Solar investors lose out in Spanish Energy Charter Treaty decision

In an eagerly awaited first decision (available in Spanish only) in a series of arbitrations arising from successive amendments to Spain’s regulatory framework on renewable energy, an arbitral tribunal sitting under the Energy Charter Treaty (ECT) decided in favour of Spain and ruled that Spain’s 2010 legislative changes did not breach its obligations under the ECT (Charanne B.V. and Construction Investments S.à.r.l v Kingdom of Spain (Arbitration No.: 062/2012)). Although the decision is not binding on other arbitral tribunals, it gives an interesting insight into the potential limitations on protections afforded to renewable investors under the ECT.


In 2007-2008 Spain adopted a special regulatory framework under which certain qualifying generators of solar energy benefitted from a specified feed-in tariff for a 25-year period, following which certain generators remained eligible for 80% of the feed-in tariff. Under this regime, the qualifying generators were entitled to distribute all the produced energy to the grid, benefitting from the specified feed-in tariff without any caps on the amount of operating hours. A 2007 royal decree provided for tariff revisions in 2010 and then in four-year periods based on certain defined criteria.

Against the background of an exceptionally high take-up by investors in the sector of solar generation investments, resulting in an above expected surge in generators receiving the feed-in tariff, and the global financial crisis putting financial constraints on the Spanish government, in 2010 Spain enacted amendments to the special regime applicable to solar generators. These amendments included the removal of the feed-in tariff after the 26th year of the solar plant’s life (later extended to 30 years), the requirement that certain solar plants install mechanism to react to voltage dips, the introduction of caps on the amount of operating hours subject to the feed-in tariff and the charge of an access fee to the transmission grid.

Charanne B.V., a Dutch company, and Construction Investments S.à.r.l, a Luxembourg company (together the “Claimants”) held shares in one of the Spanish solar energy producers affected by the 2010 legislative changes. The Claimants commenced an action against Spain under the arbitration rules of the Stockholm Chamber of Commerce arguing that the 2010 legislative changes had retroactively affected the legal and economic framework based on which they had decided to make their investments. The Claimants argued, amongst others, that these changes amounted to indirect expropriation and violated the fair and equitable treatment standard under the ECT. The Claimants submitted that the 2010 legislative changes have reduced the profitability of the plants by 8.5-10%. The more significant legislative amendments introduced by Spain after 2010 form the subject of a separate arbitration.

The Respondent raised a number of jurisdictional objections, including in relation to the ECT Tribunal’s jurisdiction, arguing that the Claimants were not qualifying investors under the ECT as they were vehicles controlled by Spanish nationals (i.e. are not Investors of another Contracting Party).


Corporate nationality

In upholding its jurisdiction, the ECT Tribunal noted that the ECT requires it to determine corporate nationality based on the Claimants’ place of incorporation, the economic factors being irrelevant. In this regard, the ECT Tribunal also took into account that the ECT expressly excludes benefits to investors controlled by shareholders from a non-Contracting State only.

Indirect expropriation claim

In respect of the indirect expropriation claim, the ECT Tribunal decided that a “mere diminution in value of the shares representing the investment cannot …constitute an indirect expropriation, unless the loss of value is such that it can be considered equivalent to a deprivation of ownership.” As the 2010 legislative changes maintained the profitability of the plant, albeit at a reduced rate, the ECT Tribunal dismissed the indirect expropriation claim.

Fair and equitable treatment

In respect of Spain’s alleged violation of the fair and equitable standard, the ECT Tribunal reviewed the circumstances in which legislative changes may violate an investor’s legitimate expectations. The majority of the ECT Tribunal concluded that such circumstances were not present in this case. In its analysis, the ECT Tribunal found that:

  • Spain had not made any specific undertakings towards the investor in relation to the non-alternation of the legislative framework.
  • The legislative framework, by being addressed to a limited group of investors, could not be deemed to be equivalent to a specific undertaking. The ECT Tribunal observed that “[c]onverting a regulatory norm, through the limited character of persons who can be subject to the same, into a specific undertaking by the State towards each of the said subjects, would constitute an excessive limitation of the capacity of the State to regulate the economy depending on general interest.”

The Tribunal then considered whether the legal framework in force at the time of the investment could by itself generate legitimate expectations. It concluded that “in the absence of a specific undertaking of stability, an investor cannot have the legitimate expectation that a legislative framework such as the one subject to this arbitration is not modified at any time in order to adapt it to the necessities of the market and the public interest.”

The Tribunal accepted, however, that an investor may legitimately expect that the host country does not act unreasonably, contrary to public interest or disproportionately when it modifies legislation based on which an investment had been made. In this respect the ECT Tribunal found:

  • The proportionality requirement is in principle satisfied so long as “the changes are not capricious or unnecessary and do not result in the unpredictable and sudden removal of the essential characteristics of the existing regulatory framework.”
  • The 2010 legislative changes implemented adjustments without removing the essential characteristics of the existing framework. The qualified solar investors retained the right to charge a feed-in tariff and the possibility to sell the produced energy to the grid with priority over other producers.
  • The 2010 legislative measures were not arbitrary or irrational as the 30-year limitation for the applicability of the tariff objectively reflected the projected useful life of the plants and the cap in the operating hours was based on the objective criteria of climatic zones where the plants were located as well as on the employed technology.
  • The 2010 legislative measures were not contrary to public interest.

In the view of the dissenting arbitrator, the legal framework in place when the investment was made was such that the claimants could “objectively” assume that the established tariff regime would not be modified. In this regard, the dissenting arbitrator noted that the special regime introduced in 2007-2008 was aimed at stimulating investments and was addressed to a limited number of qualifying investors. In his view, these circumstances should have resulted in a decision upholding the legitimate expectations of the investors.


The majority’s decision is consistent with other arbitral tribunals’ findings regarding the requirements for indirect expropriation or violations of legitimate expectations. The decision also addresses the circumstances in which, in the absence of a specific undertaking, a host country may exercise its sovereign right to regulate without violating its international investment law obligations.

As the ECT Tribunal was not called upon to address the wider legislative changes enacted in 2013, which led to a flurry of arbitrations that are still pending against Spain, it remains to be seen what impact, if any, this decision will have on the other tribunals’ analyses in those cases. The instant decision does not bind those arbitral tribunals.

The majority’s decision and the dissenting opinion (in Spanish) are available here.