Lexology | 26 January 2018
Solar wars: Part III - Return of the European Commission
by Richard Power
In the previous Solar Wars articles, we examined the arbitral awards made in late 2016 and 2017 in respect of investors’ claims under the Energy Charter Treaty (ECT) in connection with the curtailment of renewable incentive schemes across Europe.
We concluded that these awards gave some hope for both investors and states, but there was little certainty about how future claims would be decided. Recently the European Commission (EC) has muddied the waters still further.
The EC’s Decision
The 2012-2014 amendments to Spain’s 2007 “Special Regime” scheme to encourage investment in solar energy, which triggered almost 30 ECT claims, were described in Part I of the Solar Wars articles. In December 2014, Spain formally (and belatedly) notified the EC of the reformed scheme, which prompted an EC investigation into the scheme’s legality.
On 26 December 2017, the EC published its decision (the Decision) on the reformed scheme. The Decision found that the 2012-2014 reforms were compatible with EU law. That is no real surprise. However, the Decision went on to attack the ECT claims brought by investors against Spain (and other EU states).
Legitimate expectation and legal certainty
The Decision stated that the EC had considered submissions made by investors to the EC investigation and the ECT tribunals that Spain had, in making the reforms, breached EU law principles of legal certainty and legitimate expectations. These were essentially the same arguments as raised and decided in the Charanne, Eiser and Isolux cases.
The Decision pointed out that Spain had established the Special Regime, and reformed it, without obtaining prior approval from the EC. That constituted the granting of state aid without first notifying the EC, and EU law provided that in such circumstances, investors could not form any legitimate expectations with regard to such state aid schemes. Given that these were claims by investors from one EU state against another EU state, the applicable law of the dispute must be EU law; and since “the principle of fair and equitable treatment [in the ECT] cannot have a broader scope than the [EU] law notions of legal certainty and legitimate expectations in the context of a state aid scheme”, no investor could have a legitimate expectation with regard to the Special Regime and its reforms.
The legitimacy of the ECT arbitrations
The decision went on to criticise the very concept of the ECT claims. The Decision stated that the EC considers that “any provision that provides for investor-State arbitration between two Member States is contrary to [European] Union law…Union law provides for a complete set of rules on investment protection…Member States are hence not competent to conclude bilateral or multilateral agreements between themselves”. The Decision concluded that “[f]or those reasons, ECT does not apply to investors from other Member States initiating disputes against another Member States”.
Finally, the Decision stated that if an arbitral tribunal awarded an investor compensation in respect of losses caused by Spain’s reform of the Special Regime, that would constitute state aid; and thus if Spain paid such an award, it would require EC approval. For good measure, the Decision pointed out that “this Decision is part of Union law, and as such also binding on Arbitration Tribunals, where they apply Union law. The exclusive forum for challenging its validity are [sic] the European Courts”.
The EC’s conclusions on legitimate expectation are diametrically opposed to the Eiser and Isolux awards, which recognised the possibility of legitimate expectations in these circumstances. The conclusion that paying an award would amount to state aid hands Spain grounds to object to the enforcement of the Eiser award, further undermining the arbitral process.
The attack on the legitimacy of the ECT process is perhaps to be expected. The EC has previously indicated that intra-EU investment/trade disputes should be handled by the EC and the European Court of Justice, not by investor-state arbitration tribunals. The EC has sought to intervene in ECT arbitrations to make these very points; indeed, in Charanne and Isolux, and RREEF Infrastructure v. Kingdom of Spain (another intra-EU arbitration brought under the ECT), the tribunals all rejected arguments advanced by the respective respondents and the EC itself that the tribunals lacked jurisdiction for the reasons specified in the Decision.
It is understood that further awards in respect of other ECT claims brought against Spain will be made later this year. It will be interesting to see if the tribunals in those arbitrations adopt the EC’s reasoning. What is certain is that, given the Decision, Spain will be emboldened to resist any awards in favour of an investor.