Both EU institutions and member states are actively undermining the investment climate in the energy sector, writes Alan Riley, Senior Fellow at the Institute for Statecraft in London. The European Commission is undermining investor protection by its determination to apply EU state aid law to arbitration awards.
Member States are disrupting investor expectations through arbitrary political interventions in the energy sector. Worst of all, the European Court of Justice has just, shockingly, outlawed the entire intra-EU bilateral investment treaty regime! According to Riley, if the EU wants to attract the investment it desperately needs for the energy transition, it needs to put in place a predictable, fair and transparent regulatory regime.
The EU’s climate goals are ambitious. They require severe cuts to C02 emissions by the middle of the century. Crucial to their achievement is the raising of tens of billions of euros in investment capital over the next three decades.
There are now a plethora of directives setting out renewables deployment targets, promoting energy efficiency or regulating CO2 emissions. However, there are hardly any EU regulatory mechanisms which seek to encourage investment in the energy sector. In fact, the EU and the Member States appear to be doing the reverse: they are adopting policies which undermine investment in the energy sector.
Energy ambition and international capital
For the last two decades, the European Union has been a leader and champion of the energy transition. Its initial 2020 climate goals of a cut in 20% of C02 emissions from a 1990 base line, a 20% increase in energy efficiency and a 20% share of renewables in primary energy looks like they are going to be largely met.
However, meeting the Paris Agreement target of holding man-made warming well below a 2°C increase above pre-industrial levels will require substantially more effort, tougher regulatory goals, and far more capital investment. For the EU, such targets mean that by 2050 the whole energy sector will have to cut its carbon based energy generation by 80%. In the power sector that means cutting net carbon emissions to zero.
These are formidable targets. It is not surprising therefore that the Union’s next set of “intermediate” climate change targets for 2030 are also ambitious. They are still being negotiated, but look like they will aim at minimum cuts in C02 emissions of 40%, a minimum 27% of energy generation from renewables and a minimum improvement in energy efficiency of 30%.
On the one hand, the EU wants approximately $2 trillion of energy related investment by 2050. On the other, the European Commission is deploying the state aid rules to undermine compensation awards from the Energy Charter Treaty
To reach the 2030 and 2050 targets in 2030 requires a huge infusion of capital. The International Energy Agency (IEA) has estimated that to reach the overall 2050 targets in the power sector alone $1.6 trillion will need to be invested. That is approximately $50 billion every year from now till 2050.
However, while the EU has introduced a range of measures setting down climate change goals, introduced energy efficiency legislation and improved the Emissions Trading Scheme, it has done little to actually improve the investment environment to encourage the flood of private capital necessary to actually deliver the energy transition.
This it can be argued is in part down to the fact that much of the responsibility for maintaining a healthy investor environment is down to the individual Member States. Regretfully, both EU institutions and Member States are undermining investor confidence in the energy sectors.
The European Commission and the state aid problem
Following the launch of the original 20/20/20 climate goals in 2007, and particularly after the enactment of the EU legislative package in 2009, Member States supported a wide range of renewable support programmes. On the back of these programmes, investment poured into the energy sector, rapidly expanding the deployment of renewables and boosting the transition process.
However, as the financial crisis got underway and national finances came under strain, many of the programmes investors had relied on were cut back. Some investors sued in national courts, but failed (save in one Bulgarian case) to obtain any redress.
However, for non-domestic investors, there was an alternative. They could instead bring claims under the multilateral Energy Charter Treaty. This has met with some success. After investors in the Spanish renewables sector in 2017 and 2018 in Eiser v Spain, and subsequently Novenergia v. Spain, were awarded respectively €128 and €53 million, a significant number of cases alleging unfair and inequitable treatment are now making their way through the ECT machinery.
But then a spanner was thrown in the works – by the European Commission. The Commission announced by its Decision 2017/C442 that the specific Spanish renewables regime under question in the ECT proceedings had not been notified to the Commission. Therefore the awards based in ECT proceedings were unlawful as a matter of EU law.
The Commission in its decision, however, then went much further arguing that as matter of principle EU investors could not use the investor protection treaties in respect of investments in EU states. The decision took the view that the only basis for claims was under national and EU law, and jurisdiction solely remained in such cases under the exclusive competence of the EU’s own courts.
Given the weaknesses in terms of quality of judgments and also procedural delay in many Member States courts, the Achmea ruling threatens to further undermine investor confidence in the EU
The ECT tribunals so far have rejected the Commission’s arguments, even where the Commission has appeared as amicus in some of the cases. However, Commission hostility does raise significant dilemmas for investors. Potentially investors face the prospect of registering their ECT awards as judgments under the 1958 New York Convention and then to try to seize Member State assets outside the EU. This is clearly a very unappealing prospect. The reality therefore is that investors are left in a legal limbo between the processes of the Energy Charter Treaty, and the State Aid rules of the EU.
There is also the remaining and broader problem of the inability of domestic investors to obtain any effective redress as they are unable to avail themselves of the ECT, or the national courts. Domestic investors also need to be effectively protected in order to encourage investment in the energy transition process as well.
European Court of Justice attacks bilateral investment treaties
Meanwhile to make matters much worse on 6th March of this year in Case C-284/16 Slovakia v. Achmea, the European Court of Justice (ECJ) handed down a ruling that appears to effectively render all intra-EU bilateral investment treaties unlawful. The case involves the Dutch-Slovakia Bilateral Investment Treaty (BIT).
Achmea, a Dutch insurance company, had entered the Slovakian health insurance market when it had been liberalised. Subsequently a new Slovakia government reversed the liberalisation, as a result of which Achmea suffered losses from its forced market exit. It sued under the BIT and obtained $27 million in damages awarded by a Frankfurt located arbitration tribunal. The award was challenged in the German courts by Slovakia which resulted in a reference to the ECJ.
There are hardly any EU regulatory mechanisms which seek to encourage investment in the energy sector
The Court took the view that a ruling made under a bilateral investment treaty undermines the autonomy of the European Union’s legal order. Decisions involving questions of EU law could be made by investment tribunals with no prospect of an effective redress and review by the court in Luxembourg, argued the ECJ.
This ‘autonomy’ argument is much more devastating than it first appears. It is first of all difficult to limit the case to its own facts as it is an argument of principle and a claim of jurisdiction by the EU’s highest court. Secondly, it also would appear to apply to not just intra-EU BITs but also to BITs EU Member States have with third states, as such BITs would have the same ‘autonomy’ problem as the intra-EU BITs.
Given the weaknesses in terms of quality of judgments and also procedural delay in many Member States courts, the Achmea ruling threatens to further undermine investor confidence in the EU. BITs are particularly important in an energy investor context because of the amount of capital involved in rolling out new energy infrastructure.
Member States undermining Europe’s investment market
It is not just the EU institutions who are undermining investor confidence in EU markets, it is also the Member States. As was mentioned above Spain is at the forefront of renewable claims in a number of ECT cases due to introducing radical reforms to its renewable support programme in 2012.
The German government was extremely reluctant to pay compensation following on a decision to rapidly close down the domestic nuclear power industry
Ten Member States also intervened in support of Slovakia in the Achmea case. These are the Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary Poland and Romania. Most of these states have rule of law questions in respect of their judicial systems, from concerns around procedural and delay problems to more serious questions around the quality of judgments to issues concerning the termination of their renewables support programmes.
What they don’t seem to realise is that the loss of BIT cover due to Achmea will lead to a loss of investment in their countries, principally in the capital intensive energy sector. The likelihood is that without BIT protection investment, and particularly energy investment, will be concentrated in future in the strongest rule of law states in Western Europe.
However, even in Western Europe, governments are not acting predictably or fairly. The German government was extremely reluctant to pay compensation following on a decision to rapidly close down the domestic nuclear power industry. It was only when the power companies forced their compensation claims through the judicial hierarchy that a basis for an award was agreed. The German government did not reflect that given the scale of the German ambition to transform its energy sector forcing investors through the courts was not sending a positive message.
Many Member State governments are chopping and changing energy regimes so often, there is very little predictability, transparency or security for an investor to rely upon
Meanwhile in the Netherlands investors and operators are facing a potential double Dutch whammy. First, to deliver on its ambitious climate targets, the Dutch government has said it plans to close three new efficient coal fired plants, preferably without compensation, even though the plants were constructed at the request of the government to enhance the security and cost competitiveness of power supplies.
The second potential blow may stem from the rapid production cuts ordered by the Dutch government in the Groningen gas field. Clearly the production cuts flow from the tremors that have occurred in the Groningen region in the last few years. The state and operators of the field have indicated that they will fully compensate local communities who were affected by the tremors. But the scale of the production cuts proposed in the Groningen field creates a broader compensation issue for the Dutch government.
Huge amounts of natural gas could still be extracted safely from the field over the next two decades. The government appears to recognise that a fair settlement would help preserve investment confidence in the Netherlands. This however, does need to be fully followed through on in order not to undermine investor confidence.
Even in traditionally the strongest European rule of law state, Great Britain, the Labour Party under Jeremy Corbyn was prepared in its 2017 election manifesto to adopt legal and administrative measures under which it would pay no or limited compensation for a proposed nationalisation programme. With the Brexit fiasco, it is quite possible that Jeremy Corbyn will be the next British Prime Minister.
Open and reliable energy markets and 2050 goals: some practical solutions
It is not unreasonable for investors to look at the European Union and wonder. On the one hand, the EU wants approximately $2 trillion of energy related investment by 2050. On the other, the European Commission is deploying the state aid rules to undermine compensation awards from the ECT. The ECJ is seeking to dismantle the entire bilateral investment treaty regime. This is despite the fact that many Member State courts remain practically impossible to rely on as a place where investments can be fairly and effectively protected. In addition, many Member State governments are chopping and changing energy regimes so often, there is very little predictability, transparency or security for an investor to rely upon.
The principal solution to the ‘investability’ problem is for the EU institutions and the Member States to first of all recognise the vital importance of attracting investment capital to the success of the energy transition. They should realise that not taking steps to protect investments may boomerang back on them. They are likely to find as a consequence that there is less investment capital available for green transition projects.
One way to seek to minimise the damage would be to develop common principles which states and investors can rely on terminating or amending such deals
Potential investors and operators will take the view that an enthusiastically embraced capital intensive renewables project today may be deemed an expensive albatross tomorrow and treated in the same way as the modern coal fired power stations yesterday.
There also needs to be recognition that ‘investors’ are not anonymous Wall Street, City or Geneva money men, they are in fact substantially the pension funds and private savings of their own citizens. Once that recognition takes place it may then possible to consider a number of practical solutions.
State aid Guidance for Arbitration Awards. It should be possible for the European Commission to draft guidance for aid resulting from compensation before arbitration courts and provide individual guidance in specific cases. Most renewable schemes that are the subject of ECT claims will already have been subject to state aid review when the initial renewables support programme was adopted. The Commission should be able to derive from its case law and decisional practice a robust assessment that can be relied upon by both Member States and investors.
Bilateral Investment Treaties. A now far greater problem flows from the ruling in Slovakia v. Achmea. Whilst it appears very abstract, the EU law concept of autonomy is fundamental and has devastating consequences for investment protection. Essentially, the ECJ’s view is based upon the reality that above all it is the law contained in the acquis communautaire that binds the European Union together. For the acquis to function there must be coherence and uniform application. Therefore it is not possible to have courts or tribunals of any sort that can apply EU law without review by the Luxembourg courts.
One further option that is worth considering is the establishment of EU district courts
One practical solution here is for Member States to recognise arbitration tribunals as national courts and provide them with an express right to refer cases to the ECJ under Article 267 TFEU. At the same time the Member States could deal with much of the criticism made of arbitration tribunals by providing for transparency in rulings and appointments.
Common rules on Termination of Energy Investments. Every time for budgetary reasons, change of government or external political pressure, governments seek to terminate or amend an energy deal there is significant damage. In particular, damage to the reputation of the state as a reliable place to invest, in terms of both access to capital and the cost of capital; damage to vital state and EU objectives like the energy transition and damage to investors.
One way to seek to minimise the damage would be to develop common principles which states and investors can rely on terminating or amending such deals. An ex ante set of principles, providing for due process, appropriate notice, transparency, options to bring in independent arbitrators between state and investor and setting out principles for compensation could take much of the heat and conflict out of these cases, and help reduce the level of damage to all parties.
These solutions are only partial in that domestic investors would not be able to rely on bilateral investment treaties nor on the inadequate courts that exist in many Member States. One further option that is worth considering is the establishment of EU district courts. Such courts would be modelled on the US Federal District Courts, cases would be able to be brought which relate to EU law, and in respect of investment issues related to EU policies, such as investment in the energy transition or investment related in which EU funds are contributed.
The establishment of EU district courts would be voluntary, but Member States that permitted the establishment of a district court would be likely to obtain far greater capital flows than those that did not, incentivising other states to also to seek district courts on their territory. As the number of district courts grew, investor protection, the energy transition and the broader application of the rule of law would be enhanced.