This article is written by Edwina Kwan, Amanda Lees, Patric McGonigal and Nick Horton
The global energy transition to counteract the impacts of climate change has seen an enormous growth of investments into renewable energy projects around the world. With China pledging to be carbon neutral by 2060 and other countries following suit, there are extensive opportunities for investment in renewables. However, the changing regulatory, political, and technological environment of the renewable energy sector poses real risks for investors. These risks are likely to lead to an increase in disputes between investors, host countries and commercial contracting parties.
Below, we highlight some recent international disputes in the renewable energy sector and consider the impact of these cases, in particular the first case against Japan, for foreign investors in renewable projects.
In order to mitigate host state risk, foreign investors should consider the importance of investment treaty protection from the outset and seek legal advice on how to structure their investments to take advantage of investment treaty protections. Investors should also conduct adequate due diligence on the regulatory landscape and consider and document any promises or incentives that were made by the host state to encourage their investment in this sector.
- Changes in renewable energy subsidy regimes lead to wave of claims in Europe
European states such as Spain, Italy and the Czech Republic have faced multiple investment treaty claims under the Energy Charter Treaty (ECT) following changes made to their renewable energy regulatory regimes that were arguably contrary to their obligations under various international treaties. The ECT provides a multilateral framework for energy cooperation and includes key protections for foreign investments. Fifty-three countries across Europe, the Middle East and Asia are currently signatories to the ECT, including Japan.
The country that has faced the most claims and had the most awards against it, is Spain. In the period 2004-2010, Spain made a number of legislative and regulatory guarantees and commitments to incentivise investment in its renewable energy sector. In 2013 the Spanish government introduced changes to its renewable energy subsidy regime, including for existing projects, that altered the favourable investment landscape for investors in Spanish renewables. In the decade since, the Spanish government has been forced to respond to more than 50 arbitrations commenced by foreign investors in disputes relating to these regulatory changes, which are estimated to be worth over US$7.3 billion. The investors claim that Spain breached the fair and equitable treatment standard under a number of treaties, including the ECT.
Some examples of the successful claims brought against Spain are:
- Eiser award – in 2017, an ICSID tribunal awarded two foreign investors €113 million in damages, finding that the changes to Spain’s renewable energy subsidies constituted a breach of the ‘fair and equitable treatment’ standard (FET) under the ECT.
- Antin award – in June 2018, another ICSID tribunal awarded two foreign investors who had invested in solar power projects in Granada €113 million in damages and similarly found that the Spanish governments renewable energy subsidy changes breached the ECT’s FET standard.
- PV Investors award – more recently, in a February 2020 award, Spain was ordered to pay a group of photovoltaic (‘PV’) investors damages totalling €90 million for failing to provide these investors with a reasonable rate of return on their investments due to its regulatory changes.
Both the Antin and Eiser awards have been the subject of high-profile litigation in Australia. The claimant investors in those cases have sought to enforce the awards against Spanish sovereign assets in Australia, which Spain has resisted based on the doctrine of foreign sovereign immunity. In Kingdom of Spain v Infrastructure Services Luxembourg S.à.r.l.  FCAFC 3, the Full Court recognised the ICSID awards against Spain, however it remains an open question whether such awards can be successfully enforced against Spanish assets located in Australia.
The Spanish government has become so exposed to litigation risk that in November 2019 it passed a royal decree to reintroduce incentives for the renewable energy sector in exchange for investors withdrawing pending arbitral or judicial proceedings.
- Renewable energy disputes in Asia
Given the early stages of renewable energy programs and projects in many Asian jurisdictions, there has not yet been a similar wave of renewable energy disputes in Asia. This is likely to change as energy demands in the region increase and renewable energy subsidies change over time. The first ever investment treaty claim against Japan reportedly filed by a Hong Kong investor under the Hong Kong-Japan Bilateral Investment Treaty (Hong Kong BIT) in relation changes to Japan’s renewable energy subsidies is likely to be a precursor to more renewable energy disputes across the region.
Japan’s first investment treaty case
The claim by a Hong Kong investor against Japan centres on a dispute over whether changes to Japan’s renewable energy subsidy program exposed investors to unreasonable risks and were a breach of Japan’s treaty obligations. According to a report by the Financial Times, the claimant is understood to be Shift Energy, a renewable energy investor with offices in Hong Kong, Tokyo and three other Japanese cities.
Japan’s feed-in-tariff regime for renewable energy
To incentivise investment in renewable energy following the Fukushima nuclear disaster in March 2011, Japan established a feed-in-tariff (FIT) regime for renewable energy. The FIT regime is designed to address the significant upfront costs of renewable energy projects and promote adoption of renewable energy technologies.
Under the FIT regime, the applicable tariff rate is reviewed annually.
Since the introduction of the tariff, there have been a number of significant changes to the way in which the tariffs are fixed resulting in much lower tariff pricing. The Japanese government also announced in 2018 that large-scale projects approved between 2012 and 2014 that would not reach completion by September 2019 would have their FIT tariff rate retroactively reduced.
The impact of these measures on the renewables sector in Japan has been significant – more than 250 solar companies have become insolvent in Japan since 2017.
- Significance of the Hong Kong BIT claim for investors in renewable energy market in Asia
This recent claim against Japan has made Northeast Asia the latest theatre for investor-state renewable energy disputes. If the claimant is successful, Japan will join a growing number of countries that have been forced to compensate investors for changes to renewable energy subsidies and other investment incentives. Regardless of confidentiality restrictions, news of the Hong Kong investor’s claim has already broken existing taboos against disputes under Japan’s investment treaties and may lead to copycat claims, in particular from Chinese investors who are among the main foreign investors in Japan’s renewable energy market.
The Japanese government has legitimate cause for concern given what has occurred in Europe, especially as it is bound by the same FET standards as Spain under the ECT.
- Key takeaways for investors in the energy sector
The wave of disputes in Europe and now against Japan reinforces the importance of protection mechanisms for investors in investment treaties and underscores that arbitration is an important and legitimate route for foreign investors to pursue claims against host nations for changing regulatory and market conditions that have adverse impacts on their investments.
Another recent development is the first claim against the Netherlands over its phase-out of coal power plants as part of climate change legislation. And it is not just advanced economies that are facing a potential wave of claims: a Lithuanian renewable energy company is understood to have filed the first ECT claim against Ukraine following regulatory changes to Ukraine’s “green tariff” regime.
With China’s commitment to carbon neutrality by 2060 and other countries having similar commitments to phase out fossil fuels, foreign investors in the renewable energy sector should be aware of, and seek legal advice, in relation to available investment treaty protections to mitigate the risk that their investment will be adversely impacted by any regulatory changes. Similarly, existing investors in coal power plants should consider whether they are adequately protected in relation to any compulsory phase out of coal power.
KWM’s extensive experience in investor-state disputes and deep connections with the region mean we are well placed to assist our clients as the dispute landscape heats up across Asia.
 Eiser Infrastructure Limited and Energia Solar Luxembourg S.À R.L. v Kingdom of Spain (Award) (ICSID Arbitral Tribunal, Case No ARB/13/36, 4 May 2017) <https://www.italaw.com/sites/default/files/case-documents/italaw9050.pdf>.
 Antin Infrastructure Services Luxembourg S.à.r.l and Antin Energia Termosolar B.V. v The Kingdom of Spain (Award) (ICSID Arbitral Tribunal, Case No ARB/13/31, 15 June 2018) <https://www.italaw.com/sites/default/files/case-documents/italaw9875.pdf>.
 The PV Investors v The Kingdom of Spain (Final Award) (Permanent Court of Arbitration, Case No 2012-14, 28 February 2020) <https://pca-cpa.org/en/cases/238/>.
 Pablo Pérez-Salido, ‘Royal Decree-Law 17/2019: An Opportunity for Spain to Leave Behind the Renewable Energy Arbitrations?’ Kluwer Arbitration Blog (Blog post, 30 December 2019) <http://arbitrationblog.kluwerarbitration.com/2019/12/30/royal-decree-law-17-2019-an-opportunity-for-spain-to-leave-behind-the-renewable-energy-arbitrations/>.
 Agreement between the Government of Hong Kong and the Government of Japan for the Promotion and Protection of Investment, signed 15 May 1997 (entered into force 18 June 1997).
 Leo Lewis, ‘Hong Kong energy fund sues Japan in groundbreaking case’, Financial Times (News article, 3 March 2021) <https://www.ft.com/content/155da1d7-075e-4122-adec-1e4fec51f582>.
 Teikoku Databank, ’特別企画：太陽光関連業者の 2020 年倒産動向調査’(Report, 19 January 2021) <https://www.tdb.co.jp/report/watching/press/pdf/p210106.pdf> (in Japanese).