Energy Arbitrations

Author:Mr Richard Power
Profession:Clyde & Co
 
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The past year has been tumultuous for the energy sector. Proxy wars and uprisings continue to destabilise the Middle East and North Africa; the migrant crisis and the Brexit vote have destabilised an economically moribund European Union. Demand for oil and gas remains depressed due to sluggish economic recovery and the need to reduce CO2 emissions (especially in light of the COP21 Paris Agreement), while supply remains high due to geopolitical factors in the Middle East (including Iranian sanctions being lifted). This has resulted in a persistently depressed oil price. The arrival of the first cargoes of US shale-sourced LNG in Europe signalled further downward pressure on European gas prices.

These difficult conditions have contributed to some significant developments in the field of energy arbitration in the past year. Energy Charter Treaty (ECT) claims made Western Europe the most sued region before the International Centre for the Settlement of Investment Disputes (ICSID) during 2015, largely due to yet more claims against Spain in relation to the 2010 and 2013 amendments to the regulatory framework of its renewables industry. At the time of writing, Spain faces at least 26 ongoing arbitrations. Indeed, as set out below, few EU states appear immune to ECT claims, based on the number of cases pending in the past year.

However, this year also saw the first reported decision by a tribunal constituted to consider whether or not the measures taken by Spain constituted a breach of the ECT. Given the importance of this decision in the context of European energy arbitration, a significant amount of this overview is dedicated to consideration of the award in Charanne B.V. and Construction Investments S.á.r.l v Kingdom of Spain (Arbitration No. 062/2012) (Charanne).

This overview also considers the approach of the EU and its institutions to the controversial subject of intra-EU BITs/MITs, such as the ECT. This year saw a further two arbitral decisions considering the European Commission's (EC) position on competence over disputes under such instruments, with the results leaving the EC in a difficult situation in respect of achieving its aims of unifying energy policy across all member states.

Finally, this overview will address the impact of continued depression of the global oil price on disputes, including whether or not the recent glut of gas price review arbitrations in Europe is likely to continue.

Charanne: is the sun is about to set on Spanish solar panel ECT claims?

Perhaps the biggest development in the field of energy arbitration in the past year came in the form of the SCC award in Charanne.1 The award may be significant not only for Spain's remaining ECT caseload but also more widely for investors in Europe's energy sector.

Spain's regulatory changes

During 2007 and 2008, Spain's Ministry of Industry, Energy and Tourism promoted its solar energy sector with a campaign under the slogan 'The sun can be yours.' Spain's actions were designed, pursuant to the EC's objectives, to promote renewable power generation (Directive 2001/77EC). Among the measures included in the 'Special Regime' were (i) a specified feed-in tariff for a 25-year period, following which certain generators would benefit from 80 per cent of the feed-in tariff; (ii) an entitlement to distribute all energy generated to the Spanish electricity grid; and (iii) no limitation on the operating hours of generators.

Spain's promotional drive led to a flooding of the solar sector. This, coupled with the effect of the global financial crisis on the Spanish economy, led Spain to enact two further pieces of legislation in 2010 which had a substantial impact upon the Special Regime. Royal Decree 1565/2010 removed the applicability of the feed-in tariff to generators after the 26th year of the solar plant's life (subsequently increased to 30 years) and added the requirement that certain plants install mechanisms to protect the electricity grid from voltage dips. Royal Decree 1614/2010 together with Royal Decree-Law 14/2010 introduced a limit on the amount of operating hours subject to the feed-in tariff and a charge of €0.5/MW for access to the transmission grid. Further changes to the Special Regime were enacted by the Spanish government in 2013 - however, and potentially critically, such legislative measures were not raised by the claimants in this arbitration.

Substantive claims

The co-claimants - Charanne B.V. (a Dutch company) and Construction Investments S.á.r.l. (a Luxembourg company) - brought their claim under the ECT on the basis of their shareholding in Grupo T-Solar Global SA (T-Solar), which owned a number of solar plants in Spain. They argued that the 2010 legislative amendments had retrospectively and detrimentally affected the legal and economic framework within which they had decided to invest. More specifically, they argued:

in breach of ECT, article 13(1) Spain's actions 'caused a brutal economic impact on the profitability of the activity of T-Solar and constitute[d] an expropriation of a substantial part of the value and returns of the[ir] investment';2 and in breach of ECT, articles 10(1) and 10(12), Spain's actions 'violated the standard of fair and equitable treatment frustrating the legitimate expectations of the Claimants by breaking the stability of the regulatory framework under which they invested'.3 Jurisdictional objections

Spain's primary response to the claims was to challenge the jurisdiction of the tribunal on three grounds. First, Spain argued that by having already taken the dispute to the Supreme Court of Spain and the European Court of Human Rights (ECHR), the claimants had invoked the 'fork in the road' provision in ECT, article 23(2)(b)(i). Secondly, Spain asserted that neither claimant qualified as an 'investor' for the purposes of ECT, article 1(7)(a) as their ultimate shareholders were Spanish nationals (and that the resolution of the dispute by this tribunal would breach the Spanish constitution as not all Spanish nationals have access to arbitration). Thirdly, as discussed in more detail below, for reasons overlapping to a degree with the EC's amicus curiae brief in the arbitration, Spain argued that neither it, the Netherlands nor Luxembourg consented to disputes under the ECT being resolved by arbitration in an intra-EU context.

Decision

The tribunal dismissed all of Spain's jurisdictional objections. It found that the fork in the road clause did not fall for consideration, holding that the claimants in the arbitration had not, themselves, brought either the proceedings before the Spanish Supreme Court (brought by the T-Solar Group together with other owners of plants affected by the changes to the Special Regime), or the ECHR claim (various subsidiaries...

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