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
SUMMARY

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 ... (see full summary)

 
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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

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