Appeal against the reduction of feed-in tariffs in Spain

Under the Transatlantic Free Trade Agreement (Transatlantic Trade and Investment Partnership, short TTIP) property rights for foreign investors and the competence of joint international arbitration are particularly faulted. Looking at the fight of many international investors against the Kingdom of Spain because of legally guaranteed (and partially retroactive) unpaid feed-in tariffs, one can see that such schemes certainly have their place.

Spain was particularly regarded as one of the leading countries to promote renewable energy: under the action plan for renewable energy in Spain 2011-2020 (PANER), by 2020, they should alone provide 20% of the energy consumption.

The EU Directive 2001/77/EC allows free choice of the Member States with regard to the promotion system, to increase the share of renewables in gross inland energy consumption. However, the dominant promotion system is the feed-in tariff system, for which Spain has also opted for. According to the law on the electricity sector (LSE) of 27 November 1997, producers of renewable energy, not the consumers of certain energies, are subject to special regulations, which impose their own duties and stipulate special rights such as receiving a remuneration (art. 30.4 LSE).

Due to the international economic and financial crisis of 2007, many member states had to make drastic cuts, which resulted mainly in savings in renewable energy. Spain also had to implement cuts as a result of the budget deficit, to the extent of a complete withdrawal of allowances for new facilities. This led to the threat of the existence of numerous companies in many places, in which foreign investors were involved.

In order to tackle the drastic measures, three options are provided for investors in Spain: the transition before the national courts, before the Court of Justice or the assertion of claims under the so-called Energy Charter Treaty.

The actions before the Spanish courts relied mainly on the retroactivity bans and violation of legitimate expectations in public decisions of Art. 2 para. 3 of the Civil Code and Art. 9 para. 3 of the Spanish Constitution, which have had little success. Under EU law, the investor cannot direct legal action against national laws of the Member States, which is why the Court of Justice offered no solution.

Energy Charter Treaty

Only the Energy Charter Treaty (Energy Charter Treaty, in short: ECT) offers any hope. An international agreement on the protection of foreign investments and promotion of energy efficiency has been signed by the vast number of European countries and the EU, and foreign investors have been told of special protection rights allowing them to appeal before an international arbitration tribunal. In the exercise of such rights, however, the following problems may arise:

From the European Commission’s view, the ECT does not apply to internal European disputes which EU competencies concern, because consequently the EU is the actual Defendant and EU law continues to force agreement between the Member States in the year 2014 to issue valid priority. On the other hand, it can be argued that the interpretation of European law and in foreign courts would be possible, since the arbitration actions are not solely directed against the EU or its actions, but against individual Member States and the EU has also unreservedly ratified the ECT. Given this disparity, arbitration courts for the purpose of enforcement are transferred to the ECT and EU law can be interpreted harmoniously, which allows EU law but the priority.

To qualify for the protection granted by the ECT, a private investor has to make an investment in another Contracting State i.S.d. Art. 1 no. 6 ECT. The question is then whether the resulting reduction of feed-in tariffs also constitutes a breach of the ECT. In question are primarily two rules:

Fair and equitable treatment, Art. 10 I ECT

The disappointment of legitimate expectations of an investor with respect to the maintenance of the general legal framework might impede fair treatment. Legitimate is above all such an expectation that a change in law on the basis of the rule of law and not unilaterally damaging takes place, and its justification is not an excuse. However, feed-in tariffs can be regarded as worthy of protection, when the required payment of compensation for plant operators is guaranteed by law or contract. The long payback periods for renewable energy and the lack of cross sales opportunities clearly speak for such a right. Protecting value is the position of investors even if discriminatory reflects the new regulations over foreign investors, or the bad financial situation.

Prohibition on expropriation, Art. 13 I ECT

A direct or indirect expropriation of investors is not available at the reduction of feed-in tariffs and the conditions of indirect expropriation have not yet been fully explained in the arbitration litigation practice. Increasingly, however, the requirement is made by a substantial property loss.

The first arbitration ruling issued in this context against Spain is Charanne v Spain. Due to the requirements specified in the LSE compensation (see above), various presentations El sol puede ser suyo, and the requirements in the Pan Renewable Energy (PER) from 2005 to 2010, aimed at the lawsuit against the cancellation of the compensation after completion of the 25th year of operation and a reduction of remuneration eligible power volumes. However, the Tribunal ruled in favour of Spain: The state cannot, by means of its legal system, produce any expectations under Article 10 of the IECT, therefore no specific agreement has been concluded. A legitimate interest, with respect to the feed-in tariff system, has only been found in the minority vote. An indirect expropriation i.S.d. Art. 13 I ECT was rejected, due solely to lower losses, which do not constitute substantial property loss.

It seems that even the ECT in this regard, would not justify any rights for foreign investors. However, the measures discussed in Charanne v Spain in comparison to later cuts are considered as slightly minor. Also it seems to be increasingly accepted that a State cannot commit to the idea of not changing its legal system. Furthermore, a violation of the prohibition of expropriation in the case of individual threat could well occur. Thus, the approach of foreign investors in Spain against the cuts of compensation seems to be not such a hopeless idea for the future, although the ways to effectively enforce their rights are limited.

Isla Markham

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Please note that this article is not intended to provide legal advice.

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