By: Aloke Prabhu; Junior Staffer

Spain’s decade-long war with foreign investors over the changes to its renewable energy policy in 2010 continues as the country seeks to annul tens of millions in awarded damages.  The story of Spain’s disputes will likely discourage investors’ confidence in international investments in renewables for the foreseeable future.  These cases demonstrate a need for reliable systems of dispute resolution if countries are to tackle the pressing global climate issues facing them today.

As Spain discovered, the evolving technology and the need for flexibility in this sector make disputes both highly likely and costly.  Developing and implementing renewable energy systems involves high upfront costs that investors can only make up over long periods.  Furthermore, there are usually challenges in getting the energy produced by renewables to consumers at an affordable price.  In the late 2000s, Spain enacted well-intentioned policies, but the inherent obstacles eventually caused disputes between the State and foreign investors.

In 2007, Spain instituted regulations that featured a generous feed-in-tariff (FIT).  A FIT policy guarantees developers a premium price above the wholesale market value for all electrical output produced.  The goal was to stimulate renewable energy development to meet targets directed at sustainable development.  In this sense, the program was a profound success.  Spain’s deployment of solar photovoltaic (PV) modules skyrocketed in 2008, nearly 400% compared to 2007 deployments.  Spain was responsible for half of the world’s new solar installations that year, making it a global leader in renewable energy implementation and well on track to meet its sustainable energy goals.

Unfortunately, the Spanish regulatory regime lacked mechanisms to adjust the FIT, to limit solar PV capacity, and to support the electrical infrastructure. As a result, massive cost increases accompanied the boom in solar PV.  In 2009, government payments supporting solar PV made up 50% of Spain’s renewable energy expenditures, despite accounting for just under 12% of renewable energy produced.  This burden coincided with the 2008 financial crisis; the combination forced Spain to address solar PV deployment in the country.

“Unfortunately, the Spanish regulatory regime lacked mechanisms to adjust the FIT, to limit solar PV capacity, and to support the electrical infrastructure. As a result, massive cost increases accompanied the boom in solar PV. “

Aloke Prabhu

The Spanish government responded in 2010 by reforming its regulations.  It limited the output of solar PV, reduced the FiT provided for it, and introduced taxes on energy provided to the electrical grid; many of the changes applied retroactively.  Solar energy companies complained that the changes made their operations economically nonviable considering the high up-front cost of solar deployments.  These reforms, as well as the eventual moratorium on solar PV support in 2012, sparked dozens of claims from investors against Spain.

The claims against Spain primarily rely on the Energy Charter Treaty (ECT), of which Spain is a signatory.  The treaty provided for a fair and equitable treatment standard (FET) that investors contend Spain violated by frustrating their legitimate expectations.  Spain faced fifty claims, totaling 8 billion euros, stemming from changes to their regulatory regime.

The investors argue that they reasonably relied on Spain’s representations that the regulatory regime would be stable and that the contested reforms unreasonably changed the allocation of costs and risk.  In response, Spain has maintained that the policies only entitled investors to a “reasonable” rate of return and that the original regime overcompensated them.  Investment arbitrators failed to provide much clarity because each tribunal used a different analysis when reviewing the reasonableness of Spain’s policy reforms. 

The tribunals varied in the way they resolved the disputes.  Each tribunal assigned a different weight to several factors, including the justifications behind the change to the regulations, expected return to investors as compared to a reasonable return benchmark, and allocation of costs and risk.  In general, if the reforms made the investments unviable or against the public’s interest, they would be unreasonable.  To date, tribunals have decided twenty-one of twenty-eight cases against Spain and awarded 1.2 billion euros in damages.

So far, Spain has refused to pay any damages, joining Venezuela, Russia, and Argentina as one of the countries with the highest unpaid arbitration awards in the world.  Spain has fought to annul or reduce damages for years.  The European Court of Justice’s ruling bolstered Spain’s efforts by holding that the ECT’s arbitration provision did not extend to member states.  Most recently, Spain has used this decision to annul a fifty-three million euro award made to a Luxembourg-based investor and has filed five more cases seeking to do the same.

Spain and many other signatories of the ECT intend to withdraw from the Treaty, asserting that it prevents them from meeting their renewable energy goals.  Spain’s withdrawal, and the European Court of Justice’s decision regarding the arbitration clause, have created significant doubt that the ECT may protect investors in future disputes.  How comfortable will foreign investors feel in cross-country investments where the only means of redress may be the state’s courts?

Spain’s drawn-out disputes over its renewable energy policies underscore the need for a dispute resolution system that is consistent and reasoned.  The arbitration tribunals that investors initially sought were inconsistent in their analysis of the reasonableness of Spain’s policy changes.  However, they appeared more objective than local courts, which were unfriendly to investor complaints.  The European Court of Justice’s decision to remove arbitration as an option between member states stirs these already turbulent waters.  In the face of such uncertainty, investors will likely avoid international investments in renewables, which would hinder sustainable development in the EU for the foreseeable future.