Think tank reignites Spanish energy sector arbitration controversy

Report accuses foreign investors of hunting for profits in Europe´s crisis countries, and says Spain´s ´solar dream´ has become a nightmare

The controversy surrounding international investors suing the Spanish government following its decision to cut generous solar energy subsidies has been reignited by the publication of a report by think tank The Transnational Institute (TNI), which was founded as the international programme of the Washington DC-based Institute for Policy Studies.
The report, entitled “Profiting from Crisis: How corporations and lawyers are scavenging profits from Europe’s crisis countries”, includes a chapter focused on the renewable energy market with the heading: “Spain’s solar dream becomes a legal nightmare”. It tells the story of how Spain´s thriving solar sector ran into trouble after the economic crisis of 2008, when the Spanish government decided to slash its generous solar subsidies.
“These [subsidiaries] had offered companies rates for renewable energy that were higher than the market price, with big returns guaranteed for the entire lifetime of the installations,” the report says. “The Spanish government blamed the high costs it faced on the fact that the renewable energy market grew well beyond expectations and created a massive electricity tariff deficit.” Cutting the “guaranteed” returns upset investors – 22 companies launched legal proceedings against the Spanish State under the Energy Charter Treaty, a multilateral agreement that provides similar protections to bilateral investment treaties on energy contracts. The Treaty also allows companies to sue governments at international arbitration tribunals.
The 13 cases launched include claims from Isolux Infrastructure Netherlands, RREEF, Antin, Eiser Infrastructure, NIBC Infrastructure Partners, HB Capital and AES Solar, in seats such as the International Centre for Settlement of Dispute, Stockholm Chamber of Commerce and the United Nations Commission on International Trade Law. All the investors referred to in the TNI report are being represented by Allen & Overy and Bird & Bird. Both firms declined the opportunity to comment on the report.
One partner says solar arbitrations are “a polemic issue” because foreign investors are protected under the Energy Charter Treaty, but Spanish investors cannot file claims.

´Spanish government is sovereign´
Energy sector specialist María Pilar García Guijarro, partner at Watson Farley Williams and head of the firm´s Madrid office, says that because Spanish investors cannot file claims against the Spanish government under the Energy Charter Treaty – which only protects foreign investors – they instead have the option of Spanish tribunals. She adds: “The jurisprudence of the Spanish Supreme Court on the matter basically maintains the Spanish government is sovereign and can change laws in certain circumstances.”
One arbitration expert says that, while foreign investors also have the right to sue a government in a local court, there is a reluctance to do so because some argue the impartiality of local courts is sometimes questionable, especially when a foreign company is suing the government. “The truth is that no serious investor makes international investments without an arbitration clause; irrespective of where the investment is, such as Spain, Argentina, China or South Sudan, the principles remain the same,” says one Spanish arbitrator.
“The rule of law is vital,” he adds. “If a company goes into a jurisdiction, signs various guaranteed agreements, only for the government to backtrack on its agreements by increasing taxes dramatically or repatriating assets, investors should have a right to challenge that under international law. Governments have to respect the rules that they have established.” The TNI report says that corporate investors have claimed more than €700m from Spain in arbitration disputes. It adds that, of the 22 companies involved in lawsuits, 12 invested after 2008 when the first restrictions to feed-in tariffs for solar energy were introduced.
The report quotes Juan Fernandez-Armesto, who says: “When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all… Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”