In recent years, project developers, investment funds, and energy companies have invested heavily in renewable energy as a result of incentive programs offered in the legislation of countries such as Germany, Spain, and Italy, among others. Many governments enacted these incentive programs to encourage investors to develop and fund renewable energy projects because producing energy from renewable sources is more expensive than from conventional sources. In addition, states are striving to achieve green energy targets as well as decrease dependency on hydrocarbons. The success of those regimes can be attributed to the states’ explicit guarantees of attractive and stable incentives over a fixed period of time, typically twenty years or more. The long-term stability of these measures was extremely important to investors because the expense of developing and operating a renewable energy facility often takes a decade or more to recover.
Currently, however, the once-booming renewable energy market in parts of Europe is at a virtual standstill. Some countries, including most notably Spain and Italy,1 have made significant, retroactive changes to their investment regimes, in some cases abolishing the very incentives that were needed to bring about the investments, in direct contravention of the stability provisions explicitly stated in the laws. For investors in the sector, the ongoing reform came as a complete surprise, jeopardizing their ability to repay initial cost outlays, much less earn an eventual profit. These unanticipated modifications have created financial hardship and uncertainty in the market; and they have left many investors wishing they had never invested in these countries.
To make matters worse, legal claims in local courts are unlikely to provide any meaningful relief. While this leaves purely domestic investors with limited options, foreign investors should be aware of the legal remedies available to them under international investment treaties. To date, seven international arbitration proceedings have been filed against the Czech Republic, twenty-five have been filed against Spain, and dozens have been threatened against Italy. This article focuses on the specific situations facing investors in Spain and Italy.
In 2007, Spain enacted Royal Decree 661/2007, a comprehensive incentive regime that promoted investment in the renewable energy market and guaranteed investors stable and predictable feed-in tariffs for the life of their facilities.2 Encouraged by Spain’s support of renewable energy, investment in the Spanish market boomed, particularly within the photovoltaic sector. RD 661 was so successful that Spain met its short-term capacity target for photovoltaic energy in little over a year. Encouraged by the success of its incentive program, Spain followed RD 661 with another regime, promulgated in Royal Decree 1578/2008. Like RD 661, RD 1578 also guaranteed investors stable and predictable feed-in tariffs, this time for a twenty-five year period.
Having made serious strides toward reaching its international and domestic policy goals, in late 2010 Spain began making retroactive changes to its investment regimes. Initially, it enacted several measures limiting the extent to which investors could benefit from the statutorily guaranteed incentive tariffs, including what was initially thought to be a temporary moratorium on the payments as well as limits on the amount of electricity eligible for the tariffs. With the enactment of Royal Decree 9/2013 in 2013, however, Spain abolished RD 661 and RD 1578 outright. Over a year later, it promulgated Royal Decree 413/2014, an unstable regulatory regime that provides investors severely reduced tariffs compared to what Spain had originally guaranteed and that is subject to review every six years.
Starting in 2005, Italy enacted successive incentive regimes applicable to photovoltaic facilities, known as the Conto Energia Decrees. The Contos provided investors stable feed-in tariffs for energy produced from photovoltaic facilities for a period of twenty years. The Italian public energy company further guaranteed the stability of this regime by entering into contracts with each investor, guaranteeing their facilities twenty years of tariff pricing as provided in the applicable Conto. Due to the regimes’ reasonable and stable tariff rates, investors made significant investments in the Italian market, helping the state make significant strides toward achieving its renewable energy targets and policy goals.
Despite its statutory and contractual guarantees to investors, starting in 2008 Italy began making retroactive modifications to its investment regimes. These regulatory alterations reduced investors’ remuneration in various ways, including by exacting new administrative fees and other arbitrary measures under the guise of taxes. In 2014, Italy announced an even more draconian measure: with the enactment of Law Decree No. 91/2014, the state significantly cut the tariff rates offered to certain photovoltaic facilities, severely decreasing the revenues investors had reasonably expected when they acquired or developed those facilities.
Remedies under International Investment Treaties
In both Spain and Italy, investors have thus far been unable to obtain effective relief in domestic courts; and there is significant speculation that the courts in both jurisdictions will uphold the legislative reforms that are harming investors.3 Despite this situation, foreign investors can pursue claims under international investment treaties such as the Energy Charter Treaty (“ECT”), to which Spain and Italy are signatories.4 Like many investment treaties, the ECT obliges its member states to provide “fair and equitable treatment” to foreign investments, to refrain from expropriating rights relating to those investments, to maintain a consistent legal framework, and to observe their legal commitments and obligations to foreign investors. Should a state violate these provisions, the ECT permits investors to pursue an international arbitration proceeding to recover damages for the state’s illegal acts.
Under the ECT, investors are given the option to bring claims before an international tribunal at the International Centre for the Settlement of Investment Disputes (ICSID), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), or in an ad hoc proceeding under the Rules of the United Nations Commission on International Trade Law (UNCITRAL). There are advantages and disadvantages to each, depending on the particular circumstances of a given investor. Furthermore, although domestic investors are generally precluded from bringing claims under the ECT, the ECT and ICSID Convention allow a domestic company to bring a claim if it is controlled by a national of another contracting party to those treaties. Moreover, for investors with claims for damages that are significant, but perhaps not large enough to warrant bringing an individual claim, it is possible for a group of investors to pursue an arbitration together.
Remedies under international investment treaties generally allow investors to recover financial damages for harm caused by a state’s illegal actions. Frequently, tribunals evaluate damages as the difference in the fair market value of the investments before and after the illegal measures. This requires consideration of a hypothetical “but for” scenario in which the state honored its commitments and the “actual” situation following the state’s illegal measures. The difference between these valuations is the damage, which is usually discounted to account for the present financial value of future cash flows.
Investors in the renewable energy sector are now confronted with a difficult situation in several European countries. Although domestic remedies hold little promise, foreign investors have viable options under international investment treaties.
To date, several dozen investors have filed twenty-five international arbitration proceedings against Spain and eleven against Italy, the Czech Republic, and Romania for retroactive changes the states have made to their renewable energy incentive regimes. That number seems to increase each week, and many more claims are expected.