From pv magazine 01/2020
Many countries around the world have implemented feed-in tariff (FIT) incentive regimes to foster the development of PV, and in some cases they have gone on to scale back those regimes, inflicting damage on those who invested based on those incentives. Some investors, seeking redress before arbitral tribunals, have relied on international treaties to make their claims.
Indeed, more than 50 such international arbitration proceedings have already been brought against Spain, Italy, and the Czech Republic alone. The rulings arising from those arbitration proceedings – many of which are public – will have an impact on future claims pursued by PV investors against governments.
Bilateral investment treaties (BITs) are treaties that are concluded between two countries, pursuant to which each government promises certain minimum levels of fair treatment and non-discrimination for investors from the other country. There are currently thousands of BITs in effect. In addition to BITs, there are also a number of multilateral international treaties (treaties signed by three or more countries), under which similar principles apply. The most prominent example of a multilateral treaty relevant to PV claims is the Energy Charter Treaty (ECT), with investor protections applying to more than 50 countries.
Protection with qualification
Underinvestment protection treaties, host states must usually accord fair and equitable treatment (FET) and full protection to investments, while not engaging in discriminatory treatment or expropriating investments without just compensation. A number of arbitral tribunals have concluded that a host state’s obligation under an investment treaty to provide fair and equitable treatment to investments includes the provision of a stable legal environment and safeguards for the legitimate expectations of investors. Some investment protection treaties also contain an “umbrella clause” under which the violation of an agreement between an investor and a host state could amount to a breach of the treaty.
As a result, qualifying PV investors who made investments based on incentives or promises made by host governments may have the right to commence arbitral proceedings against the host state to obtain compensation when those incentives or promises are changed.
Who is protected
However, while bilateral and multilateral investment treaties provide investors with important protections, they also contain limitations on what qualifies as an “investor” and an “investment.” For example, issues can arise in qualifying as an “investor” when a PV project is owned by a special purpose vehicle (SPV) which is bought and sold by investors of different nationalities over the course of the project’s development and implementation. Issues can also arise where a PV project is owned by a chain of SPVs of different nationalities, with the ultimate beneficial ownership held by one or more people or entities of different nationalities. Cases such as these require close consideration to determine which investment treaty or treaties apply.
Similarly, attention must be given to how each relevant treaty defines “investment.” The definition is often quite broad and could include many types of property and property rights, as well as companies, shares, stocks, other forms of equity participation, bonds, and debt. It could also include claims to money, amounts associated with qualifying investments, and any rights conferred by law or contracts.
International arbitration is a process that happens outside of the host state’s court system. An arbitral tribunal or panel is appointed, typically with three members (one appointed by the investor claimant, one by the respondent host state, and a third presiding arbitrator). The arbitrators are usually senior lawyers with expertise in international investment treaty disputes.
The arbitration process itself typically involves the exchange of written submissions accompanied by documentary evidence, statements by witnesses directly involved in the project at the time, and perhaps expert evidence (for example, calculations of the damages caused by the change to the host state’s legislation). The exchange of written submissions will usually lead to one or more hearings at which the parties’ lawyers will present their arguments and witnesses will be cross-examined. The arbitral tribunal will then ultimately issue an award with its findings. It is a lengthy process that typically takes between two and four years from the commencement of proceedings to the final award, although that time can vary depending on the facts of the case and how the arbitration proceedings unfold.
International arbitration awards can be enforced pursuant to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, or the Convention on the Settlement of Investment Disputes of 1965. These two conventions facilitate the enforcement of arbitral awards and assist successful claimants in collecting money awarded by arbitration tribunals.
PV investors with successful cases against Spain Since May 2017
NextEra (€290 million)
Eiser Infrastructure (€128 million)
Antin Infrastructure (€101 million)
Masdar Solar (€64 million)
Novenergia (€53 million)
Athena Investments, formerly known as Greentech (€48 million)
9Ren / First Reserve (€42 million)
SolEs Badajoz (€41 million)
Cube Infrastructure Fund (€34 million)
Several recent decisions by arbitral tribunals indicate the possible outcomes of FIT-related arbitration. For example, since May 2017, there have been at least nine known cases brought by PV investors against Spain that have resulted in awards that were favorable to investors. The claimants and amounts awarded are listed in the table on page 69.
It should be noted, however, that some of these successful cases include decisions partially in favor of Spain, with a corresponding reduction to the amounts originally claimed. In addition, there have also been at least two cases against Spain in which PV investors were not successful – specifically those brought by Charanne and Isolux.
A close look at a claim brought by Greentech against Italy illustrates how these types of arbitration actions can unfold. Greentech made its claim due to changes to the FIT and associated incentives regime, following the so-called Spalma Incentivi in 2014, as well as associated changes to the Conto Energia regime. Broadly speaking, the Spalma Incentivi Decree significantly reduced the FIT levels guaranteed to grid-connected PV power plants with a nominal capacity exceeding 200 kW, subject to express stabilization agreements between PV electricity producers and the relevant state-owned entity (the Gestore dei Servizi Energetici S.p.A., or GSE). This unexpected change affected the project finance obtained by most solar PV projects in Italy and prevented numerous investors from servicing their debt.
The majority of the Greentech tribunal – two of its three members – found that several provisions of the Spalma Incentivi Decree, which forced PV solar project operators to choose between three options of reduced FIT schemes, constituted a breach of the investors’ legitimate expectations and was therefore a violation of the fair and equitable treatment (FET) standard set out in the ECT. In reaching this conclusion, which was specific to the facts of that case, the Greentech tribunal said it was particularly significant that contracts that had been concluded with the GSE stipulated that the specific FITs would be received over a 20-year period.
To assess damages, the Greentech tribunal adopted the discounted cash flow (DCF) method to calculate the compensation that would restore the investor to the financial position it would have been in had the original FITs not been changed. The DCF methodology meant that expert accountants determined this amount by calculating the value that the PV plant would have had if the Spalma Incentivi Decree had not been enacted (i.e., with the benefit of the original FITs), and comparing that with the actual value of the PV plant (i.e., with a reduced value resulting from the reduced FITs). The Greentech tribunal chose to use the DCF method in this case because PV plants have relatively predictable performance and involve foreseeable costs, and the incentive tariffs had been set in advance.
Based on these calculations, the Greentech tribunal awarded the claimants the total amount claimed as a result of the reduction in FITs (in that case, €11.9 million), together with compound interest awarded from the date of the implementation of the Spalma Incentivi. The Greentech tribunal also ordered Italy to pay all of the claimants’ arbitrator fees, and half of the claimants’ legal fees.
The scrutiny by arbitral tribunals will always be fact-specific. Tribunals often end up focusing on the assurances given to PV investors by the host state, and investors’ expectations arising from those assurances, balanced against the host state’s right to adjust regulations over time.
Given the positive reception that some claims have received before international tribunals, PV investors are advised to explore their options against host state governments worldwide when incentive regimes are changed or reduced during the course of an investment, whether at the early stages of obtaining regulatory approval and raising funds, or once a project is operational. PV investors may also wish to consider third-party funding options, in which experienced third parties provide partial or full funding for the international arbitration proceedings in exchange for a percentage of any award against the host state. Third-party funding will be subject to its own due diligence process and can never be guaranteed, but it can help make claims possible where the investor does not have the funds or does not wish to commit the funds to pursue a claim.
There are dozens of claims currently before international tribunals, with more regularly being filed. PV investor claims against host states for altering FIT incentives are thus likely to be part of the landscape for some time.
Daniel R. Meagher
About the author
Daniel R. Meagher is a London-based partner in Winston & Strawn’s international arbitration practice. He regularly advises clients in investor-state disputes brought under international investment treaties, as well as business-to-business disputes brought under or relating to commercial contracts.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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