Energy arguments leading to disputes

A wave of court action against the Government hits the sector, and lawyers expect more are on the way

The Spanish Government’s recent decision to cut the country’s renewable energy feed-in-tariffs has resulted in an avalanche of legal claims that is set to keep dispute resolution lawyers very busy in Spain and beyond.
It was not that long ago that Spain was one of the leading jurisdictions for renewable energy and was at the forefront of wind and solar power projects. However, as the economy has contracted, the Government’s once-generous support for investments has eroded. As such, the busy period for energy and project finance legal departments has slowed as the support has subsided. That is not to say that all legal work has ceased in relation to renewables; there is now considerable activity in dispute resolution departments as developers now look to launch cases against the Government’s policy change on green power.
“We do not know the exact number of domestic cases yet, as the deadline for challenging the Government expired in May and not all have been published, but I expect there will be dozens of cases,” says Luis Pérez de Ayala, an Energy Partner at Cuatrecasas Gonçalves Pereira. “Regarding international arbitration procedures, there may be over 10, which is a marked contrast to the last time the tariffs were changed in 2010 when just two arbitrations were launched. This latest rise in cases stems from Order IET/221/2013, which is an update to the notorious and controversial Royal Decree 661/2007. The Decree was viewed as the starting point for the decline in renewables as, since then, the countless benefits for investors in wind and solar has reduced greatly. The key reforms in the Order IET/221/2013 include cutting the guaranteed off-take payments for green power, known as ‘feed-in-tariffs’, removing the index-linked inflation, removing additional subsidies on off-take agreements as well as new tax burdens.
Developers claim the high costs of developing renewable projects and the descending lack of support since 2007 has practically squeezed away the profit margin and left them adversely affected.
The market was understandably upset, say lawyers, prompting a wave of court action from disgruntled developers.
The most high-profile case has been an arbitration launched by a consortium of international investors: Ampere Equity Fund; AES Solar; KKR; RREEF Infrastructure; MEAG; KGAL; Infrared Capital Partners; HG Capital; Eiser Infrastructure Partners; Cube Infrastructure; and Antin Infrastructure Partners.
Among those advising are Allen & Overy (which is acting for the international consortium); Herbert Smith (acting for the Government on two arbitrations alongside state lawyers from Abogacía General del Estado); and PwC (acting for Asociación Empresarial Eólica). Some firms such as Cuatrecasas and Bird & Bird are also said to have been instructed by claimants.
The claim is that the Government breached contracts signed with investors by slashing the subsidies. With Spanish renewable assets of around €13bn, lawyers say, the potential damages could be massive.
Other organisations have now followed suit. Proceedings are being considered or have since been launched by parties including Abengoa, Acciona, ANPIER, APPA, Protermosolar, UNEF and the Asociación Empresarial Eólica (Spanish Wind Energy Association). The final number of cases is expected to be considerably more. These are likely to keep litigation teams in Spain busy for some time, although Pérez de Ayala is expecting the cases to divide broadly into two groups; domestic litigation and international arbitration.
“The Government is quite comfortable with the first group as the Supreme Court has always been quite favourable to the State, but the international proceedings will be much more interesting,” he adds. “Not only is the outcome less predictable, but there is the chance for appeals, which could result in cases going on for years.”
One concern in light of such a division is that companies may need to balance the benefits and costs of arbitration over litigation. This could prove problematic because of the potential duration and cost of both processes, and any subsequent appeals, at a time where company finances are struggling in the crisis. This could result in some of the smaller energy developers not having the capital to fund such lengthy and expensive procedures, therefore getting squeezed out of the renewable energy market altogether.