong BIT resembles the ECT in respect of the definition of investment and nationality requirements. This BIT also contains FET protection and prohibitions to impose unreasonable or discriminatory measures on an investment and illegal expropriation. This BIT contemplates a six-month cooling off period and vests qualifying investors with the right to pursue arbitration against the host state under the UNCITRAL Arbitration Rules. As such, under this BIT, aggrieved Hong Kong investors that invested in the PV solar sector in Italy are entitled to commence arbitral proceedings against Italy.
Facilitated Enforcement of Resulting Awards
Depending on the applicable treaty and the type of arbitration pursued by a party, a resulting arbitral award may be enforceable in and outside Italy under the Convention on the Settlement of Investment Disputes of 1965 or the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. These two conventions facilitate the enforcement of arbitral awards and would permit a successful claimant to collect the monies awarded by an arbitral tribunal against some assets of the Italian State in most countries in the world.
Duration of Arbitral Proceedings
Although it is extremely difficult to predict the duration of an investment treaty arbitration, it is not uncommon for proceedings to last two to four years on average. However, with a view to obtaining a favourable decision relatively early in the proceedings, it may be possible to persuade an arbitral tribunal to decide issues of liability first, reserving quantum issues for a later stage.