Frequent changes to the regulatory framework governing renewable energy generation in Spain have given rise to an almost unprecedented amount of investor-State arbitration cases. Spain, which is a Contracting Party to the 1994 Energy Charter Treaty (ECT), is respondent in no less than 33 ECT cases. Since many of these cases were registered from 2011 onwards, it is to be expected that a significant number of these cases will be resolved in the near future.

In May 2017, the first arbitral award was rendered where a Tribunal concluded that Spain had violated its obligations under the ECT. More recently, an arbitral award came to the surface that was already decided in July 2016, but that had remained confidential. The findings of the Tribunals in these cases, where the same measures were being challenged by investors, will be the subject of this blogpost.

The Energy Charter Treaty

The ECT is a multilateral trade and investment agreement with approximately 50 Contracting Parties. The Treaty protects foreign investors against discrimination, unfair and inequitable treatment, and expropriation without compensation. Since the Treaty also contains an investor-State arbitration clause, foreign investors do not have to resort to Spanish courts, but can settle disputes at international arbitration fora, such as the International Centre for Settlement of Investment Disputes (ICSID), the arbitration institute of the Stockholm Chamber of Commerce (SCC) or under the UNCITRAL arbitration rules.

It is firmly established in ECT arbitration that the obligation to provide ‘fair and equitable treatment’ includes the protection of the legitimate expectations of investors.

Renewable Energy Law and Policy in Spain

After having established a very generous renewable energy support scheme in the years 2007 and 2008, substantial investments were made in the renewable energy sector in Spain, particularly in solar energy. However, due to the economic crisis and the fact that Spain had a regulated electricity tariff that was set lower than the feed-in tariffs, this support scheme became a heavy financial burden.

Therefore, various changes were made in the years 2010, 2012, 2013 and 2014. Especially those measures that were adopted in 2013 and 2014 adversely affected investors: they abolished the regimes adopted in 2007 and 2008 and introduced a fundamentally different remuneration methodology. Instead of basing remuneration on production, future remuneration would be based on the investment. Each investment would be entitled to a ‘reasonable rate of return’ and a hypothetical efficient plant would provide the applicable yardstick. Since the new methodology was also applied to existing investments, this meant that, in some cases, revenues were reduced by as much as 60 per cent. Since many of the renewable energy projects in Spain were highly leveraged, bankruptcies and forced financial renegotiations were widespread in the industry.

Eiser v. Spain

In Eiser v. Spain (Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36) the investor had invested in concentrated solar power plants from 2007 onwards. Its facilities had become operational in 2012. Since the historical finance and operational costs of Eiser’s investments deviated from the ‘hypothetical efficient plant’ standard that was employed by the Spanish authorities, revenue was reduced by 66 per cent in comparison to the previous regime which reduced the value of the investment to EUR 4 million while Eiser had invested almost EUR 130 million.

According to the Tribunal, the Spanish measures retroactively prescribed design standards in violation of the fair and equitable treatment standard. In particular, the ‘obligation to accord fair and equitable treatment means that regulatory regimes cannot be radically altered as applied to existing investments in ways that deprive investors who invested in reliance on those regimes of their investment’s value.’

On the basis of the discounted cash flow method, the Tribunal would quantify damages at EUR 128 million.

Isolux v. Spain

The Isolux v. Spain case (Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153) was already resolved a year ago, but the award only became publicly available recently. Although this case concerned the same measures as those targeted in Eiser v. Spain, the Tribunal would reject the legitimate expectations claim of the investors. A fundamental difference between the two cases is that Isolux only invested in Spain from 2012 onwards at a time that the Spanish regulatory framework had already been modified ‘repeatedly’ while Eiser had invested from 2007 onwards. Therefore, the Tribunal was of the opinion that ‘no reasonable investor could have the expectation that this framework would not be modified in the future and would remain unchanged.’

Conclusion

If one lesson can be learned from these cases, it is that the facts in any given investment case are of profound importance to the outcome. As demonstrated by these two cases, these facts can differ from investor to investor. Therefore, one should be cautious with jumping to conclusions for the still pending Spanish ECT cases.

Nonetheless, since the Eiser award contains an elaborate analysis of the fair and equitable treatment standard of the ECT, it may well set a difficult precedent for Spain. By reference to the specific object and purpose of the ECT – to establish an international legal framework for long term cooperation in the energy sector – it gave an interesting interpretation to ‘fair and equitable treatment’ in the wider context of Art. 10(1) ECT.