Are you wondering how private investors in the photovoltaic sector will keep up with the legislation reforms that in the past five years in a number of European States have affected their economic expectations? Are you wondering behind what shield will the States attempt to escape damage compensation or indemnification claims raised by private foreign investors as a consequence of the legislation reforms that progressively reduced incentive tariffs for the energy production from photovoltaic plants?
The arbitration award issued on 21 January 2016 within the arbitration proceedings started under the Energy Charter Treaty (‟ECT”) by two private investors against the Kingdom of Spain provided some interesting ‟food for thoughts” in order to find some answers to these queries.
After having dismissed Spain’s preliminary objections concerning the lack of jurisdiction, the Arbitral Tribunal rejected all of the private investors’ claims, stating – inter alia – the following principles.
First, expropriation occurs only if the value of the private assets is reduced as a consequence of the State’s action up until the point that it equals to a misappropriation by the State of the private investment. Only as such, the expropriation shall be indemnified accordingly.
Second, the protection of a foreign investment cannot stretch until freezing a State’s legislation making process. In other words, investors are not granted with legitimate expectations that the feed-in tariff would not vary along the years of the investment, unless investors have entered into a specific agreement with the State in this respect (i.e. stabilization clause).
Third, the Spanish legislative reform of 2010 did not breach the State’s obligation of granting the investors a fair and equitable treatment as set forth under article 10, paragraph 1, of the ECT. The measures introduced with said reform were based on objective criteria (such as the plants’ average life, the energy produced during certain hours of the day or in specific geographic zones in the Spanish territory).
The outcome of this arbitration re-opens the debate on the balance between the protection of private investors’ expectations versus the State’s supremacy. The dissenting opinion submitted by the party appointed co-arbitrator nominated by the investors confirms that this matter is far from being settled.
Attracted by a promotional campaign of the Spanish government enhancing the market of the energy production from renewable sources (precisely, photovoltaic plants), foreign investors invested in the ‟sun’s land” relying on feed-in tariffs that would grant them a certain profit for the overall life of the plants.
The investment was made in 2009 and the investors’ relevant business plan was modelled on the feed-in tariffs existing at the time the investment was made.
In 2010, the Spanish government issued legislative reforms that reduced those tariffs. As a result, the investors’ expected margins from the sale of the energy produced by photovoltaic plants decreased accordingly.
The investors started the international arbitration under the rules of the Stockholm Chamber of Commerce, with the aim of being indemnified for the lost profit caused by such legislative intervention.
The Spanish legal framework at the time the investment was made
At the time the investment was made, RD no. 661/2007 and RD no. 1578/2008 – inter alia – regulated the incentive tariffs granted to operators that would produce energy from photovoltaic plants.
In order to be awarded with the feed-in tariffs, photovoltaic plants should be registered in the so-called RAIPRE (‟Registro Administrativo de Instalaciones de Producciòn en Régimen Especial” which in English translates as Administrative Registry for Production Installations in Special Regime). RD no. 1578/2008 introduced a subsection of the RAIPRE, specifically dedicated to the projects of installations of photovoltaic energy (‟RPR”).
Based on the Spanish legal framework of 2007 and 2008, the feed-in tariff would be granted for the overall life of the plants. Depending on the power of the plants, up until the first 25 years of the investment, the feed-in tariff would amount to Euro cent per KW/h 44.0381, 41.7500, 22.9764. After the 25th year, these tariffs would be progressively reduced, yet maintained for the overall life of the plant.
These are the basis on which a number of private investors made their investments in the photovoltaic sector in Spain.
The 2010 Spanish legislation reform
The main – and most debated – novelty introduced in 2010 by the Spanish government is the removal of the feed-in tariffs from the 26th year after the investment was made. By subsequent reforms in 2011 and then 2013 this timeframe has been extended up until 30 years after the investment was made.
The effects of this reform on the investors’ economic expectations from year 25 onwards is the heart of the arbitration started by the private foreign investors against Spain.
The Arbitral Tribunal’s reasoning
- The Spanish legislation reform of 2010 – that, by reducing the feed-in tariffs granted to the operators, had allegedly affected the investors’ expected return – is not an (indirect) expropriation, as defined by art. 13, paragraph 1, of the ECT
The Arbitral Tribunal has shared the views of other precedents stating that an expropriation (whether direct or indirect) occurs only if the value of the private assets is reduced up until the point that it equals to a misappropriation, by the State, of the private investment. In other words, only if the investor ends up empty-handed as a consequence of the State’s intervention the State shall be ordered to indemnify the investor.
In the disputed case, the Arbitral Tribunal observed that the investors were indeed enjoying the benefit of their investments. Certainly the Spanish 2010 legislation reform had an impact on the investors’ expected revenues. Yet, this reform did not prevent the investors from yielding returns. As such, the Arbitral Tribunal concluded that no expropriation occurred in this specific case.
- Investors are not granted with legitimate expectations that the feed-in tariff would not vary along the years of the investment
The investors maintained that Spain carried out unexpected legislative reform through acts that formally would have required an urgent situation in order to be enacted. According to the investors, no emergency justified the enacted legislative reform. Furthermore, the latter was (allegedly) unchallengeable before Spanish ordinary courts.
According to the investors, this would translate into a violation by Spain of article 10, paragraph 12, of the ECT, according to which any Contracting Party should ensure that its domestic law provides for effective means ‟for the assertion of claims and the enforcement of rights with respect to Investments” (art. 10, paragraph 12 of the ECT).
In this context, the investors maintained that they had a legitimate expectation that the feed-in tariff they relied on at the time the investment was made would remain unvaried. Such expectation should be duly protected and/or indemnified.
The Arbitral Tribunal excluded that the Spanish promotional campaign aimed at attracting investors within the photovoltaic sector could provide legitimate grounds for the investors’ expectations that the tariff granted at the time the investment was made would not vary in the future.
Absent any specific undertaking by the State in which the investment has been made, that the feed-in tariff would remain steady (i.e. a stabilization clause), the investor does not have legitimate expectations to be protected, nor indemnified.
Furthermore, according to the Arbitral Tribunal, the fact that the plants should have registered in the RAIPRE and the RPR does not imply that the investors have an acquired right to the steadiness of the feed-in tariff.
- The 2010 legislative reform was not arbitrary or unreasonable. As such, this measure is not a violation of the fair and equitable principle
The Arbitral Tribunal maintained that the 2010 Spanish legislative reform did not breach the State’s obligation of granting the investors a fair and equitable treatment as set forth under article 10, paragraph 1, of the ECT.
The Arbitral Tribunal was of the view that the Spanish 2010 reform was based on objective criteria (such as the plants’ average life, the energy produced during certain hours of the day or in specific geographic zones in the Spanish territory).
In particular, the Arbitral Tribunal found that the 2010 reform affected plants only from the 26th year after the investment was made. Considering that the average life of photovoltaic plants does not materially exceed that duration, the Arbitral Tribunal resolved that the legislative measure adopted by Spain were not arbitrary or unreasonable.
As to the introduction of hourly limitations for the energy production, the Arbitral Tribunal observed that the original feed-in tariffs (included in the 2007 and 2008 laws) were calculated on the basis of similar parameters. As such, once again the 2010 Spanish reform could not be considered arbitrary or unreasonable.
The impact of this award on future disputes
As of today, the ECT website accounts approximately 20 arbitrations pending against Spain concerning the legislation reform in the photovoltaic sector. According to the same website, 4 arbitrations are pending against Italy on the same topic.
Although a non-binding precedent, this overwhelmingly clear award will certainly have an impact on the pending arbitrations.
No doubt it is a matter of finding a very delicate balance between the effective functioning of the ECT – aimed at protecting investments – and the limits to the States’ legislative power (if any). The fact that the European Commission joined the proceedings as amicus curiae – yet endorsing and supporting the arguments raised by Spain – leads to the legitimate thought that States may have an easiest way out, at least in the highly regulated photovoltaic sector.
The dissenting opinion submitted by Professor Tawil is certainly an indicator that this delicate balance is far from being reached.