Cancellation of the “green” tariff: international practice of protecting the rights of foreign investors

Perhaps the hottest topic in the energy sector at the end of 2018 and early this year is the discussion of changes to the approaches of providing state support for electric power producers from renewable sources. The main idea of the change is that, starting from 2020, new players of the RES market will be subject to a new incentive system – “auctions” instead of the “green” tariff. The main aim for this is the unreasonably high level of the “green” tariff. First of all, it concerns the tariff for solar power plants (SPP) and wind power plants (WPP), which create a price load for end users of electricity in Ukraine, and it is obvious that such load will continue to grow rapidly with commissioning of new power plants.

Why did it happen that, despite the legislative guarantees of the unchanging state support for electricity producers from renewable sources till 2030, is Ukraine still planning the changes? On the one hand, it is quite natural that at a certain stage there may be a need to adjust the active mode of stimulation. But will not such changes be the first call for investors that Ukraine will cancel the stimulus regime at all?

Oddly enough, a similar practice has already developed in a number of European states. At present, arbitration practice on protection of interests of foreign investors is actively being formed in the event that the state changes rates of preferential tariffs, retrospectively applies them to producers of renewable energy, introduces retrospective taxes, etc. The largest number of such disputes (more than 30) at the end of 2018 brought by foreign investors to the Kingdom of Spain. The latter actively attracted foreign investments in the field of renewable energy until the crisis of 2008. Due to the colossal accumulation of subsidies and the formation of a power system deficit that the state was supposed to cover, the Spanish government took a difficult but compelled decision. The limits for the construction of new SPPs were introduced, the feed-in-tariff was abolished, and finally, a retrospective tax for the SPPs was introduced.

The first dispute resolved in favor of investors was the dispute between Eiser Infrastructure Limited and Energia Solar Luxembourg S.à r.l. v. Kingdom of Spain (May 2017), which was considered by the International Center for the Settlement of Investment Disputes (ICSID). The investor’s side insisted on the violation by the Kingdom of Spain of Article 10 (1) of the Energy Charter (ECT), the participant of which is also Ukraine. This article determines that:

Each Contracting Party, in accordance with the provisions of this Agreement, encourages and creates stable, equitable, favorable and transparent conditions for investors of other Contracting Parties for the purpose of capital investment in its territory. Such terms include an obligation to provide fair and equitable treatment at any time regarding the investment of investors of other Contracting Sides.(…)

In no case should such a capital investment be granted a less favorable treatment than is required by international law, including obligations under the treaty. Each Contracting Side shall comply with any obligations, which it has accepted with regard to an investor or investment of an investor of any other Contracting Side.
Arbitration has determined that the rulemaking actions of Spain did not really meet the requirements of a fair and equal treatment with regard to foreign investors, especially since pre-investors had every reason to rely on such a regime, as Spain is well aware of its active support for the development of renewable energy, in particular solar energy.

Arbitration found that the state's energy reform in 2013-2014 was “devastating” and indeed inflicted irreparable harm to foreign investors.

Thus, the first case against the Kingdom of Spain and its energy reform was resolved in favor of foreign investors. The decision was based on the violation of the Energy Charter provisions regarding the fair treatment established for foreign investment, as well as the arbitrage determination of the fact of the destruction of investments.

Next dispute Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. The Kingdom of Spain (February, 2018) was resolved by the Arbitration Institute of the Stockholm Chamber of Commerce also in favor of foreign investors with the compensation of 53 mln euros plus interest and court costs, but with a few important additions that would definitely affect the practice of resolving such disputes in the future.

First of all, the arbitration forced the plaintiff to admit that the legislative changes did not inflict irreparable damage to his investments, and the already operating solar stations continued to generate revenue, and therefore it would be incorrect to consider the investments as completely lost. However, the arbitration has noted that the reform was still “radical, eradicative and unexpected”, and although it did not inflict irreparable damage to investments, it significantly reduced the expected revenues from them.

The second important aspect of the dispute is the extended interpretation by arbitration of Article 10 (1) of the Energy Charter. In the context of the fact that the Energy Charter is developed as an agreement aimed at long-term cooperation in the energy market, the arbitration has established that the “fair and equal” regime provides that:
(i) legal field in which the investment is made will not be subject to ungrounded and unjustified modifications;

(ii) legal norms will not be subject to modifications that conflict with a special commitment to the investor.
In such an interpretation of Article 10 (1), arbitration will be based on two subsequent decisions made in favor of investors against Spain. In addition, there are no reasons to doubt that investors in potential disputes will also be able to rely on this article and its interpretation.

The last dispute today resolved in favor of a foreign investor, Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdom of Spain (June 2018) with 112 mln euros of compensation, in general, is based on the same principles as previous disputes, although it has an important story in the appointment of court costs. For example, if in previous disputes the arbitration ordered equal payment of court costs for both parties, within the limits of the given case the arbitration awarded Spain payment of 60% of expenses of the plaintiff.

Also, it is important to note one more common aspect to all decisions, which plays an important role in shaping the amount of claim – the period of operation of the solar system. Although investors say that the life of the plants is over 40 years, the arbitration in each of the disputes determined the lack of evidence for this and set a time limit on which Spain insisted, i.e. 25 years.

We hope that our state will take into account the experience of foreign partners and will not allow violations of investors' rights. But in any case, given the already established arbitration practice, the potential of protecting foreign investments in the renewable energy sector of Ukraine looks quite promising.