By Fernando Badenes, King & Wood Mallesons’ Madrid Office

The last step of the reform of the electricity sector carried out by the Spanish Government has been the final straw. That step was the enactment of a Ministerial Order that has set the parameters of remuneration for different renewable energy technologies. This regulatory change supposes the retrenchment of the profitability that the Spanish state had promised and stimulated and which had been the reason for fresh private equity funds in the sector. This change of regime was initiated some years ago by the Spanish Government with the aim of reducing the tariff deficit of the system and has triggered foreign alarms to investors who had invested in the renewal energy sector relying on the Government’s promises on keeping premium fees throughout the lifetime of the plants. These investors have now initiated arbitration proceedings under the protection of the Energy Charter Treaty (“ECT”) to claim from the Spanish State fees lost as a result of this change of regulation.

Regulatory change

The starting point of the electricity sector legal framework in Spain was the Electricity Sector Act of 1997 which set the basis for the renewal energy retribution system by establishing a premium remuneration that consisted in either a regulated tariff fixed by the Spanish Government or the market price premium.

This regime was developed during the next decade with the enactment of multiple regulations that encouraged the production of renewable energy. These created a stable legal framework that incentivised the investment and attracted foreign investors,in particular, venture capital funds. The greatest expression of this was the Royal Decree 661/2007, which turned Spain into one of the leaders in the expansion of renewable technology.

Nevertheless, as a result of diverse factors, the principal being the misapplication by the Spanish Government of the tariff regime established by Royal Decree 661/2007, the electrical system began to significantly increase the tariff deficit. This meant that successive governments needed to enact legislative measures to reduce system costs which eventually led to a new remuneration system that was introduced with the enactment of the new Electricity Sector Act of 2013. The change of model materialise with the enactment of the abovementioned Ministerial Order that has set the parameters of remuneration for different renewable energy technologies.

This new economic regime implies that the installations which were entitled to a premium remuneration prior to the entry into force of Royal Decree-Law 9/2013 are now affected by a relevant reduction on their remuneration based on the premiums already paid. This circumstance will force these facilities to return part of the incomes up to date accrued and charged by means of a reduction in their future remuneration, which is, indeed, a retroactive application of the regime. In fact, for plants of some technologies (e.g. biogas cogeneration), the new parameters of remuneration approved are forcing them to close down given that they now suffer direct losses for remaining in operation.

This reform has been strongly criticized by the industry given that it alters the profitability of these installations before the end of their lifetime. Most investors had invested in such plants relying on financial projections that have now been frustrated.


This new profitability scenario for the renewal energy sector has pushed the investors to start arbitration proceedings under the ECT claiming against the Spanish State damages in compensation.

In particular, investors mainly allege that the new regime could breach, in addition to constitutional principles. Principles of as legal certainty, against retrospectivity, of legitimate expectations and general principles on international law such as of fair and equitable treatment and protection and safety for the investments set forth in the ECT.

Common features of arbitration proceedings

1. Parties to the proceedings

The actors in these arbitration proceedings are predominantly venture capital investment funds which landed years ago in the sector attracted by the high returns promised by the Government.These are, among others, the Americanphotovoltaic multinational fund, Nextera;Masdar Solar, the financial branch ofAbu Dhabi, which participates in Spain in Torresol with the engineering firm Sener; RREEF Infrastructure, a Deutsche Bank linked fund; a fund related to the BNP, Antin Infrastructure Services Luxembourg; Eiser, a British fund created by ABN Amro bank, which operates in Spain with Elecnor; Isolux Infrastructure Netherlands, a subsidiary of Abengoa CSP Equity Investments; the investment companies Charanne and Construction Investments; or PV Investors, a group of 16 investors in renewable energy.

2. Arbitration courts

The ECT provides international arbitration as the primary method of dispute resolution. Arbitration provisions are set forth in article 26 ECT and the arbitration courts which disputes are referred to are the Stockholm Chamber of Commerce (“SCC”), the International Centre for Settlement of Investment Disputes (“ICSID”) or ad hoc tribunals established under the Arbitration Rules of the Commission of the United Nations Commission on International Trade Law (“UNCITRAL”).

3. Damages claimed

Foreign investors are claiming damages resulting from the reduction in the profitability originally provided by the former legislation, which includes both the direct damages suffered and the loss of profit that was initially expected to be achieved until the end of the lifetime of the installations under the previous regime.

The basis for claiming such compensation lays on the interpretation of article 12 ECT, considering that the electricity sector reform could be included within the scenarios that article describes in order that investors be entitled to damages incurred by their investments in Spain.

4. Main arguments of the claimants

Under these arbitration proceedings, investors allege, in short, the infringement of article 10.1 ECT, on promotion, protection and fair and equitable treatment of investments, and of article 13 of the ECT, which prohibits expropriation.

(1)Art. 10 ECT

Article 10 provides that the contracting parties shall encourage and create “stable conditions” and ensure “fair and equitable treatment”. In addition, investments will enjoy “full protection and security” and“exorbitant and discriminatory” measures will be forbidden.

This standard of treatment is the core of the Treaty and consists in giving full protection and security to the investments of nationals of another State and preventing those investments from being obstructed in their performance, use or disposal by arbitrary measures.

Therefore, foreign investors expect that the host State will not act in a contradictory manner. That is to say, that it will not act arbitrarily reverting previous decisions or permits issued on which the investor relied and based its investments. In this regard, investors argue that, with the reform of the electricity sector, the Spanish State has acted contradictorily revoking a legislation which gave a high profitability on the renewable energy installations and according to which they made their investment decisions. Otherwise, they say, they would have never invested in the sector.

(2)Art. 13 ECT

Article 13 protects investments,establishing that they cannot be subject to“nationalisation, expropriation or measures having equivalent effect” unless certain requirements are met, such as:

  • the concurrence of a public interest reason;
  • the absence of discrimination;
  • the compliance with established legal procedure; and
  • the payment of a prompt, adequate and effective compensation.

In particular, investors are claiming for indirect expropriation, also known as ‘creeping’, which entails a hidden expropriation operated continuously through permanent regulatory measures adopted by the State (e.g. taxes, regulations and legislative reforms), that virtually deprive the asset or rights that are owned by the investor in the particular country, of the economic value derived from use, benefit or disposal.

For the implementation of this indirect expropriation it is not necessary to disturb the title of ownership but only the rest of the property rights (e.g. the economic benefits of the asset or right).

Current status of arbitration proceedings

All of these proceedings are still pending resolution. Nextera is the latest international fund that has filed an arbitration claim against Spain this year before the ICSID in 2014. Likewise, this year and before the same arbitral Court, Masdar Solar has decided to lodge a similar claim.In addition, before the said court, in 2013, firstly, RREEF Infrastructure, and subsequently, Antin Infrastructure Services Luxembourg, brought an action in this regard.

Similarly, in 2013, three arbitration claims were filed by Charanne and Construction Investments, Isolux Infrastructure Netherlands and CSP Equity Investment before the SCC.

In addition, as a precedent, in November 2011, a claim was filed under the UNCITRAL Rules by PV Investors. Others are still expected to bring an action in the short term.

Consequences of an arbitral award finding for these investors

The issuance of an arbitral award finding in favour of any of the claimants in the pending arbitration proceedings is a risk that the Spanish State is not prepared to bear. There are billions at stake.

Moreover, it is undeniable that the irreparable harm the reputation of Spain would suffer in the renewable energy sector under that scenario and this would surely lead to a loss of confidence for future investors in this and other related sectors.

However, it has to be highlighted that an award that finds for any of the international funds would not affect in any way Spanish investors for two reasons: the award would be binding just between the parties to the arbitration and ECT provides no protection to national investors.

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