Spain Wins First PV Solar Arbitration: A Word of Caution in Using this Case to Predict Outcome in the more than Three Dozen Cases to Come

By Daniel Behn, Postdoctoral fellow, PluriCourts

Solar panels in Northern Spain. Photo: James Moran under CC BY-NC 2.0

Released to the public on 25 January 2016, the first arbitral Award rendered in relation to the PV solar subsidy bubble in Spain was decided in favor of the State, with all claims alleged by the investor-claimants being dismissed in their entirety and the Tribunal ordering a partial cost award in favor of the State.

This case, Charanne v. Spain, was one of the first claims initiated (in early 2013) by aggrieved investors who had invested in the PV solar sector in Spain prior to the global financial recession. With the dismissal of the claims in favor of the State in this case, one is to wonder what implications the Charanne case will have for the 26 currently pending investment treaty arbitrations against Spain that have yet to be decided?

The universe of PV solar cases

However, before discussing the Award and its potential effects on future outcomes, it is important to provide some level of precision about where this case sits in relation to the more than three dozen investment treaty arbitrations that have been initiated to date in relation to the revocation or modification of PV solar incentivization schemes among select EU Member States.

First of all, there are currently 39 investment treaty arbitrations that have been filed. There are 27 cases against Spain (the most recent registration in November 2015), 7 cases against the Czech Republic (the most recent registration in June 2013), and 5 cases against Italy (the most recent registration in December 2015).

In addition to the diversity among respondent states, there is also a diversity in relation to the arbitral institution used (26 ICSID, 9 UNICTRAL, 4 SCC) and the timing of the initiation of the cases (1 in 2011, none in 2012, 11 in 2013, 6 in 2014, and 21 in 2015). The only area where there is no diversity among the claims initiated is in regard to the legal instrument that forms the basis of the claim and the nationality of the investor-claimants: all 39 cases are based on the Energy Charter Treaty (ECT) and all of the claimants are from Western European EU Member States.

Distinctions in the timing of claim initiation

The key to understanding the outcomes in these cases will be in the distinctions between when the claims were initiated and against which State. For example, the 7 Czech Republic cases were all brought in 2013 and relate to claims stemming from the imposition of a special (and facially discriminatory) claw-back tax of 28% that only applied to investors with PV solar projects that came online in 2008 or 2009 (the years when the majority of PV solar investment was made in the sector).

The 5 Italian cases were all brought in 2014 and 2015 and likely relate to changes in the ways PV solar projects were to be subsidized. It wasn’t until late 2014, however, that major retroactive measures were taken. This means that the first cases – brought in early 2014 – and the later cases – as recently as December 2015 – will be claiming violations of the ECT according to very different legislative and regulatory changes.

This is likely what will happen in the Spanish cases as well. In Spain, the changes to the regulatory and legislative framework governing the subsidization of the PV solar sector through feed-in tariffs was progressively restricted through a series of changes beginning in 2010 and not stopping until 2014. This means that the timing of claim initiation in all of the Spanish cases will be critical and is likely to create substantial differences in outcomes.

For example, it is likely that the claims brought in 2011 and 2013 (including the Charanne case) are less likely to result in successful outcomes for the investor-claimants, while the later cases (ie, those filed in late 2014 and 2015) might be more likely to result in violations to the ECT because the claims in those cases are be based on the more severe regulatory changes that occurred in 2013 and 2014.

Different measures, different outcomes?

What this means for investment treaty arbitration is that many of these cases are likely to come to vastly different results. But this will not necessarily mean that investment treaty arbitration is incapable of rendering consistent decisions across tribunals. Rather, the different outcomes in these cases will turn on the timing and the severity of the regulatory changes made by the State vis-à-vis when the investor-claimant chose to initiate its arbitration claim.

Because the Charanne case was initiated in early 2013, its claims focused on a pair of laws passed in 2010 that scaled back some of the incentives offered to investors in the PV solar sector in Spain, but could not be considered retroactive, only retrospective. In essence, these changes to the feed-in tariff scheme included limits on the amount of energy that could be fed into the grid and a new grid access fee. These changes had a significant impact on the profitability of PV solar projects in Spain but were not of the severity that would come with more changes in 2013 and 2014.

In other words, it is not surprising that the Tribunal in the Charanne case did not find a violation of the legitimate expectations of the investor. It would have been unreasonable to expect – absent a specific contractual guarantee between the investor and the state – that the regulatory and legislative environment governing PV solar projects would remain static and completely unchanged for the life of the project. The tribunal found that there had been no violation of the FET standard and no that there was no expropriation either.

However, the changes that were made in 2013 and 2014 to Spain’s PV solar feed-in tariff scheme are of the type that are typically found to violate international investment agreements. These include reductions in the promised feed-in tariffs to rates below what is required for the operation of a going concern; and the imposition of various claw-back taxes aimed at remedying the over-incentivization of PV solar projects. These changes bankrupted a large number of PV solar projects in Spain and has resulted in hundreds of thousands of domestic lawsuits concerning the legality of the measures taken by the Spanish state.

Concluding words of caution

It is very likely that the investment treaty arbitrations filed against Spain in 2013 and 2014 will have a considerably higher chance of successfully demonstrating that Spain indeed violated its obligations under the ECT. But we will have to wait a number of years for all of these decisions to be decided. For now, the Charanne Award provides some preliminary evidence that proving violations of the ECT in this context will not be as straight-forward as some investors may have initially imagined.  

With that said – and despite the fact that Spain will surely use this Award as evidence that it should win on all of its claims – caution should be laid in terms of relying on this Award as the ultimate predictor of outcomes in the 38 cases that will follow given the diversity and timing of the claims being made.

Tags: Investment By Daniel Behn
Published Jan. 27, 2016 9:43 AM
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