Saturday, January 4, 2014

Prospects and Challenges of International Energy Investment Law

International energy investment law is not a distinct and coherent body of international law. It consists of a variety of different legal sources which contain some core principles despite their heterogeneity. The most important sources of contemporary international energy investment law are bilateral investment treaties (BITs). BITs are international agreements in which each state party guarantees certain rights and remedies to investors of the other party. The relative importance of these agreements increased remarkably during the two last decades. While the total number of BITs amounted to about 400 in the 1980s, there are currently (as of 2010) 2750 BITs in force. Most BITs have a comparable content which includes international protection standards for foreign investors against expropriation and other negative interferences of the host state government. Many of these agreements provide for clauses on investor-state dispute settlement which usually gives the investor the right to claim an alleged violation of a BIT before an international arbitration tribunal which will then render a binding award. The increased incorporation of such a dispute settlement tool in BITs has been viewed as the major improvement from the perspective of foreign investors. The practical importance of this instrument is illustrated by the growing number of cases adjudicated by the International Centre for Settlement of Disputes (ICSID) By May 2011, the ICSID secretariat registered 126 pending cases and recorded 221 settled cases since 1972.

As countries increasingly seek to promote clean-energy investment to meet carbon-emissions goals, foreign investors are attracted to economic-incentive programs that subsidize or otherwise support high
upfront investments in clean-energy infrastructure. Once the initial investment has been made, what protections does the investor have against the revocation of such support systems that remove the economic benefits expected from the investment?

In the PV Investors v. Spain, case which is subject to the Energy Charter Treaty legal framework. The case is based on claims of foreign investor damages caused by Spain’s revocation of several feed-in tariff benefits the country implemented to attract foreign investment in solar photovoltaic energy. Although Nykomb v. Latvia appears instructive on the issue, this Note argues that PV Investors should be treated with a different legal analysis. This Note uses legal principles derived from the Energy Charter Treaty, customary international law, the North American Free Trade Agreement, and the United States Model Bilateral Investment Treaty to determine that the revocation of clean-energy investment economic support
systems can constitute indirect expropriation requiring compensation. PV Investors may be the first of many clean-energy cases involving the revocation of promised economic benefits for foreign investors, and the decision in this case will provide guidance for future cases dealing with similar cuts in benefits.

Next to bilateral investment treaties are regional integration agreements or free trade agreements with an investment chapter. One example is NAFTA Chapter Eleven which contains a full set of investment protection rules similar to many BITs. The most important regional agreement relating directly to energy investment is the Energy Charter Treaty, a multilateral agreement concluded by  European and Central Asian states as well as the European Union.

The Energy Charter Treaty aims at promoting and securing energy-related investment in the territories of the member states. It contains similar protection standards as the bilateral investment agreements. In addition, the Energy Charter Treaty addresses trade liberalisation and rules on energy transit. Other regional trade agreements also contain investment provisions though some of them are less ambitious than NAFTA or the Energy Charter Treaty.

Apart from public international law agreements, international energy investment law in a broader sense also includes the body of investor-state contracts, in particular concession agreements, which are concluded between a foreign investor and the government of the host state. These contacts are governed by the domestic legal order of the host state or by a legal order the parties agreed upon. Consequently, they are national law instruments and are not considered part of public international law. There are, however, attempts to “internationalise” these contracts. While it is difficult to achieve this through a choice of law clause in the contract, international investment agreements can incorporate investor-state contracts: Some investment tribunals and academic commentators held that rights arising from investor-state contracts can be protected through bilateral investment agreements, in particular through so-called umbrella clauses. Consequently, the violation of a concession agreement would be covered by bilateral or regional investment agreements. Importantly, this would allow investors to challenge the violation of those contracts through investor-state arbitration on the basis of the investment agreement whereas breaches of contracts between the investor and the state would normally be dealt with through commercial arbitration. Investor-state contracts in the field of energy investment often also contain so-called stabilization clauses which oblige the host government not to change its domestic law to the detriment of the investor. These obligations tend to “freeze” regulatory options of the government and are therefore problematic from the perspective of preserving regulatory autonomy.

 In particular, the energy policy challenges of the 21st century (security, access, climate change etc.) can only be met adequately if governments maintain sufficient space to adopt those regulations which are necessary to achieve their respective goals.

Sources:
1. UNCTAD, World Investment Report 2010 - Investing in a low-carbon economy, 2010, p. 81.
2, Information taken from ICSID, List of cases, available at http://icsid.worldbank.org/ICSID/FrontServlet (accessed on 19 May 2011).
3. Cameron, International Energy Investment Law – The Pursuit of Stability, 2010, p. 164 et seq


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