Greek solar investors are now feeling the heat more than ever. Liquidity problems in the electricity market seem to be leading Greece’s new government to consider making cuts in feed-in tariffs (FITs) or introducing other measures of equivalent effect for operational solar plants. FITs and green certificate regimes have been the bedrock of investor confidence in renewable energy since EU legislation started to require EU Member States to implement renewable energy support regimes. However, Greece is far from being the only jurisdiction to set its sights on the renewables industry in the face of broader austerity measures. This article considers how helpful some aspects of EU and international law are, in protecting the interests of investors.
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The “pre teens” (2010 - 2012) have presented a series of anni horribili for those trying to follow the scent of renewable energy incentives in Europe. Just before Christmas 2010, the Spanish government issued a decree regarding FITs for existing solar power plants. The Italian government mooted the removal of the green certificate buy-back mechanism, which supports large scale renewables in Italy. The Italian green certificates mechanism is now being replaced for new projects. The UK government, which had previously been a poster child of regulatory certainty, spent much of 2011 implementing emergency reviews of FITs for PV modules. This led to an embarrassing battle in the courts. The Government was found not to have observed due legislative process. The Government has subsequently made a hash of determining support levels for large scale renewables that will apply from 2013, much to the chagrin of those seeking to finance projects in the UK that will be operational in or about April 2013. Other EU jurisdictions have resorted to less obtuse measures, such as implementing changes to tax regimes and instigating new permitting requirements. These have had the effect of reducing support levels via the back door.
All this can be seen as EU Member States reneging on what had been assumed to be a mutually beneficial and long-lasting bargain with private investors: you give us your feed-in tariff and we give you much needed new electricity generation technology that harnesses the power of the sun and the wind.
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Thank goodness for the Renewable Energy Directive?
Way back when, in the late “noughties”, the Renewable Energy Directive (RED) was hailed as a breakthrough piece of legislation that would enable renewables to push past barriers. It would confirm Europe as the leader of an energy revolution. The RED was said to be legally binding. An important element of this was the requirement of each Member State to ensure that a 2020 target for consumption of renewable energy was met. Member States were obliged to outline the measures they would take in order to meet this objective in a National Renewable Energy Action Plan (RAP).
The EU does not now appear to be able to pay for the subsidies needed to achieve RED targets. But surely the wave of recent cuts in support schemes is incompatible with the provisions of the RED?
The RED is one of the primary drivers behind the creation of the web of renewables incentives mechanisms which are currently on offer throughout the EU. Member States have broad obligations under the RED. The preamble to the RED (which is not in itself legally binding), states that one of the most important ways to achieve the aims of the RED is “to guarantee the proper functioning of national support schemes… in order to maintain investor confidence and allow Member States to design effective national measures for target compliance”. However, the RED does not prescribe any particular support scheme, nor does it set out any rules on how such schemes are to function.
Instead, the RED imposes an obligation on Member States to ensure that their share of energy from renewable sources in 2020 is at least at the level prescribed in the RED, with each country having its own level. In order to reach this target, each Member State must adopt a RAP assessing the total expected contribution of each renewable energy technology to meet the mandatory targets. The RAP should also contain details of the Member State’s national support scheme for the promotion of the use of energy from renewable sources.
Under EU law, directives are binding as to the end to be achieved but leave Member States with discretion as to the way in which these are to be implemented in national law. The RED sets out a large number of obligations for Member States, but leaves each country a significant measure of choice as to the way in which it meets these obligations.
In general, the powers of enforcement granted to the European Commission under the RED are rather soft. While the Commission has powers to analyse each RAP as a whole, it has no formal powers to amend or even reject a Member State’s plan and may only issue recommendations. Under EU law, this is a legal act with no binding force. While the Member State ought to give consideration to the Commission’s views, there is no obligation on it to do so.
The RED does make provision for what is to happen in circumstances where Member States are not on course to meet their targets. In the first instance, a Member State is required to submit an amended plan setting out the measures required to get back on track. The Commission has powers to issue a recommendation in respect of the amended plan. Where a Member State thinks it will be unable to meet its targets as a result of force majeure, it must inform the Commission who will then take a decision on whether this claim is valid and what, if any adjustment, should be made to the national target. This decision is a more formal act and is binding on the Member State to whom it is addressed.
Below, we have summarised the provisions most relevant to national targets and support measures in the RED:
- Member States shall ensure that their share of energy from renewable sources in terms of gross final consumption in 2020 is at least its national overall target - which is to be consistent with a target of at least a 20 per cent share of energy from renewable sources in the EU
- Member States shall introduce measures to ensure that their share of energy from renewable sources equals or exceeds an indicative trajectory established by the RED
- In order to reach their targets, Member States may apply the following measures (a) support schemes; (b) co-operation measures with different Member States and with third countries
- Member States shall adopt a national renewable energy action plan setting out its national targets for the share of energy from renewable source consumed in the transport, electricity and heating and cooling in 2020, as well as adequate measures to be taken to achieve those targets. These are to include details of national support schemes for the promotion of the use of energy from renewable sources. The plan should assess the total expected contribution of each renewable energy technology to meet the mandatory targets. These are to be notified to the Commission by 30 June 2010
- Where a Member State’s share of energy from renewable sources falls below the indicative trajectory set out in the RED, it shall submit an amended renewable energy plan to the Commission setting out adequate and proportionate measures to rejoin the trajectory. If the Member State has not met the trajectory by a limited margin, the Commission can, under certain circumstances, waive the requirement to submit an amended plan (Article 4(4)). The Commission shall evaluate Member States’ national renewable energy action plans. It may issue a recommendation in response
- If a Member State considers that, due to force majeure it will be impossible for it to meet its share of energy from renewable sources target, it shall inform the Commission as soon as possible. The Commission shall then adopt a decision as to whether or not force majeure has been demonstrated - and if so, what adjustments are to be made to the Member State’s targets, and
- By 31 December 2011 and every two years thereafter, Member States shall submit a report to the Commission on progress in the promotion and use of energy from renewable sources. The report shall provide details, inter alia, on the sector and overall shares of energy from renewable sources in the preceding two calendar years, the introduction and functioning of support schemes and other measures to promote the use of energy from renewable sources; and how, where applicable, it has structured the support scheme to take into account renewable energy applications that give additional benefits in relation to comparable operations but may have higher costs.
How effective are these provisions?
From the date of the RED’s entry into force, Member States are under an obligation not to adopt any national measures liable seriously to compromise the result prescribed by the RED. This means that were a Member State adopts legislation that would seriously threaten its national target, this could potentially lead to infringement procedures before the European Court of Justice, at the initiative of the Commission or a Member State.
In theory therefore, there will in the future be several ways in which the Commission might bring pressure on Member States who have failed to comply with their RED obligations. However, the lack of interim targets might be seen as a significant weakness of the RED in the short term. Thus, unless there is a failure to produce a credible RAP or to implement all aspects of the RED, there is little action that can be taken until an indefinite date in the future.
Given the timeline set out in the RED, we doubt that it would be possible to challenge a Member State’s current revisions to a support scheme on the basis that they risked compromising its overall target. This is because, even if it could be shown that a support scheme was crucial for a Member State to meet its target and that amendments to the scheme potentially threatened that objective, the RED gives Member States an opportunity to apply corrective measures. Member States have significant discretion as to the means to achieve the mandatory targets, meaning that even where changes to support schemes risk reducing the production of renewable energy, Member States are free to adopt other types of measures to achieve the targets. Even if it could be said that a change, for example, in FITs would make the achievement of national targets more difficult, an argument that this would seriously undermine the attainment of those targets would be too hypothetical, both in terms of timing and scope, to stand any realistic chance of success.
Commission powers of enforcement
Further, infringement proceedings are lengthy. Under Article 258 of the Treaty on the Functioning of the European Union (TFEU), the Commission would at first give a ‘reasoned opinion’ after allowing the Member State to submit its observations. Infringement proceedings could also be commenced by other Member States under Article 259. The Member State would first bring the matter to the attention of the Commission, and the Commission would then deliver a ‘reasoned opinion’ on the basis of submissions from the parties.
In either case, where Member States do not comply with the Commission’s reasoned opinion, the complaint can be brought before the European Court of Justice (ECJ), which may require that such measures be taken as are necessary to comply with the ECJ’s judgement. Quite how this would work in practice in the context of the implementation of such a broadly drafted piece of legislation as the RED is debatable. Failure to comply with the ECJ’s ruling would lead to a request that the ECJ imposes a penalty payment on the Member State concerned, but only after the Member State has the opportunity to submit its observations. The deployment of such remedies will do little to alter the fact that if a substantial number of Member States have failed to reach their RED targets, there are unlikely to be any short term fixes to rectify a problem whose solution lies in the deployment over many years of expensive and infrastructure-intensive technologies.
Claim by individuals?
So if the Commission and Member States are unlikely to be of assistance, what is the role of individuals and corporations affected by this issue?
If, after the RED’s date of implementation, a Member State has failed to adopt implementing measures or has incorrectly implemented the directive, an individual or a company may invoke the provisions of the RED before a national court under national legislation, assuming they are sufficiently precise and unqualified by conditions. However, because of the breadth of the RED’s provisions, it is highly unlikely that the provisions of the RED could be relied upon by an individual or company in proceedings before a national court.
Principle of legitimate expectations
The protection of legitimate expectations is a general principle, which is binding on all authorities entrusted with the implementation of provisions under EU law. Member States are bound by the principle when they exercise the powers conferred on them by EU Directives. It has previously been held that a national legislative amendment retroactively depriving an individual or company of a right derived from an EU directive is incompatible with the principle of the protection of legitimate expectations.
However, in order to claim a similar breach of the principle of legitimate expectations in the current case, it must first be demonstrated that the RED establishes rights for individuals or companies as regards support schemes. Again, in light of the wide scope of discretion afforded to Member States under the RED, it will not be possible to establish that it creates any such direct rights for individuals or companies. As such, it will not likely be possible for private individuals to rely on this principle.
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Energy Charter Treaty
In the face of such adversity, some have thrown the net wider than EU law in order to establish a legal claim and protect their economic interests. Thank heavens for the Energy Charter Treaty (ECT), particularly if you are an arbitration lawyer!
The ECT came into being following the collapse of the Soviet Union. It was intended to minimise the risks associated with energy-related investments into other countries. The ECT was negotiated in the early 1990s and it did not enter into force in 1998. At the time of its negotiation, no-one would have bet a Drachma that EU Member States would themselves fall prey to the provision of a treaty that had been devised to protect the investments of individuals in creditworthy states into countries facing socioeconomic difficulties. Still greater astonishment might have been expressed at the idea that such investments would take the form of European seas and hillsides dotted with solar panels and wind turbines.
What does it do?
The ECT provides its members with comprehensive protection for foreign investments in the energy sector. It offers:
- Guarantees of fair and equitable treatment
- Protection and security for foreign investments
- A prohibition against arbitrary or discriminatory measures
- An obligation to observe any obligations the state has entered into with respect to a foreign investment, such as in a contract signed with a foreign investor
- Guarantees of national treatment (ensuring that foreign investors receive benefits at least equivalent to those conferred on domestic investors) and most-favoured nation treatment (treatment no less favourable than that granted to investors of a third state)
- A requirement to pay prompt, adequate and effective compensation (no less than market value) if a state expropriates a foreign investment or subjects it to measures equivalent to an expropriation, and
- Rights to freely transfer capital and returns in and out of the host state.
Who is protected and how?
Importantly, the ECT protects individuals who are citizens, nationals or permanent residents of an ECT state. It also protects companies or other legal entities organised in accordance with the laws of an ECT state. As such, its provisions are likely to avail investors of much more useful remedies than the RED.
Under the ECT, the concept of investment is defined broadly but must be ‘associated with an economic activity in the energy sector and must relate to the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of energy materials and products.’ The scope of the protection that the ECT can offer is therefore relatively wide, and potentially applicable at a number of points in the renewable energy supply chain.
However, it should be remembered that the ECT is designed to protect foreign investment. A Greek investor seeking protection for its investment in Greece is unlikely to be able to avail itself of the ECT’s provisions.
The ECT enables foreign investors to enforce investment protection through international arbitration. Investors may litigate in the host state’s own courts, resolve the dispute through a previously-agreed mechanism, or arbitrate through:
- ICSID arbitration
- Arbitration under the ICSID Additional Facility Rules
- Ad hoc arbitration under the UNCITRAL Arbitration Rules, or
- Arbitration under the Arbitration Rules of the Stockholm Chamber of Commerce.
Though there is no significant track record of awards rendered to date, claimants have been awarded damages in several cases.
Why is this relevant?
Over twenty investment disputes are known to have been brought to international arbitration under the ECT in a broad range of areas. Importantly, the ECT is now being used by private investors to challenge Spain over cuts to its solar PV subsidy regime. When, on 23 December 2010, the Spanish government issued a decree cutting subsidies for existing solar power plants, it sent a shockwave through the renewable energy community. Investments had been made on the basis that subsidies would be guaranteed for 25 years. Impax Asset Management Group Plc, Hudson Clean Energy Partners and HGCapital are among at least 15 international investors suing the Spanish government. These companies are reported to have invested more than 4 billion euros in Spanish solar PV projects.
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Governments may have good reason to seek to reduce their exposure to renewable energy subsides regimes, and they are unlikely to be overly perturbed by the prospect of falling foul of the RED’s requirements. Outside traditional domestic legal remedies available to investors, such as juridical review in the UK, private investors will no doubt be seeking advice as to whether there are any other ways of protecting their investments at law.
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