When green incentives go pale: investment arbitration and renewable energy policymaking.

• Author: Simoes, Fernando Dias

1. INVESTMENT LAW AND RENEWABLE ENERGY

   The use of renewable sources of energy, along with the implementation of eco-friendly technologies, plays a pivotal role in addressing the predicaments caused by climate change. States, the industry, international organizations, and other stakeholders have been striving to develop and employ new solutions that allow a shift from the current model, based on fossil fuel production and consumption, to one based on low-carbon options, (1) so as to ensure a sustainable future. This global quest for greener alternatives led to the emergence of an international market for renewable energy technologies and equipment. (2) Over the last decade this market attracted gigantic flows of capital. (3) Foreign direct investment is particularly welcome as it can not only provide fresh funds but also induce the transfer of knowledge and technology. (4) From a broader perspective, foreign investment is a key component of any agenda for sustainable development. (5)

   The financial viability of investments in renewable energies is frequently dependent upon public support (6) All over the world, governments have designed and implemented renewable energy support mechanisms so as to encourage private investment, often in the form of subsidies and incentive tariffs. (7) Among the different available variants, feed-in-tariffs became especially popular. (8) Under this scheme, the electricity generated from renewable or high-efficiency cogeneration installations is paid at a fixed minimum price, generally set higher than the market price and guaranteed over a specified period of time. (9)

   Investments in the energy field are highly capital intensive and require a lengthy payback period. (10) Regulatory risks loom large--the possibility that the rules in force at the moment the investment was made are altered, threaten the ability of investors to recover and earn a profit on their investments. (11) Governments may decide to change the regulatory framework once investments take place and costs are "sunk." (12) Renewable energy support mechanisms are designed to attract capital flows into the renewable energy market; thus, they play a central role in determining both the period of time and the rate of return on the investment. Changes to economic mechanisms are a critical risk factor surrounding such investments, since the level of public support is the most important element influencing expected profits. (13) Therefore, investors seek to ensure the stability of the regulatory framework that underpins their investments and secure protection from unwarranted policy changes.

   In order to attract cross-border investment, states must provide adequate security and protection to foreign investors, namely through the creation of adequate regulatory frameworks. These legal instruments generally take two forms: investment contracts and international investment treaties. (14) Investment contracts provide some consistency through the development of stabilization clauses, (15) but often prove inadequate when dealing with sovereign states. (16) As a result, international investment agreements have become especially important over the past few decades. These legal instruments aim to create a "level playing field" for investments in the energy sector, and minimize non-commercial risks associated with such investments. (17) They can help lower regulatory and political risks, thus boosting investor confidence and increasing international investments into renewable sources of energy. (18)

   The association between investment law and the energy market has a long history, taking into account the global nature of this area of business. (19) Like in many other fields of the economy, the significant increase in foreign investments into the energy market, which have taken place over the last decade, would have been more difficult without the existence of a transnational system of substantive and procedural guarantees. (20) Currently, the international legal framework governing foreign investments to the energy market consists of a vast network of international investment agreements supplemented by the general rules of international law. (21) These agreements include bilateral investment treaties ("BITs"), regional free trade agreements, and sectorial treaties including investment obligations. (22) While international investment agreements differ in many important respects, they are composed by two essential elements: first, they include a set of standards of promotion and protection of foreign investment; second, they provide for mechanisms on the settlement of any possible disputes between the foreign investor and the host state. (23)

   Investment agreements are a form of international law that creates a series of obligations owed by the host state towards foreign investors. (24) The numbers of BITs and multilateral agreements entering into force have increased throughout the past few decades. (25) The Energy Charter Treaty (26) ("ECT"), a multilateral treaty signed in 1994 and entered into force in 1998, that establishes a legal framework to promote long-term cooperation in the energy field, is especially relevant. (27) The ECT currently has 54 member-states. (28) The ECT's investment provisions build upon the content of BITs as they have developed during the last half-century. (29) While there are differences between the scope and content of the different legal instruments, there is a shared core content: they normally include the obligation to treat foreign investors fairly and equitably; provide foreign investors full protection and security; and not to expropriate foreign investment except under certain conditions, including the payment of compensation. (30) Besides including a set of standards of promotion and protection of foreign investments, international investment agreements also contain procedural protections. They typically include dispute resolution clauses that enable foreign investors to initiate arbitration proceedings against the host state, known as "investor-state arbitrations." (31) For instance, Article 26 of the ECT provides investors with the opportunity to file arbitration claims directly against member-states for violations of protections under the treaty. (32) The investor is given the option of choosing among:

   1. Arbitration before the International Centre for Settlement of Investment Disputes (ICSID). Established pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), if the contracting party of the investor and the contracting party to the dispute are both parties to the ICSID Convention, or under the rules governing the Additional Facility of the ICSID, if the contracting party of the investor or the contracting party to the dispute, but not both, is a party to the ICSID Convention; (33)

   2. Arbitration under the Arbitration Institute of Stockholm Chamber of Commerce Rules; (34) or

   3. ad hoc arbitration under the Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules). In such disputes, the foreign investor brings a claim before the arbitral tribunal alleging that certain acts, or omissions of organs of the central government or local authorities, resulted in damages to his investment or violate the host state's obligations under an international investment agreement. If the host state is a party to the ECT or another international investment treaty and has consented to investor-state arbitration, the arbitral tribunal has jurisdiction to hear the claims of the investor against the state for violation of its obligations under the treaty. (35)

2. DISPUTES OVER CHANGES IN RENEWABLE ENERGY SUPPORT MECHANISMS

   Over the years, arbitration has bccome the principal technique for resolving disputes in the energy sector. (36) International investments in energy represent a huge percentage of overall investments and, consequently, a substantial part of international commercial and investment disputes relates to this field. (37) Arbitration increases are well evidenced by the new era of "mega cases" (38) in the oil and gas industries. (39) While billion dollar claims were virtually unheard of twenty years ago, they are now ordinary. (40) As a result, energy-related dispute resolution, in particular international arbitration, is a growing area of practical and academic interest. (41) Specifically in the area of investor-state arbitration, Whitsitt and Bankes (42) arrange energy-related disputes into four categories: disputes involving significant economic or political structural adjustment in the host state; disputes triggered by the efforts of states seeking to claim an enhanced share of resource rents; disputes in which states seek to enhance the environmental or social regulatory regime within which existing investments operate; and disputes where the states seek to withdraw economic support mechanisms for a policy measure that was introduced to support a particular energy or environmental policy. (43)

   The number of disputes fitting the latter category surged in the last two years. (44) With a view to increasing the production of clean energy, many countries introduced incentives to encourage investment in the renewable energy sector. (45) As originally intended, the introduction of these mechanisms led a substantial number of companies and individuals making investments in this field. (46) While economic incentives attracted significant amounts of investment, several countries have began reducing or eliminating them. Since 2008, Spain has introduced several measures affecting the renewable energy sector. (47) In 2010, the Spanish government reduced feed-in tariffs in the solar energy sector and enacted measures that substantially cut some incentives granted to wind generation. Subsequently, the Spanish government imposed a limit on the feed-in tariffs of 25 years and imposed an annual cap on the...