“Green” Investors Against the State
The government is reducing the “green” tariff: will investors be able to go to arbitration and win?
However, at the end of 2019, the rapid development of renewable energy has led to an imbalance in the energy system and allegations of inflated tariffs.
There is a crisis: the state cannot fulfill its obligations to buy “green” energy at such tariffs.
The new acting Minister of Energy resolved this situation, and on June 10 a memorandum was signed with investors.
By early July, there will have been adopted a law applying new “green” tariffs. However, investors are already discussing the possibility of filing lawsuits against the government. We hereby assess the prospects of such initiatives.
- The government has no right to revise the tariffs guaranteed by law until 2030, investments must be stable;
- Enterprises will not be able to repay bank loans that were actively involved in the construction of solar power plants, if the green tariff is reduced;
- The solutions proposed in the memorandum do not solve the systemic crisis in Ukraine's energy sector;
- Revision of the green tariff violates the principle of fairness and stability of legislation;
- The government does not refuse to import electricity from Russia and Belarus to correct the energy imbalance, but instead reduces spending on RES investors;
- Changes in the conditions for investment in renewable energy sources will significantly worsen the investment climate in Ukraine;
- The terms of the memorandum are discriminatory against producers of electricity at solar power plants compared to investors in wind power plants;
- The terms of the memorandum are discriminatory against individual investors.
Following the Spain
Investment arbitrage (namely, it is a potential tool for foreign investors in renewable energy) is a fairly conservative process: cases are considered for years.
At the same time, arbitration practice is largely predictable, in particular within similar factual circumstances.
Without claiming complete similarity, I will give examples of arbitration decisions on the address of investors in renewable energy of the Kingdom of Spain.
As of now, of all the publicly-known arbitrations, 3 were in favor of Spain, 3 in favor of investors.
These decisions can be good guidelines for assessing the prospects of renewable energy investors in Ukraine.
Thus, in 2007, Spain set great conditions for investment in solar energy, and for a period of 25 years – Ukraine “repeated” in 2009.
However, in 2013 Spain was forced to reconsider these previously guaranteed conditions. We have it in 2019.
The background was the problems in the economy (GDP went from growth to fall) – as in our country.
Changes in the tariff and tax regime meant a reduction in payments to RES producers by 2.2 billion euros over 3 years. Ukraine expects UAH 6.6 billion in savings.
Foreign investors took advantage of their status and turned to international arbitration.
The first group (15 investors worth 600 million) in 2011 by UNCITRAL.
The second group of 20 investors (worth several billion) followed ICSID and SCC (Stockholm, Naftogaz’s place of glory).
A total of at least 40 claims of investors to investment arbitrations are known.
In one decision in favor of Spain, the arbitrators agreed that the Government should take measures in the context of the economic crisis, in particular to balance the market.
In another decision in favor of the investor, the arbitral tribunal ruled: Spain terminated the favorable regulatory regime granted to investors to encourage investment at the time of arrival, and subsequently replaced it (the regime) with an unprecedented, completely different regulatory regime.
Particular emphasis is placed on the application of the new unfavorable regime to investments made at the expense of another (more favorable) regime.
That is, the Spanish government violated two provisions of the Energy Charter (ECT): (1) fair and equitable treatment (FET); (2) legitimate expectations.
Also, the arbitration agreed with the statement that the government’s actions led to the investor’s problems with bank loans.
In a case where 25 investors in 2014 appealed to arbitration with claims for 1.9 billion in compensation from the Spanish government, only on February 28 this year, arbitration awarded only 91 million euros and only 10 of the 25 plaintiffs.
The key legal arguments of the Spanish government (with which the arbitration generally agreed) were as follows:
- investors' income from investments in renewable energy still remains high (7-8%);
- the government has the right to regulate;
- proper and adequate communication by the government of its actions;
- national producers suffered in the same way as foreign investors, so there was no discrimination.
- Justification by the government of the need for regulatory changes (reduction of tariffs);
- Consistent approach (to all RES investors the same, and not only to investors in the field of renewable energy);
- Transparent dialogue with investors (conclusion of a memorandum).
Potentially, it will be more difficult for an investor to challenge the government’s actions, which they agreed to when signing the memorandum.
Of course, investment arbitrage is actually much more complicated than you can write in this publication.
Renewable energy investors in Ukraine will be able to get almost all the income they expected. But not all investors, but only those who go to arbitration and win it.
The odds of actually winning are 50/50. Some key parameters may be: the fact of signing the memorandum, the state of the economy and energy, the professional level of lawyers involved.
The experience of the Kingdom of Spain is interesting for the assessment of arbitration prospects.
Given all this, I assume that the Ukrainian government is unlikely to be afraid of the threat of arbitration, as budget expenditures should be reduced now and by the entire amount, and the compensation shall be paid to the investors later on, and not all to all of them – therefore not all money.