The Revocation of Clean-Energy Investment Economic-Support Systems as Indirect Expropriation Post-Nykomb: A Spanish Case Analysis

• Author: Rachel A. Nathanson
• Position: J.D. Candidate, The University of Iowa College of Law, 2013
• Pages: 863-904

863

The Revocation of Clean-Energy

Investment Economic-Support Systems as

Indirect Expropriation Post-Nykomb:

A Spanish Case Analysis

Rachel A. Nathanson

ABSTRACT: As countries increasingly seek to promote clean-energy

investment to meet carbon-emissions goals, foreign investors are attracted to

economic-incentive programs that subsidize or otherwise support high

upfront investments in clean-energy infrastructure. Once the initial

investment has been made, what protections does the investor have against

the revocation of such support systems that remove the economic benefits

expected from the investment? This Note discusses a pending Spanish

arbitration case, PV Investors v. Spain, which is subject to the Energy

Charter Treaty legal framework. The case is based on claims of foreign-

investor damages caused by Spain’s revocation of several feed-in tariff

benefits the country implemented to attract foreign investment in solar

photovoltaic energy. Although Nykomb v. Latvia appears instructive on

the issue, this Note argues that PV Investors should be treated with a

different legal analysis. This Note uses legal principles derived from the

Energy Charter Treaty, customary international law, the North American

Free Trade Agreement, and the United States Model Bilateral Investment

Treaty to determine that the revocation of clean-energy investment economic-

support systems can constitute indirect expropriation requiring

compensation. PV Investors may be the first of many clean-energy cases

involving the revocation of promised economic benefits for foreign investors,

and the decision in this case will provide guidance for future cases dealing

with similar cuts in benefits.

I. INTRODUCTION ...................................................................................... 865

II. BACKGROUND ........................................................................................ 865

 J.D. Candidate, The University of Iowa College of Law, 2013; B.B.A. & B.A., The

University of Iowa, 2010. I would like to thank my family and friends for their support and the

members of Volumes 97 and 98 of the Iowa Law Review for their work on this Note. I would also

like to thank Professors Jonathan Carlson and Maya Steinitz of The University of Iowa College

of Law for their advice as I developed my Note topic.

864 IOWA LAW REVIEW [Vol. 98:863

A. CLEAN-ENERGY INVESTMENT ............................................................ 865

B. BILATERAL INVESTMENT TREATIES AND MULTILATERAL

INVESTMENT AGREEMENTS ............................................................... 866

C. BARRIERS TO CLEAN-ENERGY INVESTMENT ........................................ 867

D. CURRENT CLEAN-ENERGY INVESTMENT ECONOMIC-SUPPORT

SYSTEMS .......................................................................................... 868

E. INTRODUCING INDIRECT EXPROPRIATION .......................................... 870

III. CURRENT INDIRECT-EXPROPRIATION LAW ............................................ 871

A. INDIRECT EXPROPRIATION UNDER CUSTOMARY INTERNATIONAL

LAW ................................................................................................ 871

1. Defining Indirect Expropriation ........................................... 872

a. Sole-Effects Doctrine ............................................................ 875

b. Mixed-Effects Doctrine ......................................................... 876

2. Tribunal Interpretations of Indirect Expropriation ............ 876

3. Stabilization Techniques Against Indirect Expropriation .. 878

4. Damage Valuation .................................................................. 880

B. THE NORTH AMERICAN FREE TRADE AGREEMENT, THE ENERGY

CHARTER TREATY, AND THE UNITED STATES MODEL BILATERAL

INVESTMENT TREATY ....................................................................... 880

1. The North American Free Trade Agreement ...................... 881

a. Metalclad .......................................................................... 882

b. Pope & Talbot, S.D. Myers, and Methanex ................... 883

2. The Energy Charter Treaty ................................................... 885

a. Nykomb ............................................................................ 887

3. The United States Model Bilateral Investment Treaty ........ 889

IV. CASE STUDY: THE REVOCATION OF SPANISH PV BENEFITS AND THE

IMPLICATIONS OF INDIRECT EXPROPRIATION ........................................ 891

A. BACKGROUND: SETTING IN SPAIN ...................................................... 892

B. FOUNDATION FOR PV INVESTORS ..................................................... 893

C. SPANISH LAWS RELEVANT TO PV INVESTORS .................................... 894

1. Royal Decree 661/2007 ........................................................ 894

2. Royal Decree 1578/2008 ...................................................... 895

3. Royal Decree 1565/2010 ...................................................... 896

4. Royal Decree Law 14/2010 ................................................... 896

D. EFFECTS AND LEGAL ANALYSIS OF THE REVOCATION OF BENEFITS ....... 897

1. Effects of the Revocation of Benefits in Spain ..................... 898

2. Applying Sources of Law to PV Investors ............................... 899

3. Reconciling Indirect-Expropriation Compensation with

State Sovereignty .................................................................... 902

4. Stabilization Clauses as Preemptive Measures Against

Indirect Expropriation........................................................... 903

V. CONCLUSION ......................................................................................... 904

2013] A SPANISH CASE ANALYSIS 865

I. INTRODUCTION

This Note explores a novel situation in international investment law

that arguably fits within the constructs of indirect-expropriation arbitral

jurisprudence. For years, States have passed regulations that protect the

environment by constraining environmentally detrimental foreign direct

investments (“FDI”), such as hazardous-waste landfills and the use of certain

fuel additives.1 Now, situations are emerging in which the State is cutting the

economic incentives it used to attract foreign investors who protect the

environment by investing in clean energy.

Spain, for instance, has revoked such incentives, in particular many of

its feed-in-tariff-system benefits, to the detriment of its foreign investors.

These investors are now attempting to claim compensation under the

Energy Charter Treaty in PV Investors v. Spain.2 This is the first arbitral case

under a multilateral trade agreement wherein foreign investors in clean

energy are demanding compensation for the revocation of economic

benefits. The decision in this case has the potential to provide guidance for

the many similar cases that will surely arise in the future as States strive to

meet clean-energy goals. This Note argues that under international law, the

revocation of clean-energy investment economic-support systems can

constitute indirect expropriation, requiring that compensation be paid to

investors.

II. BACKGROUND

Prior to such an analysis, it is important to understand the following:

(1) the definition of “clean energy” as referred to in this Note; (2) a basic

history of bilateral and multilateral investment agreements; (3) the barriers

to and types of economic support for clean-energy investment; (4) the

evolving definitions of indirect expropriation; and (5) the results of

Nykomb—an earlier investment dispute which involved a more

environmentally friendly fossil-fuel powered electricity generating station.3

A. CLEAN-ENERGY INVESTMENT

“Clean-energy investment,” as referred to in this Note, comprises the

renewable energy subcategories defined by the International Sustainable

Energy Assessment (“ISEA”).4 These include hydropower, solar, geothermal,

1. See infra Part III.B.1.

2. See Investor–State Dispute Settlement Cases, ENERGY CHARTER, http://www.encharter.org/

index.php?id=213&L=0#PV (last visited Sept. 13, 2012) (listing PV Investors v. Spain).

3. Nykomb Synergetics Tech. Holding AB v. Republic of Latvia, Case No. 118/2001,

Award (Arb. Inst. of the Stockholm Chamber of Comm. 2003), http://www.

encharter.org/fileadmin/user_upload/Investor-State_Disputes/Nykomb.pdf.

4. See Lakshman Guruswa my & Kevin Doran, The Effectiveness and Impact of International

Energy Treaties, in F

ROM BARRIERS TO OPPORTUNITIES: RENEWABLE ENERGY ISSUES IN LAW AND

POLICY 89, 96–106 (Parker et al. eds., Pre-Publication Draft 2007), available at