UK: Tariff Changes For Photovoltaic Solar Power In Spain

Last Updated: 15 March 2011
Article by Boris Kasolowsky

Summary

The Spanish government recently published new legislation capping photovoltaic (PV) solar energy production and limiting entitlement to incentive feed-in tariffs. The measures are intended to correct the tariff deficit in the energy sector. Both changes are likely to have a significant negative impact on the overall revenues for Spanish PV projects in comparison with the expectations based on the original incentive schemes. This briefing considers judicial remedies to these changes under Spanish law and the Energy Charter Treaty.

On 23 November 2010, the Spanish government published Royal Decree (RD) 1565/2010, which limits the entitlement of solar photovoltaic plants to the incentive feed-in tariff under RD 661/2007 to the first 25 years of operation. By Organic Law Complementing the Sustainable Economy Law (Proyecto de Ley Orgánica Complementaria de la Ley de Economía Sostenible) of 4 March 2011, the entitlement was extended to 30 years. Notwithstanding natural degradation of PV modules, the new rule may result in lower project life revenues for PV plants, which will solely be entitled to sell electricity on the spot market as of year 31, rather than benefitting from the reduced incentive feed-in tariff provided for in RD 661/2007.

Furthermore, on 24 December 2010, the Spanish government published Royal Decree-Law (RDL) 14/2010, imposing a production cap for solar photovoltaic plants. The new law limits the maximum annual number of hours of operation on a regional scale for plants registered under RD 661/2007 and RD 1578/2008. In addition, plants entitled to the particularly beneficial tariff under RD 661/2007 are subject to an even lower uniform cap from 1 January 2011 to 31 December 2014. These measures, which were finally approved by the Spanish parliament on 10 March 2011 after a turbulent legislative process, are likely to jeopardise the financial viability of many existing PV projects because of their front-end impact.

Below is a series of questions and answers on judicial remedies to these changes.

Judicial remedies under Spanish law

Does Spanish constitutional law afford protection against the recent changes to the incentive scheme for Spanish PV projects?

The most relevant provisions of Spanish constitutional law are articles 9.3 and 106.2.

Article 9.3 establishes the principles of legal certainty and of non-retroactivity of punitive provisions affecting individual rights. Moreover, article 106.2 stipulates the obligation to compensate individuals for losses suffered as a result of government action.

When applying the principle of non-retroactivity, the Constitutional Court and the Supreme Court have, however, sometimes taken a rather restrictive view. In particular, several Spanish Supreme Court judgments have rejected the argument that the retroactive application of cuts in feed-in tariffs under RD 661/2007 would violate the Spanish Constitution.

Furthermore, the legal certainty principle does not imply that any regulation is unchangeable; Electricity Sector Law 54/1997 entitles the government to modify its energy policies as long as the modifications are objective and non-discriminatory and the installations adhered to the special regime are not materially affected in their return on investment. Hence, any challenge of the new regime on grounds of legal certainty is likely to turn on the point of materiality.

Could a lawsuit challenge validity of the statutory changes as such, or would it be a claim for compensation? Who would be the plaintiff in the proceedings? Would a successful action by any owner of a PV plant also benefit other projects?

The procedure for challenging the decrees varies according to their different regulatory quality, as one is a royal decree-law and the other has only a royal decree status.

Project companies themselves are unable to challenge directly the dispositions of RDL 14/2010, since it was ratified by parliament and became law on 26 January 2011. An unconstitutionality appeal (recurso de inconstitucionalidad) could, however, be filed by (a) the prime minister (el presidente del gobierno); (b) the ombudsman (el defensor del pueblo); (c) 50 members of parliament (diputados); or (d) 50 senators (senadores). Such an appeal could be made on the grounds that articles 9.3 and 106.2 of Spanish constitutional law (discussed above) have been contradicted. If, following such an appeal, the Constitutional Court were to conclude that the decree violates the Spanish Constitution, this would benefit all project companies.

The normal indirect procedure to challenge RDL 14/2010 would entail waiting until there is a specific application, such as the settlement of the rate of the photovoltaics. A project company could then challenge the specific application before an ordinary court, asking the court to submit a motion for unconstitutionality (cuestión de inconstitucionalidad) to the Constitutional Court.

With RD 1565/2010, a favourable ruling on an administrative appeal (recurso contencioso administrativo directo) would also benefit all other project companies. Moreover, it is still possible to challenge RD 1565/2010 by means of the normal indirect procedure described above.

There is also the possibility of filing liability claims against the public administration as a result of any damages caused to a project company that the project company had no obligation to bear.

In this sense, the damage has to be caused by the public administration and has to be real, concrete, of economic value and has to be the result of the act of the public administration. Therefore, the damage suffered by the producers due to the decrease of the value of the photovoltaic plants, alleging that those photovoltaic plants have declined in value exclusively by the enactment of the royal decree, could be claimed. This claim would have to be filed within one year.

Remedies under the Energy Charter Treaty

What is the Energy Charter Treaty?

The Energy Charter Treaty (ECT) is an international agreement providing a multilateral framework for energy trade, transit and investment. The ECT's provisions broadly cover four distinct areas: (i) the protection of foreign investments, based on the extension of national treatment, or most-favoured nation treatment (whichever is more favourable) and protection against key non-commercial risks; (ii) non-discriminatory conditions for trade in energy materials, products and energy-related equipment based on World Trade Organization rules, and provisions to ensure reliable cross-border energy transit flow through pipelines, grids and other means of transportation; (iii) the resolution of disputes between participating states and – in the case of investments – between investors and host states; and (iv) the promotion of energy efficiency, and attempts to minimise the environmental impact of energy production and use. The ECT has been created to foster international co-operation and build a legal foundation for energy security, based on the principles of open, competitive markets and sustainable development. One particular focus of the ECT is to promote long-term co-operation by, inter alia, protecting foreign investments. The ECT has been signed and ratified by 51 countries and the European Union. Spain, Germany and the UK are signatories to the ECT.

Which individual rights under the ECT could be violated by the recent changes to the incentive scheme for Spanish PV projects?

Under Article 10 of the ECT on the promotion, protection and treatment of investments by foreign nationals, the ECT obliges its signatories, the contracting states (ie also Spain), to adhere to specific standards of international law. Four such standards are likely to be relevant in the present case. If there is a breach of any of those standards, Spain as the contracting state would be liable for damages:

  1. foreign investors can, inter alia, rely on the undertaking by the contracting state to accord fair and equitable treatment to investments by investors of other contracting states;
  2. the ECT obliges the contracting states to refrain from impairing the management, use, enjoyment, maintenance or disposal of the investment by unreasonable measures;
  3. contracting states are further bound to observe any obligations entered into vis-à-vis the investors; and
  4. the contracting states have undertaken to treat investments of nationals of other contracting states no less favourably than the treatment bestowed on their own investors or the investors of any third state.

On the basis of the information currently available, the violation of any of these standards other than (iv) appears possible. International arbitration tribunals have established that the standard of fair and equitable treatment comprises both the protection of investors' legitimate expectations generally and the protection of investors' expectations of a stable and predictable legal and administrative framework. On the current facts, a violation of the fair and equitable treatment provision of the ECT seems, therefore, particularly likely. Moreover, depending on the specific factual circumstances, the measures of the Spanish state can also constitute a violation of Spain's obligation entered into with the investors relating to the incentive feed-in tariffs.

How does the ECT afford protection to individual private investors?

If there is a violation of the aforementioned standards, investors can rely on the dispute settlement mechanism under Article 26 of the ECT.

Under Article 26 of the ECT, the foreign investor can choose to submit any dispute either to the local courts of the contracting state, to any other previously agreed dispute settlement procedure, or to international arbitration or conciliation. As regards the latter, an investor can choose to initiate arbitration proceedings either under the World Bank's ICSID (International Centre for Settlement of Investment Disputes) Convention, the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). Any award rendered as the consequence of such arbitration proceedings will be enforceable both in Spain and against Spanish assets abroad in a manner similar to a court judgment.

How does international arbitration under the ECT interrelate with domestic proceedings under Spanish law?

The ECT includes a so-called fork-in-the-road provision, requiring the investor to choose at the outset between pursuing domestic legal remedies or international arbitration. Under this provision, the investor's choice of a dispute settlement procedure is, in principle, binding. Hence, investors who have chosen to initiate court proceedings in Spain are barred from resubmitting the same dispute to international arbitration at a later stage. The provisions of the ECT, however, arguably do not bar investors in a local company from submitting the dispute to international arbitration, if the investment vehicle, ie the local company, has initiated court proceedings in Spain.

Is international arbitration under the ECT available for disputes within the EU?

Yes. The number of international arbitrations between investors domiciled in the EU and EU member states under the ECT has increased in the past few years. Recent cases include the proceedings in Electrabel v Hungary, AES Summit Generation and AES-Tisza Erőmű v Hungary, EDF v Hungary and Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co KG v Germany. The Vattenfall arbitration, which is related to the aborted Moorburg power station in Hamburg, is currently on hold pending settlement negotiations between the investor and the German government.

Is arbitration under the ECT an appropriate remedy for the protection of investments in PV projects with a size of €10m or less?

Yes. International arbitration proceedings can provide a reliable and efficient tool to enforce claims of €10m and even less. The decision whether or not initiate arbitration proceedings should be made on the basis of a proper analysis of the risks and costs of each individual claim. To reduce the burden of legal costs for individual investors, arbitration proceedings can be pursued for several parties at the same time.

Can several investors initiate international arbitration proceedings together as a group of joint claimants?

Yes. Joint claimants are a common feature in international arbitration proceedings. Indeed, we have experience of co-ordinating numerous claimants bringing claims against host states with the claimants sharing the resulting legal costs among themselves. US-style class action and/or mass litigation rules are, however, not provided for under the ECT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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