Between 1997 and 2009, Spain adopted several regulations promoting investments in renewable energy sources. The new support system guaranteed investors a reasonable rate of return at even 15%. Marketing actions were also taken, culminating in information prospectuses under the slogan “The Sun Can Be All Yours”, aiming at attracting foreign investments to Spain – write Emanuel Wanat (advocate in the firm White and Case), dr Grzegorz Goniewicz (lawyer in the law firm specializing in litigation and arbitration) and Łukasz Zbyszyński (advocate specializing in litigation and arbitration).
This article has been published in the Polish Energy Brief quarterly.
However, Spain would soon lose its fervor, as the costs of the support system proved too high to sustain. Between 2010 and 2013, Spain adopted measures that effectively limited the support system and reduced profitability of the renewable energy investments.
The new measures were constitutional and compliant with Spain’s domestic law. However, this did not preclude the breach of international law. Sued by foreign investors, Spain initially prevailed in the Charanne case, but lost the three subsequent cases: Novenergia, Masdar and Eiser. The disputes proved costly: tribunals awarded from Spain EUR 128 million (Eiser), EUR 64,5 million (Masdar) and EUR 53 million (Novenergia) in compensation. Other EU states, including Italy and the Czech Republic, faced similar disputes.
In light of these cases, a fundamental question arises. Namely, whether a state can be held liable for changing the regulations that it previously used to induce foreign investors to make investments on its territory? In other words: can a state change the rules in the middle of the game?
International investment protection
Foreign investors’ rights are protected internationally under the bilateral investment treaties („BITs”) and multilateral treaties, like the Energy Charter Treaty. Poland is a contracting party to the Energy Charter Treaty and almost 60 BITs on promotion and mutual protection of investments.
The system of protection provided in international treaties is in most parts similar, encompassing, among others, an obligation to accord investors fair and equitable treatment (the FET clause) and prohibition against expropriation of a foreign investment. These rules are subject to interpretation of international arbitral tribunals, which apply specific standards of protection. One such standard is an obligation to protect investor’s legitimate expectation that a legal framework, which induced the investment, would not be fundamentally changed. However, not every expectation of an investor is legally protected. The standard covers only the expectations that were induces by a state by virtue of specific assurances, guarantees or decisions, including imperative actions of a state (e.g. through registration of the operators of the renewable energy facilities or issuance of permits). Additionally, in the Parkerings case the tribunal stressed that a general legal and political stability of a state should be given regard to. A professional and diligent investor needs to take into account the risks associated with investing in a sector, which has unstable regulations and is subject to constant changes.
A state’s right to self-regulate and the protection of investors
Within its sovereign powers, a state is free to adopt its laws, including the energy regulations. In principle, a state’s discretion in this regard should not be limited. By concluding an international treaty, a state does not deprive itself of a right to self-regulate. Therefore, investors must accept that a state will retain a right to change its regulations and may take advantage of this right as needed.
However, a state’s discretion is not unconditional and may be limited by will of a state itself. In particular, a state may promise not to change its own law for a given period of time. This kind of obligation may be assumed via an international treaty, but also as a result of a domestic regulation giving rise to a quasi-contractual relation between a state and an investor. According to the recent jurisprudence, changes to a legal environment of an investment may violate the fair and equitable treatment standard if they radically modify the conditions in which the investment operates contrary to the obligations that the state had assumed. Consequently, a state may change some rules of the game, but not all of them.
Source: Polish Energy Brief