Squaring the Circle: Spain, the EU, the ECT and ESG.

The EU has been pulled in two different directions on the issue of renewable energy investment for some time.??

• One the one hand, the war in Ukraine has resulted in a pressing need to ensure energy security, and has revitalised the drive to ramp up the share of renewable energy in the EU’s total energy basket.??This phenomenon has been further boosted by President Biden’s Inflation Reduction Act in the US which is harnessing state support for renewable energy investments on a scale not seen for a generation.??President von der Leyen has openly stated that the EU must respond, or risk losing key business to the US.??
• On the other hand, the EU is pursuing a highly antagonistic strategy towards many of the same renewable energy investors that it is now trying to attract.?

This antagonism dates back many years now, to the time when Spain reneged on certain commitments offered to renewable energy investors that had been offered to attract them to Spain in the first place.??Many of those investors brought arbitrations against Spain; and many (but not all) of those arbitration claims were successful.??

Instead of simply paying out the damages that it was ordered to pay, however, Spain has steadfastly resisted doing so and it has found an unlikely ally in the EU.??Both the EU Commission and the CJEU have pushed back against intra-EU arbitration under the ECT, and in so doing, are chilling the environment for intra-EU investment in renewables at a time when it should be encouraged.

There are several reasons why this is the right time to resolve this tension and for Spain to pay the compensation that it has been ordered to pay to this class of renewable energy investors.

• First, any properly weighted analysis of the pros and cons of Spain paying the damages it owes militate very strongly in favour of paying.??Spain has done relatively well in defending itself in these cases, and it has successfully limited its financial exposure by securing lower damages awards than the amounts initially claimed.??Simply, there is no defeat for Spain in paying what it now owes.
• Second, the advantage in paying would be to reset the relationship with a large pool of capital – the dozens of well capitalized, ESG friendly investors that the EU and Spain now urgently need.??Collectively, these investors probably represent available capital in the hundreds of billions, if not trillions of Euros.?
• Third, at a time when the US is undoubtedly offering state aid to ESG investors under the Inflation Reduction Act, the EU’s argument that if Spain were to pay damages to the investors, this would be tantamount to state aid, is both wrong and??outdated.?
• Fourth, at a time when the rules based international order is under attack from many different directions, it is time for liberal democracies to reassert their commitment to international law.??This includes recognizing the primacy of public international law.
• Fifth, it is important to ward off portrayals of international arbitration—particularly ECT arbitration – as some kind of secretive, nefarious activity.??In fact, international arbitration has had a hugely virtuous effect on international trade facilitating vast numbers of global transactions, most of which never ended in dispute.??Moreover, the ECT protects all energy investors, in particular investors in renewables.?Proposed modifications to the ECT would go further in this direction, while phasing out protection for fossil fuel investors.??Unfortunately attempts to make the ECT more eco-friendly is being sabotaged by its inaccurate and outdated portrayal as a “polluter’s charter”.?
• Finally, just because Spain’s very capable legal team can borrow from the tactics developed by some of the most notorious, recalcitrant arbitration award debtors, to resist paying what it owes, does not mean that it is best advised to do so.??History will judge whether those countries were correct to adopt a scorched earth litigation strategy, as opposed to working consensually with their arbitration creditors to fashion a mutually acceptable solution.??In any event, things have evolved, and this is a club that neither Spain nor the EU should want to be part of anymore.?