Renewable Energy Investor-State Arbitration: Facts, Figures and Issues Overview
Renewable energy investment arbitration has been a hot topic around the globe for quite some time. The aim of this article is to provide an overview of the facts and figures regarding this phenomenon and of some issues in dispute in these arbitrations.[1]
According to the UNCTAD database, over the past decade, 93 out of the 654 arbitration cases brought by foreign investors against states have been related to renewable energies, be they solar, wind, biomass or hydro.[2] That is roughly 15% of all investor-state arbitrations. Therefore, it is easy to conclude the relevance for investor-state arbitration of renewable energies and vice versa. And this trend is likely to continue, given the rising importance of the role of renewables in the energy mix.
Another way to look at its relevance is the following: out of a total of 135 Energy Charter Treaty (ECT) arbitrations, around 80 concern renewable energy disputes.[3] That is, the majority of ECT cases, approximately 60%, are related to renewables. Yet another conclusion we can draw from these figures is that, to date, the majority of renewable energy arbitrations have been based on this multilateral treaty, adopted in 1994.
The relevance of these renewable cases is not only due to their number but also to the amounts in dispute. Statistics show that there has been over USD 20 billion at stake, more than double the amount in fossil fuel arbitration cases and more than four times the amount in dispute concerning nuclear power.[4]
Regarding the outcome of these disputes, it can be argued that the awards and decisions rendered so far show rather diverse results. Indeed, this is only to be expected since no two cases are identical. Nevertheless, the issues in contention, and some points that may move the needle can be recognized. In any case, studying in detail the already substantial renewable energy investment arbitration case law is a must, both for States and investors alike.
Fair and Equitable Treatment
According to ECT statistics,[5] 75% of the breaches alleged (and 87% of the breaches found) are grounded in article 10(1) of the Treaty, which provides that:
“[e]ach Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”
Article 10(1) of the ECT refers to stable, equitable, favourable and transparent conditions (6% of the alleged breaches), fair and equitable treatment (25%), most constant protection and security (12%), unreasonable or discriminatory measures (18%), less favourable treatment than that required by international law (1%), and the umbrella clause (13%). It is worthwhile to remark as well that 62% of the breaches found are related to the fair and equitable standard.
As an approximation to the content of these standards, the Antaris Solar v. The Czech Republic award[6] of 2018 provides an attempt “to summarize the present state of international law and practice”, as follows:
“[a]s is usual in these cases, the Parties have adduced many published awards (in this case more than 50) on the interpretation or application of the FET (“fair and equitable treatment”) standard, and the FPS (“full protection and security”) and non-impairment standards. Most of them are well-known, and, although formulations of the principles differ in detail, it is only necessary to summarize the present state of international law and practice in these general propositions (several of which overlap with each other):
(1) There will be a breach of the FET standard where legal and business stability or the legal framework has been altered in such a way as to frustrate legitimate and reasonable expectations or guarantees of stability. […]
(3) A claimant must establish that (a) clear and explicit (or implicit) representations were made by or attributable to the state in order to induce the investment, (b) such representations were reasonably relied upon by the Claimants, and (c) these representations were subsequently repudiated by the state.
(4) An expectation may arise from what are construed as specific guarantees in legislation. […]
(7) An expectation may be engendered by changes to general legislation, but, at least in the absence of a stabilization clause, they are not prevented by the fair and equitable treatment standard if they do not exceed the exercise of the host State’s normal regulatory power in the pursuance of a public interest and do not modify the regulatory framework relied upon by the investor at the time of its investment outside the acceptable margin of change.
(8) The requirements of legitimate expectations and legal stability as manifestations of the FET standard do not affect the State’s rights to exercise its sovereign authority to legislate and to adapt its legal system to changing circumstances.
(9) The host State is not required to elevate the interests of the investor above all other considerations, and the application of the FET standard allows for a balancing or weighing exercise by the State and the determination of a breach of the FET standard must be made in the light of the high measure of deference which international law generally extends to the right of national authorities to regulate matters within their own borders.
(10) Except where specific promises or representations are made by the State to the investor, the latter may not rely on an investment treaty as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework. Such expectation would be neither legitimate nor reasonable.
(11) Protection from arbitrary or unreasonable behaviour is subsumed under the FET standard […].”[7]
Moreover, in the Blusun v. Italy[8] case (award of 2016) we can note another example of an interpretation of the text of Article 10 of the ECT, where the tribunal understood that:
“the core commitment is that in the second sentence, expressly included in the first, ‘to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment’. This incorporates the fair and equitable treatment standard under customary international law and as applied by tribunals.
(4) That standard preserves the regulatory authority of the host state to make and change its laws and regulations to adapt to changing needs, including fiscal needs, subject to respect for specific commitments made.
(5) In the absence of a specific commitment, the state has no obligation to grant subsidies such as feed-in tariffs, or to maintain them unchanged once granted. But if they are lawfully granted, and if it becomes necessary to modify them, this should be done in a manner which is not disproportionate to the aim of the legislative amendment, and should have due regard to the reasonable reliance interests of recipients who may have committed substantial resources on the basis of the earlier regime.”
Just as another example of how some tribunals have performed this balancing exercise, the PV Investors v. Spain final award[9] rendered in 2020, after noting that “tribunals have taken a variety of approaches”,[10] and after stating that “the analysis shows that the regulatory framework […] did not provide for a stabilization guarantee”,[11] concludes that:
“[i]n the Tribunal’s view, the principle of reasonable return serves as the limit of ECT-compliant regulatory changes. If changes cross the “reasonable return” line, that is if they deprive investors of a reasonable return, the State conduct transgresses the standards contained in Article 10(1) of the ECT […] the Claimants are only entitled to compensation under Article 10(1) of the ECT if they establish that the new regime violates the guarantee of reasonable rate of return. This approach strikes the right balance between, on the one hand, the protection of investors who have committed substantial resources in a sector which continues to provide Spain with the environmental benefits of clean solar power, and, on the other hand, Spain’s right to regulate and adapt its framework to changed circumstances, provided that right is exercised in a manner that is proportionate, reasonable, and non-arbitrary manner”.[12]
Quantum informs liability
One last point of particular interest is the concurrence of liability and quantum. For instance, again in PV Investors, the Tribunal observed that:
“[t]he guarantee provided […] is economic in nature. This being so, the Tribunal cannot verify whether or not such guarantee was observed without considering the economic impact of the Disputed Measures on the Claimants’ investment. Only once it has ascertained such impact will the Tribunal be able to determine whether or not there is a breach of the Treaty […] in this particular case the quantification of the harm, if any, informs the finding on liability. […] In other words, the assessment of the harm suffered by the Claimants is necessarily linked to the reasonableness, non-arbitrariness, proportionality, etc., of the Respondent’s conduct”.[13]
This quantification of the damages may include assessments and decisions over the following elements, inter alia: date of valuation (ex-ante/ex-post); useful life of the plants; valuation method; discount rates; regulatory risk; liquidity discounts; return rates; taxation (pre-tax/post-tax); etc.
Therefore, multiple economic, financial, and taxation variables can be decisive for the outcome of the arbitration process, both in terms of liability and damages. As shown, the economic impact not only determines damages, but can also define liability.
Antolín Fernández Antuña, FCIArb, Managing Partner,
Antuña & Partners
[1] This article addresses a general approximation to some common issues. It does not take a position on the proper way to approach or resolve these questions for any particular dispute. The author (arbitrator, lawyer, and economist) has participated in multiple (more than 40) renewable energy investor-state arbitrations, including some cited herein.
[2] Source: UNCTAD, Investment Dispute Settlement Navigator: full data release as of 31/07/2020 (excel format), available at https://investmentpolicy.unctad.org/investment-dispute-settlement. Cases initiated in the years 2011-2020.
[3] Source: Energy Charter Treaty website. Statistics of ECT cases, updated as of 20 March 2021, available at https://www.energychartertreaty.org/fileadmin/DocumentsMedia/Statistics/All_statistics_-_20_March_2021.pdf
[4] Ib.
[5] Ib.
[6] Antaris Solar GmbH and Dr. Michael Göde v. The Czech Republic (Collins, Born, Tomka), PCA Case No. 2014-01, Award, 2 May 2018.
[7] Ib. ¶ 360. Footnotes omitted. Cases included in the footnotes to this paragraph are: Tecnicas Medioambientales Tecmed SA v. United Mexican States (Grigera Naón, Fernandez Rozas, Verea), May 29, 2003, ¶ 154; Duke Energy Electroquil Partners v. Republic of Ecuador (Kaufmann-Kohler, Gomez Pinzon, van den Berg), August 18, 2008, ¶ 340; Bayindir v. Pakistan (Kaufmann-Kohler, Berman, Bockstiegel), August 27, 2009, ¶ 179; Electrabel SA v. Hungary (Kaufmann-Kohler, Stern, Veeder), November 30, 2012, ¶ 7.74; El Paso v. Argentina (Caflisch, Bernardini, Stern), October 31, 2011, ¶ 348; Philip Morris Brands SARL v. Uruguay (Bernardini, Born, Crawford), July 8, 2016, ¶ 320; Binder v. Czech Republic (Danelius, Creutzig, Gaillard), July 15, 2011, ¶ 446 ; Arif v. Republic of Moldova (Cremades, Hanotiau, Knieper), April 8, 2013, ¶ 535; Mobil Investments Canada Inc v. Canada (van Houtte, Janow, Sands), May 22, 2012, ¶ 154; Enron Corp v. Argentina (Orrego Vicuña, van den Berg, Tschanz), May 22, 2007, ¶¶ 264-266; LG&E Energy Corp v. Argentina (de Maekelt, Rezek, van den Berg), October 3, 2006, ¶¶ 162-163; Electrabel SA v. Hungary (Kaufmann-Kohler, Stern, Veeder), November 30, 2012, ¶ 7.78; Electrabel SA v. Hungary (Kaufmann-Kohler, Stern, Veeder), November 25, 2015, ¶ 15; Philip Morris Brands SÁRL v. Uruguay (Bernardini, Born, Crawford), July 8, 2016, ¶¶ 426-427; Micula v. Romania (Levy, Alexandrov, Abi-Saab), December 11, 2013, ¶ 529; Philip Morris Brands SARL v. Uruguay (Bernardini, Born, Crawford) July 8, 2016, ¶¶ 322,422-424; Saluka Investments BV v. Czech Republic (Watts, Fortier, Behrens) March 17, 2006, ¶¶ 305-306; Arif v. Republic of Moldova (Cremades, Hanotiau, Knieper), April 8, 2013, ¶ 537; Electrabel SA v. Hungary (Kaufmann-Kohler, Stern, Veeder), November 25, 2015, ¶ 165; EDF (Services) Ltd v. Romania (Bernardini, Derains, Rovine), October 8, 2009, ¶ 219; Oxus Gold v. Uzbekistan (Tercier, Lalonde, Stern), December 17, 2015, ¶ 323; Tecmed v. Mexico (Grigera Naón, Fernandez Rozas, Verea), May 29, 2003, ¶ 154; CMS Gas Transmission Co v. Argentina (Orrego Vicuña, Lalonde, Rezek), May 12, 2005, ¶ 290; Bayindir v. Pakistan (Kaufmann-Kohler, Berman, Bockstiegel), August 27, 2009, ¶ 178; LLC AMTO v. Hungary (Cremades, Runeland, Soderlund), March 26, 2008, ¶ 74; Saluka Investments BV v. Czech Republic (Watts, Fortier, Behrens), March 17, 2006, ¶ 309; Sempra Energy International v. Argentina (Orrego Vicuña, Lalonde, Rico), September 28, 2007, ¶ 318; Plama Consortium Ltd v. Republic of Bulgaria (Salans, van den Berg, Veeder), August 27, 2008, ¶ 184; AES Summit Generation Ltd v. Hungary (von Wobeser, Stern, Rowley), September 23, 2010, ¶ 10.3.7; Binder v. Czech Republic (Danelius, Creutzig, Gaillard), July 15, 2011, ¶ 447; Micula v. Romania (Levy, Alexandrov, Abi-Saab), December 11, 2013, ¶¶ 520, 525; Electrabel SA v. Hungary (Kaufmann-Kohler, Stern, Veeder), November 25, 2015, ¶ 155.[8] Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic (Crawford, Alexandrov, Dupuy), ICSID Case No. ARB/14/3, Award, 27 December 2016, ¶ 319. Emphasis and footnotes omitted.
[9] AES Solar and others (PV Investors) v. The Kingdom of Spain (Kaufmann-Kohler, Brower, Sepúlveda-Amor), PCA Case No. 2012-14, Final Award, 28 February 2020.[10] Ib. ¶ 553.
[11] Ib. ¶ 614.
[12] Ib. ¶¶ 638-639. Footnotes omitted.
[13] Ib. ¶¶ 647-648.