Novenergia II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Kingdom of Spain, SCC Case No. 2015/063

In accordance with Spain's special regime for renewable energy support, established by Law 54/1997 and further detailed in Royal Decree RD 661/2007, the claimant, Novenergia II – Energy & Environment (SCA), a Luxembourg-based investment fund, invested in Spain's photovoltaic (PV) sector on September 13, 2007. This regulatory framework assured renewable energy producers registered with the Administrative Registry for Electrical Power Generating Units (RAIPRE) a feed-in tariff (FIT) for the operational lifespan of their PV installations. However, the global economic downturn and a regulated electricity tariff set below the FITs rendered the support scheme financially unsustainable. Consequently, in 2013, Spain enacted a series of regulatory changes, replacing the existing regime with a less favorable one, which included measures such as a 7% tax on power generators' revenues and a reduction in subsidies for renewable energy producers. In response, Novenergia initiated arbitration proceedings against Spain under the Arbitration Rules of the Stockholm Chamber of Commerce (SCC Case No. 063/2015), alleging that Spain's actions constituted a breach of its obligations under the Energy Charter Treaty (ECT), particularly the duty to provide fair and equitable treatment (FET) as outlined in Article 10(1) of the ECT. The tribunal found in favor of Novenergia, awarding €53.3 million in damages. Subsequently, Spain challenged the award before the Swedish Svea Court of Appeal, which annulled the award in December 2022. The court's decision was influenced by the Court of Justice of the European Union's (CJEU) ruling in Komstroy, which held that the dispute resolution mechanism of the ECT does not apply to intra-EU investment disputes. Main Legal Issue: The main legal issue in this case is whether Spain's regulatory changes to its renewable energy support scheme, which replaced the guaranteed feed-in tariff (FIT) regime with a less favorable system, violated its obligations under the Energy Charter Treaty (ECT). Specifically, the case examines whether these changes breached the ECT's requirement to provide fair and equitable treatment (FET) to investors under Article 10(1). Jurisdiction: The arbitral tribunal rejected Spain's intra-EU jurisdictional objection. Spain argued that the tribunal lacked jurisdiction to adjudicate intra-EU investment disputes. First, it asserted that Article 26 of the Energy Charter Treaty (ECT), which governs arbitration, applies only to disputes between “a Contracting Party” and “an Investor of another Contracting Party” and claimed that this condition was not satisfied because both Spain and the European Union are ECT signatories. Second, citing Flaminio Costa v. ENEL, Spain contended that EU law should take precedence and override the ECT as the governing framework for intra-EU relations. The tribunal, however, disagreed, holding that its jurisdiction was based exclusively on the ECT and not on EU law. Merits: i. Whether Spain breached the fair and equitable treatment standard by enacting regulatory changes to its renewable energy support regime The primary issue in the case was whether Spain breached the fair and equitable treatment (FET) standard under Article 10(1) of the Energy Charter Treaty (ECT) by retroactively altering its renewable energy support regime, thereby undermining the legitimate expectations of Novenergia. The claimant argued that Spain's repeal of the guaranteed fixed feed-in tariff (FIT) under RD 661/2007, a regime explicitly designed to attract photovoltaic (PV) investments, constituted a violation of the ECT's FET obligations. The tribunal ultimately agreed with Novenergia, concluding that Spain's 2013 and 2014 legislative changes fundamentally and retroactively transformed the regulatory framework in a manner inconsistent with the legitimate expectations of investors. These changes included abolishing the long-term FIT, which was a key feature of the original regime, and replacing it with a less favorable structure. The tribunal ultimately held that Spain breached the FET standard for the following reasons: Legitimate Expectations and Regulatory Stability: The tribunal held that Spain had created legitimate and reasonable expectations for investors by promoting a stable and transparent regulatory framework. These expectations arose from explicit assurances provided through RD 661/2007, which guaranteed a fixed FIT for the operational lifespan of PV plants. The tribunal emphasized that such expectations are critical to the FET standard, as they inform the decision-making of investors when committing substantial capital to projects. It also referred to prior arbitral awards, such as Micula v. Romania and Eiser Infrastructure v. Spain, which underscored the importance of stability in the regulatory environment for long-term investments. Radical and Retroactive Nature of the Changes: The tribunal found that the 2013 and 2014 reforms enacted by Spain, which eliminated the fixed FIT retroactively, constituted a "radical and unexpected" departure from the legal and business environment in place when Novenergia made its investment. Citing CMS v. Argentina, the tribunal noted that such measures "entirely transformed and altered" the regulatory framework under which the investment had been made, crossing the threshold of what is permissible under the FET standard. Balancing State Interests with Investor Protection: While recognizing Spain's sovereign right to regulate in response to economic challenges, the tribunal emphasized that this right must be balanced against the need to protect investors’ legitimate expectations. Drawing from the reasoning in Saluka v. Czech Republic, the tribunal applied a balancing test, weighing Spain's regulatory objectives—such as addressing the tariff deficit—against the degree to which these measures undermined the expectations of investors. It concluded that Spain's actions disproportionately disrupted Novenergia's investment. Transparency and Lack of Warning: The tribunal determined that Spain failed to provide adequate warning or signals to investors about its intention to overhaul the regulatory regime. While Spain argued that it had announced structural reforms as early as 2008, the tribunal found these announcements insufficiently specific or clear. Investors were therefore unable to foresee the extent of the changes, particularly the retroactive abolition of the FIT, which was a critical element of the original framework. Non-Discrimination and Transparency: The tribunal also noted that the FET standard includes obligations of non-discrimination and transparency. It found that Spain's abrupt and retroactive measures lacked transparency and disproportionately affected PV investors, further contributing to the breach of the FET standard. The tribunal concluded that Spain's 2013 and 2014 measures radically altered the regulatory framework in a way that breached the FET standard under Article 10(1) of the ECT. By undermining Novenergia's legitimate expectations without sufficient justification or warning, Spain failed to create and maintain stable and transparent investment conditions, entitling Novenergia to compensation. The case serves as a significant precedent in highlighting the delicate balance between a state's regulatory freedom and its obligations to foreign investors under international investment treaties. ii. Whether Spain had expropriated Novenergia’s investment The tribunal rejected Novenergia's claim of expropriation under Article 13(1) of the ECT. It reasoned that Novenergia remained the owner of its assets, including the PV plants and shares in the relevant companies, and that the measures did not constitute a direct or indirect taking of these assets. Although the regulatory changes reduced the value of Novenergia’s investment, this did not amount to an expropriation under international law. Post-Award Proceedings After the award was issued, Spain challenged it before the Swedish Svea Court of Appeal, which annulled the award in December 2022. The court's decision was influenced by the Court of Justice of the European Union's (CJEU) ruling in Komstroy, which held that the dispute resolution mechanism of the ECT does not apply to intra-EU investment disputes.