As governments increasingly turn to renewable energy to mitigate climate change, domestic climate-related policies in the form of price support measures such as feed-in tariffs (FiTs) have played an important role in stimulating the much needed investment—public and private, domestic and foreign—in the sector.
Feed-in tariffs are characterized by guaranteed electricity purchase prices (set higher than market rates), guaranteed grid access and a long-term contract. Another feature in many FiT policies are ‘local content’ or ‘domestic content’ requirements, which make it mandatory for the investor to source a certain percentage of materials from local suppliers in order to be eligible to receive the benefits of the policy. For example, in Canada the Province of Ontario’s FiT program requires the ‘Minimum Required Domestic Content Level’ to be in the range of 25-50% for wind projects over 10 kW and 50-60% for solar projects over 10 kW.
As readers of this publication may be aware, FiTs for renewable energy have been involved in a series of claims by foreign investors under investment treaties. This brief article highlights two ways in which renewable energy investments have featured in investment disputes.
FiTs and performance requirements
The first type of dispute relates to domestic content performance requirements imposed on investors.
In July 2011, Mesa Power Group LLC, a Texas-based company, served Canada with a Notice of Intent to Submit a Claim to Arbitration under the North American Free Trade Agreement’s (NAFTA) Chapter 11 in connection with Ontario’s FiT program. The investor complains that the program breaches several obligations under NAFTA: Article 1102 and 1103, for providing more favorable treatment, in like circumstances, to a domestic company and to a non-NAFTA party; Article 1105, for failing to accord minimum standard of treatment; and Article 1106, for imposing prohibited “buy local” performance requirements.
Canada’s measures relating to domestic content requirements in Ontario’s FiT program are also the subject of two ongoing WTO disputes brought by Japan and the European Union, which are now being heard together. One of the claims raised is that these measures are inconsistent with Article 2.1 of the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement), which restricts states’ freedom to impose domestic content performance requirements. Although the TRIMs Agreement prohibits trade-related investment measures with domestic content performance requirements, two exceptions relevant to the protection of the environment: paragraphs (b) and (g) of Article XX of GATT 1994 could be relied upon to justify a TRIMs Agreement-inconsistent measure.
Domestic content requirements within a FiT for renewable energy are particularly vulnerable to an investor challenge if the country’s investment treaties contain an express prohibition on performance requirements, which are particularly common in the treaties belonging to Canada, the United States and Japan. There will be, in such cases, clear inconsistencies between the climate-related policy and the investment treaties.
Although, investment disputes relating to performance requirements have been rare so far, the fact that that Canada has recently lost a dispute brought by two US-based oil companies for the breach of NAFTA’s provision on performance requirements highlights the concerns over their prohibition—especially where they are designed to achieve environmental and social objectives. To avoid surprises, governments will need to better ensure that they limit the scope of the prohibitions through careful drafting and exceptions.
Stability vs. flexibility
The second, and more common, issue raised in the context of renewable energy investment has related to the withdrawal or modification of the FiTs. Spain, Italy, and the Czech Republic are among the countries known to be facing claims challenging these types of measures.
The claim against Spain, for instance, has been brought by a group of 14 investors over retrospective cuts to solar energy tariffs. The investors claim that they relied on the FiT laws while making their investment and the subsequent cuts in tariffs by the government breach the Energy Charter Treaty (ECT), a multi-lateral agreement that provides protections to investors in the energy sector that are similar to those found in bilateral investment treaties (BITs).
Italy, too, is in a dispute with foreign investors over its efforts to roll back FiTs in the country’s booming solar energy sector. Initially taken with a view to induce investments in solar energy production, the generous subsidies have proved financially burdensome in times of economic austerity. Again, the investors complain that the cuts in FiT are a breach of the government’s earlier promise of long-term price support. It is not yet clear if the investors are claiming breaches of the ECT, or one of Italy’s many BITs.
The Czech Republic, where investors were enticed by generous FiT policies for solar power, also faced a heavy bill for the solar boom. In order to curb costs, the government in December 2010 introduced a new 26 per cent retroactive ‘solar tax’ on all producers of solar energy. Other measures taken by the government in this regard were: ending the tax holiday for solar power plant operators, changes in the FiT policies and a 500% hike in land use fees. Now, the Czech Republic is threatened with a series of legal disputes and potential arbitration claims by the foreign-based solar investors.
While the legal arguments raised by the investors are not yet publicized, any measure interfering with the amount or duration of price support is likely to be challenged as a breach of the fair and equitable treatment (FET) standard. Some tribunals have interpreted the FET standard as protecting the investor’s “legitimate expectations,” which are based on the principles of the state ensuring “a stable business environment” and “a transparent and predictable framework for investors’ business planning and investment.”
Tribunals, however, have taken divergent approaches to determining what constitutes an investor’s “legitimate expectations,” making it impossible to predict how a particular tribunal will rule in a given case. Some tribunals have placed a heavy burden on host states by not allowing them to avoid obligations on the grounds that compliance may be difficult or costly, while others acknowledge that legal and economic frameworks must evolve. As the tribunal in the Saluka case underlined, “‘no investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged.” However, tribunals do frown on government actions that run counter to explicit commitments. Therefore, if a country refuses to pay or diminishes the amount or duration of the promised feed-in tariffs, it risks frustrating the investor’s legitimate expectations.
Another likely challenge could be that withdrawal of price support or cuts in FiT amount to indirect expropriation. Tribunals relying on the so-called “sole effects doctrine,” such as in the case of Metalclad and many others that followed, could view such a measure as an indirect expropriation if it results in a significant decline in the economic value of the investment. However, it has been argued that FiTs merely entitle the operators of the renewable energy installation to fixed prices and that these may not be traded independently from the main electricity transaction. In that light, since FiTs are incapable of independent economic exploitation and investors will likely not lose control of their installations, any interference with such schemes may not be considered expropriation.
FiT policies are an important tool to promote renewable energy investments. Yet different aspects of these policies are now subject of investment disputes brought under BITs or the ECT. The cases indicate that governments need to be aware of the commitments they have under their investment treaties and design FiT policies for renewable energy accordingly. If the government concludes that its commitments under these treaties restrict its ability to set and implement environmental and other legitimate objectives, it may have to re-think its investment rules, such as those relating to prohibitions on performance requirements, to ensure that it can take the measures it judges necessary for its contribution to climate change mitigation.
Governments should also be aware that making long-term commitments with respect to tariffs and other benefits to stimulate investment in the renewable energy field can lead to expensive international arbitration down the road, as can be seen in the claims brought against cash-strapped European countries. Governments should take care to build in flexibilities at the outset so as to eliminate the risk of legitimate policy decisions triggering legal battles, while at the same time providing adequate assurances to the investors. Moreover, incentives should not be set too high to be unreasonable or too difficult for the treasury to bear.
 See, Wilke, Marie (2011). Feed-in Tariffs for Renewable Energy and WTO Subsidy Rules: An Initial Legal Review, ICTSD Programme on Trade and Environment; Trade and Sustainable Energy Series, Issue Paper No. 4, Geneva
 Feed-In Tariff Program Rules, Version 1.5.1, 15 July, 2011 available at: http://fit.powerauthority.on.ca/
 “More legal woes for Canada’s Feed-in Tariff program for renewable energy”, Investment Treaty News, October 7, 2011, available at: http://www.iisd.org/itn/2011/10/07/news-in-brief-5/. See also, Mesa Power Group’s Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter 11 dated 6 July 2011. Available at: http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/Mesa_Power_Group_NOI.pdf
 Canada — Certain Measures Affecting the Renewable Energy Generation Sector (DS412) and Canada — Measures Relating to the Feed-in Tariff Program (DS426), available at: http://www.wto.org
 Article 2.1 of the TRIMs Agreement provides that no Member shall apply a trade-related investment measure inconsistent with Article III (national treatment) or Article XI (quantitative restrictions) of the General Agreement on Tariffs and Trade (GATT). The Illustrative List in the Annex to the TRIMs Agreement stipulates “domestic content requirements” as one of the trade-related investment measures inconsistent with the obligation of national treatment in Article III of GATT 1994.
 Article 3 of the TRIMs Agreement provides that all exceptions under GATT 1994 shall apply to the provisions of the TRIMs Agreement
 For example, Article 1106 of NAFTA expressly prohibits a party from imposing or enforcing mandatory performance requirements to achieve a given level or percentage of domestic content
 Mobil Investments Canada Inc and Murphy Oil Corporation v. Canada (ICSID Case No ARB(AF)/07/4), See, “Canada loses NAFTA claim; provincial R&D obligations imposed on US oil companies held to constitute prohibited performance requirements”, by Jarrod Hepburn, IAReporter, June 1, 2012 available at: http://www.iareporter.com/articles/20120601
 “Foreign investors sue government of Spain over hikes to solar energy tariffs”, Investment Treaty News, January 12, 2012, available at: http://www.iisd.org/itn/2012/01/12/news-in-brief-6/
 “Italy put on notice of treaty claim arising out of economic austerity”, by Luke Eric Peterson, IAReporter, Vol. 5, No. 8, April 30, 2012
 Dorda, Jaroslav (2010, October). Solar bonanza turns into a nightmare for investors in the Czech Republic, available at: http://www.pv-tech.org/guest_blog/guest_blog_iv_solar_bonanza_turns_into_a_nightmare_for_investors_in_the_cze
 See, Occidental Exploration and Production Co. v. Ecuador, LCIA Case No. UN3467 (2004) at para. 183; Also, Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award dated 17 March 2006 at para. 303.
 See, Metalclad Corporation v. United Mexican States, ICSID Case No. Arb/AF/97/1, (2000) at para. 99
 GAMI Investments GAMI Investments, Inc v. United Mexican States, UNCITRAL (NAFTA) Final Award dated 15 November 2004 at para. 94
 See, Saluka, Supra note 12 at para. 305
 Boute, Anatole (2011). Combatting Climate Change through Investment Arbitration Changes. Fordham International Law Journal, Vol. 35. Available at SSRN: http://ssrn.com/abstract=1867663
 Metalclad Corporation v. United Mexican States, ICSID Case No. Arb/AF/97/1 (2000)
 Boute, Supra note 16
Author: Vyoma Jha is an international lawyer at the Council on Energy, Environment and Water (CEEW), an independent policy research think-tank based in New Delhi. vyoma.jha[at]ceew.in. The author thanks Nathalie Bernasconi-Osterwalder, Aaron Cosbey and Damon Vis-Dunbar for valuable comments. The views expressed are solely those of the author.