• The Latest Renewables Claim: Abengoa's Subsidiary Launches Investment Treaty Proceedings Against Spain
  • December 3, 2013
  • Law Firm: Dentons Canada LLP - Toronto Office
  • A subsidiary of Spanish conglomerate Abengoa is the latest energy company to seek redress against a European State for withdrawing or modifying feed-in tariffs (FiTs). FiTs were introduced to encourage investment in renewable energy and typically guarantee electricity purchase prices above market rates. However, in response to the challenging economic climate, a number of States have "rolled back" these incentives, hitting the expected profits of companies operating in this sector. As a result, investors in renewables have brought claims against Spain and the Czech Republic, with proceedings also threatened against Italy. Further actions are likely to follow if other States reduce their FiT or more investors call their host State to task.

    In this alert, we summarise the basis of this recent claim, explain the broader trend it illustrates and set out practical tips for companies investing in the energy sector and facing similar issues.

    What are the details of the claim?

    CSP Equity Investment S.a.r.l. (CSP) is a Luxembourg-registered subsidiary of Abengoa, holding interests in six thermo-solar plants in Spain. CSP has commenced a claim against Spain, following the Spanish Government's decision to reduce the scope of the FiT applied to renewable energy providers. The cuts are apparently motivated by the €28 billion deficit in the country's energy market.

    The claim is brought under the Energy Charter Treaty (ECT), to which Spain and Luxembourg are signatories. The ECT provides investors of signatory States with a minimum level of protection from state interference in relation to energy-related investments in other signatory States. Violations of these protections give rise to a cause of action against the host State that can be resolved, at the investor's election, through local courts or international arbitration.

    The basis of CSP's claim is that the new measures introduced by the Spanish Government:

    • breached its legitimate expectations contrary to the ECT, which requires States to accord "fair and equitable treatment". It appears to argue that in making its investment it relied on Government representations to the effect that the FiT would continue to apply; and

    • constituted an expropriation in breach of the ECT. "Expropriation" includes not only the overt taking of an investment, but also indirect measures (such as taxation) which erode the investment's financial equilibrium.

    CSP seeks compensation for these alleged breaches. Although its losses are not yet quantified, sources indicate they could be as high as €60 million per year. The claim was instigated in June 2013, but this only came to light in the prospectus filed for Abengoa's recent listing on the Nasdaq. CSP has elected for the dispute to be resolved by arbitration seated in The Hague under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce.

    The broader trend

    CSP's claim is one of several brought against European States following the withdrawal or modification of FiTs and other incentives previously available to renewable energy suppliers. The rolling back of subsidies has been starkest in Spain, in respect of which: (a) in 2012, Charanne and Construction Investments started a claim under the ECT for €17 million; (b) in the same year, a claim was commenced by a group of 14 investors seeking damages of around €25 million; and (c) RREEF Infrastructure, a subsidiary of Deutsche Bank, has threatened to launch a further claim.

    Elsewhere, eight investors (including Germany's Antaris Solar and the UK's ICW Europe Investments) have instigated a claim against the Czech Republic in response to a new levy on electricity generated by solar power plants. They contend that the levy breaches the ECT and a number of applicable bilateral investment treaties (BITs). Italy has also been notified of potential claims from investors in its booming solar energy sector, which are aggrieved by recent reductions to the FiT.

    As pressure continues to be exerted on State resources, there is potential for a more widespread retraction of subsidies, which could see further claims being launched under the ECT and/or BITs.

    Practical tips

    • These disputes highlight the risks of entering into long-term projects in a volatile economic environment. Before making an energy-related investment, investors should try to access protections arising under the ECT and/or BITs to which the host State is a signatory. This may require routing the investment through an entity registered in another signatory State. The importance of doing so is evident from the recent case: had Abengoa directly held its shares in the plants, it would not have been able to bring a claim under the ECT.

    • Investors should also consider what other protections they can negotiate (for example, through stabilisation clauses) or rely on under local investment laws.

    • If an investor considers that new State measures materially depart from what it was led to believe at the time of making its investment, or materially alter the financial equilibrium of the investment, it should seek advice from lawyers experienced in investment disputes.

    • In considering whether to bring a claim under the ECT and/or BITs, investors should bear in mind that around 30 to 40 per cent of investment disputes typically settle before a final award is issued. Commencing a claim can create leverage to help the investor reach a satisfactory result.