Cavalum SPGS v. Spain

Background: Cavalum SGPS, S.A., a Portuguese investor, initiated ICSID arbitration against Spain after Spain modified its regulatory framework for renewable energy, which had initially guaranteed fixed feed-in tariffs under RD 661/2007 and RD 1578/2008. Cavalum, a Portuguese-incorporated company, had developed solar power projects in reliance on Spain’s then-existing legal regime for renewables, particularly the incentives set out under the referred regulatory framework. Claims arose out of a series of energy reforms undertaken by the Government affecting the renewables sector, including a 7 per cent tax on power generators’ revenues and a reduction in subsidies for renewable energy producers. The investor claimed breaches the protection provisions under the ECT due to the adverse impact of these regulatory changes on its investment. Jurisdiction: Spain initially objected to the Tribunal’s jurisdiction, basing its argument on the inapplicability of the provisions on investment protection and dispute settlement of the ECT to relationships between EU Member States, following the CJEU in Slowakische Republik (Slovak Republic) v. Achmea BV (Achmea Judgment), in which the CJEU asserted the incompatibility of investor-State arbitration clauses in bilateral investment treaties (BITs) between EU Member States with EU law, as they adversely affect the autonomy and primacy of EU law. The Tribunal held that it had jurisdiction primarily based on the straightforward provisions of the Energy Charter Treaty (ECT) and the ICSID Convention. It determined that because the dispute involved an investor from one Contracting Party (Portugal) and an investment in another Contracting Party (Spain), and both states were signatories to the ICSID Convention, the Tribunal noted that the fundamental criteria for jurisdiction under these international agreements were “plainly fulfilled”. This encompassed disputes over investments in the renewable energy sector, which are made to advance environmental goals. Furthermore, the Tribunal highlighted its authority to rule on its own competence by referencing Article 41(1) of the ICSID Convention. Regarding the applicable law for the dispute, the Tribunal pointed to Article 26.6 of the ECT, stressing that it “shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” This framework provided the legal justification for the Tribunal to adjudicate the merits of a case concerning the regulatory treatment of investments in environmentally significant renewable energy projects. Merits and Directions on Quantum: On the merits, the tribunal's reasoning focused on the Claimant's assertions that Spain's modifications to the renewable energy regulatory and incentive framework breached the fair and equitable treatment (FET) standard and related commitments under Article 10(1) of the Energy Charter Treaty (ECT) and also constituted an unlawful expropriation of investments under Article 13(1) ECT. The tribunal acknowledged that Article 10(1) ECT requires contracting parties to create stable, equitable, and transparent conditions for investments. However, a majority of the tribunal found that investors, through due diligence, should have been aware that the regulatory regime was not immune from change under Spanish law, especially considering previous Supreme Court decisions and the overarching framework of Law 54/199. It was determined that neither RD 661/2007 nor RD 1578/2008 contained specific commitments or stabilization clauses that would give rise to legitimate expectations of no adverse changes, as states retain their regulatory powers. Similarly, registration in the Register of Electricity Production Installations under the Special Regime (RAIPRE) was deemed an administrative act not creating vested rights. Despite these points, the tribunal ultimately concluded that Spain had breached the Claimant’s legitimate expectations regarding the remuneration regime and, importantly, violated the stability obligation embedded in Article 10(1) ECT with the introduction of the New Regulatory Regime. The tribunal directed the parties to calculate damages by comparing the actual post-tax rate of return of the Claimant's plants with a "reasonable post-tax rate of return," and to agree on compensation for any shortfall. Additionally, parties were invited to make submissions on whether the breach of the stability obligation should result in damages, with experts to later submit a Joint Memorandum on areas of agreement and disagreement Follow up Annulment proceedings: On 14 July 2023, Cavalum SGPS, S.A. and the Kingdom of Spain each filed separate applications to annul the same ICSID award, triggering two parallel annulment proceedings. Both were administered by the same ad hoc Committee—composed of Dominique Hascher (President), Fernando Cantuarias Salaverry, and Yannick Radi—constituted on 16 October 2023. Following initial sessions and procedural orders in December 2023, the parties exchanged written submissions throughout 2024, raising issues including the admissibility and exclusion of evidence. A joint hearing was held in Paris on 18–19 September 2024. A non-disputing party sought to intervene, prompting further procedural steps and rulings. Both parties filed statements of costs on 4 November 2024. The annulment proceedings are still pending.