In an award dated 4 May 2017 (publicly available in Spanish only) issued in Eiser Infrastructure Limited and Energia Solar Luxembourg S.à.r.l v The Kingdom of Spain (ICSID Case No. ARB/13/36), an arbitral tribunal found that Spain’s legislative changes in the renewable energy sector adopted in 2013 breached its obligations under the Energy Charter Treaty (ECT) to accord fair and equitable treatment (FET) to foreign investments. This is the first publicly available award in a string of investor-State arbitrations arising from Spain’s sweeping legislative changes enacted in 2013. In 2016 another arbitral tribunal ruled in Charanne B.V. and Construction Investments S.à.r.l v Kingdom of Spain that less intrusive changes enacted in 2010 did not breach Spain’s ECT obligations.
Eiser Infrastructure Limited, a British private equity fund, and Energia Solar Luxembourg S.à.r.l., a company incorporated in Luxembourg, made initial investments of around 124 million Euros in the development of three concentrated solar power (CSP) plants in Spain. The investments were made under a legal regime adopted by Spain in 2007 offering a number of subsidies to generators of solar energy. Based on that legal regime, the investors obtained financing for the initial capital costs of their investments. The claimants’ operating companies raised 640 million Euros for the three CSP plants.
The exceptionally high uptake of the incentives by renewable energy investors led to a tariff deficit that the Spanish government opted to address through a series of legislative measures. Effective from June 2014, Spain replaced the entire legal and economic regime applicable to the renewable energy sector. Under the new legal framework, Spain abandoned the old tariff regime in force at the time the investors made their investment. The new remuneration system was based on a hypothetical investment taking into account the operational costs and characteristics of a model “efficient” plant. The new system did not take into account actual costs, including debt servicing costs, or the actual volume of electricity generated by the CSP plants designed, financed and built under the old system. Instead, the existing solar plants were remunerated based on their production capacity and regulatory estimates of hypothetical capital and operational costs per unit of production capacity in a hypothetical installation. Subsidies paid under the old legal regime were creditable against the remuneration payable under the new regime, which allowed the recovery of “excess” amounts received under the old tariff regime. The new regime also fixed a regulatory useful life for solar plants.
The elimination of the old legal regime triggered nearly 30 investment arbitrations under the ECT. Amongst others, the claimants in these cases submitted that the elimination of the 2007 legal regime was in breach of Spain’s ECT obligation to accord FET to their investments. The claimants demanded compensation, arguing that the new legal regime destroyed the total value of their investments in the three CSP plants.
The tribunal found that the drastic legislative changes adopted by Spain in 2013 and 2014 reduced the anticipated revenues of one of the investors’ plants by 66% and, given the high leverage rate of the overall investments, such reduction had seriously affected their investments. The tribunal noted that Spain’s new regulatory approach, applicable retroactively to existing CSP plants, effectively meant that the investors should have taken different design and investment decisions in the past. For example, the new regime did not accommodate subsidies for plants with high development costs yielding a larger annual production capacity, because these plants would not meet the new efficiency requirements of a hypothetical model plant.
The tribunal noted that Spain replaced a favourable regulatory regime with an entirely different regime, which was profoundly unjust and inequitable to the claimants’ existing investments and effectively deprived them of the entire value of their investments.
The tribunal recalled that the Charanne tribunal had held that “an investor…has the legitimate expectation that, upon amending the existing regulation on the basis of which the investment was made, the State does not act unreasonably, contrary to the public interest or disproportionately” and that the proportionality requirement is in principle satisfied so long as “the changes are not capricious or unnecessary and do not result in the unpredictable and sudden removal of the essential characteristics of the existing regulatory framework.”
Whilst the tribunal recognized that Spain was facing a legitimate public policy issue in addressing its tariff deficit in the renewable energy sector, it held that Spain was also under an obligation to deal with the situation in a manner consistent with its ECT obligation to accord FET to foreign investors. Taking into account the context and the object and purpose of the ECT, the tribunal concluded that the FET obligation “necessarily entails an obligation to provide fundamental stability of essential characteristics of the legal regime which the investors relied upon in making long-term investments. […] [the FET obligation] means that regulatory regimes applicable to existing investments cannot be radically modified in a manner which deprives the investors who invested on the basis of the said regimes of the value of their investment.”
The tribunal accepted the discounted cash flow method for the valuation of the claimants’ damages, but agreed to calculate such damages only on the basis of a 25-year useful life of the installations. Accordingly, the tribunal awarded the claimants total damages of 128 million Euros plus interest.
Whilst arbitral tribunals, being ad hoc bodies, are not bound by previous decisions rendered in other cases, it is generally accepted that, in the absence of compelling contrary grounds and subject to the particular circumstances of each case, tribunals adopt solutions consistent with prior decisions. The Eiser decision confirms that the regulatory powers of host States are not absolute and that drastic legislative changes should factor into the State’s international law obligations, including under any bilateral or multilateral investment agreements concluded by it. It remains to be seen to what extent this decision will be followed by the various tribunals charged with adjudicating the renewable energy investors’ claims in the other pending cases against Spain.