Solar Wars Part X: The Force is Strong with Investors
Market Insight12 September 201912 September 2019
UK & Europe
Previous Solar Wars articles explained how arbitral tribunals considering intra-EU claims under the Energy Charter Treaty (ECT) have consistently rejected the application of judgment of the Court of Justice of the European Union in Slovak Republic v Achmea (Case C-284/16), which held that an arbitration clause in bilateral investment treaty (BIT) between two EU states contravened EU law. Those articles also considered measures being taken by the European Commission (EC) to eradicate intra-EU BIT
Recent developments have confirmed that tribunals continue to reject Achmea-style challenges to jurisdiction, and as a result over the last three months Spain has suffered a losing streak in ECT arbitrations of alarming proportions.
Spain takes a hammering
Between 31 May and 2 August 2019 five different ECT arbitral tribunals handed down awards ordering Spain to pay EU investors compensation for the reform of its solar incentive scheme (as to which, see previous Solar Wars articles):
On 31 May 2019 a tribunal ordered Spain to pay two Dutch subsidiaries of New York-listed NextEra Energy €290 million plus interest and costs – the largest ECT award arising out of the reform of Spain's incentive scheme so far (NextEra Energy Global Holdings BV and NextEra Energy Spain Holdings BV v Kingdom of Spain (ICSID Case No. ARB/14/11)).
Rejecting Spain's Achmea jurisdictional objection, the tribunal held its remit was to determine whether the dispute fell under the provisions of the ECT (which it did), not whether it falls under or is a breach of EU law.The tribunal held that an examination of the history of the ECT’s creation generates a presumption that no contradiction exists between the ECT and EU law: consequently, the tribunal could not retroactively construe Spain’s offer to arbitrate (made by signing the ECT) as invalid.
Also on 31 May 2019 a tribunal ordered Spain to pay €42 million to Luxembourg fund 9Ren, which owned Gamesa Solar in Spain (9REN Holding Sarl v Kingdom of Spain (ICSID Case No. ARB/15/15)). The tribunal rejected Achmea-based objections to jurisdiction, concluding that Achmea extended only to BITs and not the ECT, which is a multilateral treaty; hence there is no material conflict between the ECT and EU law. In any event, EU law could not modify Spain’s obligations under the ECT.
On the merits, 9Ren claimed it invested in solar projects in reliance on Spain's 2007 and 2008 incentive schemes, which included a guarantee of a premium feed-in tariff and related benefits, and a “grandfather clause” providing that that those benefits would be irrevocable for renewables facilities registered by a certain deadline; and hence it had legitimate expectations that it would continue to receive those benefits. The tribunal held that the grandfathering clause contained in the 2007 incentives did generate such legitimate expectations, and hence Spain's decision to end those incentives was a breach of the ECT's fair and equitable treatment standard. However, the 2008 benefits were enacted by a legal instrument which expressly contemplated review and modification, and legitimate expectations could not have arisen in respect of those incentives.
On 15 July, Spain was ordered to pay approximately €34 million plus interest and costs to Cube Infrastructure (Luxembourg) and Demeter (France) (Cube Infrastructure Fund SICAV and others v Kingdom of Spain (ICSID Case No. ARB/15/20)). The tribunal dispensed with Spain's challenge to jurisdiction, holding that nothing in the ECT precluded it from hearing an intra-EU claim, and in any event Achmea did not apply to the present case.
The majority of the tribunal went on to hold that, while "no investor is entitled to assume that the regulatory regime in place at the time that its investment is made will continue to remain in force", states could make representations as to the future treatment of investments in such a manner as to create expectations that could not be defeated without violating the duty of fair and equitable treatment.In this case, Cube had invested in solar PV and hydroelectric projects with a legitimate expectation that the incentives under the "special regime" for renewable energy would not be significantly amended, or abolished retroactively; and Spain's reform of its incentive scheme violated the ECT's fair and equitable treatment standard.
In a dissenting opinion, one arbitrator held that the claimants had only invested in the hydro sector in 2011 and 2012, when "the conditions of the electricity regime had changed significantly", and so they could not have had legitimate expectations with regard to the hydro projects.
On 31 July 2019, in SolEs Badajoz GmbH v Kingdom of Spain (ICSID Case No ARB/15/38) a tribunal ordered Spain to pay €41 million to SolEs Badajoz, a German solar power plant investor. The tribunal dismissed Spain's Achmea-based jurisdictional objections, holding that (i) the ECT provides that other treaties such as the Treaty on the Functioning of the European Union (TFEU) could not derogate from investor protections conferred by the ECT that were more favourable to investors; (ii) the ECT provides investors with more favourable protections than the TFEU, including an express right to bring an arbitral claim against the host state; and hence (iii) the rationale of the Achmea judgment – that the TFEU and other EU constitutional treaties provide an exhaustive set of rights and remedies to protect intra-EU investment - could not apply to ECT claims.
On the merits, the tribunal held that Spain's regulatory reforms were "disproportionate", "sudden" and “changed the basic features of the regulatory regime that was in place, exceeding the changes that claimant could have reasonably anticipated at that time.” Consequently they breached the ECT’s fair and equitable treatment standard.
On 2 August 2019, a tribunal ordered Spain to pay compensation to the UK-registered InfraRed Environmental Infrastructure and a number of unidentified co-claimants (InfraRed Environmental Infrastructure GP Limited and others v Spain (ICSID Case No. ARB/14/12)). The award is confidential, but the damages sought were approximately €92 million.
As if to demonstrate that it never rains but it pours, on 7 August 2019 it was reported that Belgian company Sapec had lodged a new ECT claim against Spain, thought to be in respect of Sapec's investment in Spanish photovoltaic parks.
Investors with the upper hand?
These recent awards indicate that investors now have the upper hand in their ECT claims against EU states. However, as explained in previous Solar Wars articles, obtaining an award is one thing; obtaining payment of an award is another, and the successful investors will face further battles to execute their awards, most likely in jurisdictions outside the EU. And as is explained in the next Solar Wars instalment, the EC is fighting back…