ENERGY & NATURAL RESOURCES: POWER, RENEWABLES & ALTERNATIVE ENERGY: An Introduction to UK-Wide

Recent Energy Transition Disputes and How Energy Companies Should Minimise Risks Associated with Energy Transition  

The energy transition is now underway across the world as the global energy sector attempts to reach net zero carbon emissions by 2050. According to IRENA, USD150 trillion worth of investment is needed between now and 2050 to achieve this transition. A huge contribution to decarbonisation is expected to come from replacing fossil fuel generated electricity with energy generated from low carbon resources, but also from the development of new technologies such as energy storage and hydrogen, as well as greater energy efficiency.

With many energy companies embarking on huge investments be they in offshore wind, hydrogen, infrastructure upgrades, storage or nuclear, the 2023 QMUL-Pinsent Masons Future of International Arbitration Survey Report reveals that regulatory changes – including due to states’ implementation of the Paris Agreement and other treaties – are seen as key triggers for disputes going forward.

Moreover, recent years have seen governments around the world taking an increasingly active role in the energy sector by, for example, subsidising investments in renewables and hydrogen as well as intervening in the market by capping energy prices.

Albeit many of the energy transit disputes will be resolved before national courts and international courts such as the European Court of Human Rights, the bulk of the disputes triggered by changes in the regulatory environment have and will continue to be brought pursuant to bilateral investment treaties (BITs) and multilateral treaties such as NAFTA and the Energy Charter Treaty (ECT).

Energy transition disputes

Typically, investment treaty disputes concerning energy transition are grouped in the following three categories:

• disputes concerning the failure of a state to take relevant preventive measures against climate change which has harmed investment;
• disputes concerning the reversal of measures adopted to encourage investments, for example in the renewable sector; and
• disputes concerning the introduction of energy transition measures by a state which impact investments.

Failure of a state to take preventive measures

Peter A. Allard vBarbados, PCA Case No 2012-06is probably the best-known investment treaty case falling in the first category of cases. The claimant, an owner of an eco-tourism site, alleged that the mismanagement of a sewage treatment facility, a sewage spill and the rezoning of nearby land to residential resulted in the degradation of the environment which amounted to a breach of Barbados’ obligation to under the Canada – Barbados BIT to accord investments full protection and security.

Although the arbitral tribunal rejected the claim, having found that Barbados was “aware of the environmental sensitivities of the [investment]” but had taken “reasonable steps to protect it”, this case is important as it is the first case in which an arbitral tribunal held that the obligation to provide full protection and security required the state to protect an investment from environmental harm. The following two-pronged test was applied by the tribunal to determine whether Barbados was in breach of its obligation: (i) whether the degradation of the environment was sufficient to render operating of the site as an eco-tourism attraction impossible or financially unsustainable and (ii) whether such degradation was caused by actions or inactions of the state.

Reversal of measures adopted to encourage investments in the renewable sector

Since 2010 we have seen huge numbers of claims brought by investors against states for reversing regulatory frameworks for promoting renewable investments. Initially claims were brought primarily against EU member states including Spain, Slovakia and Italy for changes in electricity feed-in tariffs for solar projects, and Romania for changes to green certificates. Most recently claims have been brought against Canada, Ukraine and Japan as well, and many more are expected to be brought in the coming years.

Although some tribunals, in the case of Spain for example, have held that general legislative or regulatory provisions could not give rise to legitimate expectations as to the stability of the Spanish renewables framework, the majority of tribunals have found the contrary and have awarded investors significant damages. By way of example, the tribunal in Cavalum found that investors’ right to earn a “reasonable rate of return” was “the cornerstone of the [Spanish] incentive regime” for solar energy, giving rise to legitimate expectations on the part of investors and that a change thereof amounts to a breach of the fair and equitable treatment obligations provided for in BITs and ECT.

Introduction of energy transition measures

It is estimated that the phase out of fossil fuels will trigger over USD340 billion worth of claims against states. Vattenfall’s ECT case against Germany for the phasing out of nuclear power in the wake of the Fukushima accident in 2011 is the most well-known dispute in this third category of disputes. On 5 March 2021 an understanding was reached pursuant to which Germany paid EUR1.4 billion in compensation for the phase out. The claim brought by ExxonMobil against the Netherlands for the closure of the Groningen gas field pursuant to the sunset clause of the ECT is the most recent claim in this category of disputes. Other claims for the phasing out of coal and cancellation of oil and gas exploration licences, among many others, are being prepared to be brought against states.

How should energy companies minimise their risks?

In order to minimise risks associated with the energy transition and to achieve just and sustainable economic and social development, the following are the key lessons which ought to be learned from the recent investor-state disputes discussed briefly above:

• A stable regulatory framework and legal certainty are key to ensuring investment in energy transition.
• Legal certainty and the right to regulate should not be seen as competing objectives if the energy transition is to be achieved.
• Stabilisation clauses and rebalancing clauses are increasingly seen as an important mechanism to balance the interests of investors and states.
• Arbitration will remain the key mechanism for resolving energy transition disputes.
• Investments will continue to be structured to take advantage of rights accorded to energy companies under BITs, ECT, NAFTA and similar treaties.
• The trend of countries outside of the EU being chosen as the seat of investor-state as well as commercial arbitrations will accelerate.
• ICSID will become the preferred forum for resolving investor-state disputes that involve EU countries.