Rulings in Renewable-Energy Battle in Spain to Test Arbitration Power
The clouds may finally be lifting over a series of multiyear legal battles involving soured investments in Spain’s renewable-energy market.
In the past 18 months, international arbitrators ordered Spain to pay compensation to several investors for losses incurred after the Spanish government revoked incentives designed to attract capital to the nation’s renewable-energy market. As Spain seeks to annul the rulings, the dispute is testing the strength of international arbitration to enforce certain investor rights.
“It’s the very legitimacy of international arbitration that’s been challenged,” said Fernando Mantilla-Serrano, a partner and global co-chair of the international arbitration practice at law firm
Latham & Watkins LLP. Mr. Mantilla-Serrano represented some investors in their claims against Spain.
Dozens of renewable-energy investors claimed a total of at least €7.86 billion ($8.96 billion) in more than 35 arbitration cases filed against Spain since 2011, according to a document the Spanish government issued late last year. The document appears to be the only public tally of the claims.
These investors—which include private-equity firms, asset managers and global power companies—were attracted to Spain by a package of incentives the Spanish government introduced in 2007 to encourage electricity generation from renewable sources. However, electricity consumption in the country declined in the wake of the 2008 financial crisis, making the subsidies more costly for local electricity companies. Concerned about increasing deficits, the Spanish government in 2009 began a rollback of the incentives that culminated in 2013 and that drastically reduced the revenue of renewable-energy plants, private-equity executives said. Investors that had poured capital into renewable-energy projects during the late 2000s and early 2010s saw their returns deteriorate without the incentives. Many now seek compensation for the losses they suffered.
“That’s a huge number of cases arising out of basically one policy decision,” said Joseph Profaizer, a partner and global head the of international arbitration practice at law firm Paul Hastings LLP.
Spain has prevailed in two of the six cases international arbitrators have ruled on so far. But a series of four consecutive decisions in favour of investors tipped the scale against the Spanish government.
Spain should pay
In the latest decision, the Washington, D.C.-based International Centre for Settlement of Investment Disputes, which is part of the World Bank Group, ruled in June that Spain should pay €112 million, net of interest, in damage compensation to Antin Infrastructure Partners, less than the at least €148 million the European private-equity firm claimed, according to case documents. Antin in 2011 invested alongside asset manager DWS Group in two concentrated-solar-power plants located in the Spanish province of Granada, the documents showed. DWS is seeking compensation from Spain through a separate arbitration case it filed with ICSID.
Spain has requested an annulment of Antin’s award. The request is pending. Antin declined to comment for this article, while the Spanish government didn’t reply to requests seeking comment.
One investor still waiting for an arbitration decision is Foresight Group. The London firm in 2008 launched a retail fund dedicated to investment in solar projects, raising €35 million for Foresight European Solar Fund, said Federico Giannandrea, a partner at Foresight who leads the firm’s infrastructure investments in continental Europe. The firm made two investments in Spain from that fund, he said. In 2009, it acquired a nine-megawatt photovoltaic plant in the Castilla-La Mancha region. A year later, Foresight formed a joint venture with a Spanish company, which today is part of renewable-energy operator Athena Investments, to buy another photovoltaic plant in Cordoba.
“The tariffs were very attractive,” Mr. Giannandrea said. “We spotted the opportunity of a market that was nascent at the time, which was the solar market.”
Foresight has sold its stake in the two plants, but kept the rights to the legal claims as it still wishes to return more capital to investors, he added. Several other investors are in the same situation, according to people familiar with the matter.
In the four cases decided in favour of investors so far, ICSID and the Arbitration Institute of the Stockholm Chamber of Commerce ruled that the changes Spain made to its renewable-energy incentives violated the Energy Charter Treaty, an international agreement aimed at fostering cross-border investments in the energy industry. Spain is one of the 53 current members of the treaty.
Spain is fighting the claims and the awards by bringing the European Union into the picture. The Spanish government has argued that the EU law takes precedence over the Energy Charter Treaty to resolve disputes between EU-based investors and EU states. Another Spain argument is that paying awards to investors would amount to state aid, which only the EU could approve.
The main question, international arbitration experts said, is how far the Spanish government is willing to go to avoid paying the awards.
Adding to the pressure on Spain, Antin and the other three investors that won their cases requested the U.S. courts enforce the awards granted to them.
The arbitration institutions are expected to rule on more cases in the coming months, and they likely will award more compensation to investors, the experts said.
“There’s a tendency to try to follow what has been decided in previous cases,” said Carmen Otero García-Castrillón, a professor of private international law at Complutense University of Madrid. “When the facts are much alike, it would be shocking if the cases were decided in a different way.”
It is much less clear, however, if investors will ever get paid.
“I really hope so,” Mr. Giannandrea said. “We don’t think it would be fair if states were allowed to breach promises without consequences.”
Source: Private Equity News