The opening of the Gemasolar plant in Seville in 2011. J. M. / EFE

Spain has suffered its first setback in an international arbitration process over its cuts to renewable energy subsidies. Millions of euros of public money are at stake in a series of processes being held behind closed doors in hotels in the likes of Stockholm, Paris, Geneva and New York. Now, one of these arbitration hearings has agreed with a group of companies that put money into Spain’s solar energy sector, saying it is competent to judge compensation claims by European investors. Spain, in contrast, wants these cases to be heard by the European Court of Justice.

Spain’s Socialist government called time on its support for renewables in November 2011. It had previously promoted renewable energy, but was now announcing a cut of 30 percent to premiums paid to producers of solar energy with the goal of saving €2.2 billion over three years. This was the first of a series of cuts that the Popular Party continued after it came into office a month later, saying that consumers could not pay. Anybody who believed that their profits were guaranteed by the state for the coming decades suddenly saw their investment at risk.

Spain has received 19 arbitration requests in the three forums outlined in the UN Energy Charter to guarantee investments

Thousands of Spanish investors have lodged appeals with the Supreme Court, all of which are still being reviewed, while foreign companies took a different route. In November 2011, 15 businesses that had invested in Spanish solar energy lodged their first international claim, using the Energy Charter of the United Nations Commission on International Trade Law (UNCITRAL). This was only the second time that investors had used this legislation to bring charges against a member of the EU. Created in 1991 to encourage investment in the former Soviet bloc, the treaty aimed to provide investors with guarantees.

After that came a further 20 investors: sovereign funds such as that of Abu Dhabi, German municipalities and a Canadian civil service pension fund. Even major Spanish companies such as Abengoa and Isolux presented compensation demands, arguing that their solar energy plants belonged to affiliates in the Netherlands and Luxembourg.

Spain has so far received 19 arbitration requests in the three forums outlined in the UN Energy Charter to guarantee investments: ICSID (International Center for Settlement of Investment Disputes), the Stockholm Chamber of Commerce, and UNCITRAL.

No exact figures are available as to how much is at stake, but sources talk of billions of euros. In 2014 alone, Spanish consumers paid €6.5 billion in renewable premiums. Spain has tried to delay the process, arguing that the cuts have been approved by democratically elected parliaments, that a reasonable profit is still to be made from renewable investments, and that above all, Spaniards have been affected just as much as foreign investors. In return, foreign companies argue that Spain has breached the principle of fair and equal treatment.

Foreign companies argue that Spain has breached the principle of fair and equal treatment

The first group of claimants, made up of 15 solar investment funds, are demanding around €600 million via UNCITRAL. As most of the claimants are from Europe, Spain has tried to have the matter heard in a European court, which it believes would be more likely to favor states than an arbitration hearing.

UNCITRAL last year declared itself competent to deal with the matter, according to sources close to the process. Arbitration courts’ decisions are confidential until the proceedings are over, which will probably take another 18 months. The difference between arbitration and EU legislation is illustrated by a recent case involving two Swedish companies who brought action via ICSID against Romania. ICSID ruled in the firms’ favor in December 2013. Meanwhile, the European Commission has ordered Romania not to pay, arguing that this would privilege the two companies over others that could not afford arbitration.

Spain’s solicitor general’s office, which will defend the government in all hearings except two, says it is “wary” of the arbitration system. Each party assigns an arbitrator from a list and the arbitration body hearing the case appoints a president, who is normally a well-known jurist. “It’s three guys meeting in a hotel in Paris and if they rule against the companies, they won’t be chosen again,” say Spanish government sources. But in legal circles, arbitration is recognized internationally as a fair system, given that the arbitrators are legal experts who cannot afford to put their prestige on the line by being seen to be biased.

There is no jurisprudence in these arbitration hearings, although the principle of precedence is applied, and there is little publicity until the final decision is reached. Applying the same defense of the same cuts to the renewables premium, Spain could lose one case and win another, which makes many state attorneys uncomfortable, who are used to jurisprudence. Furthermore, arbitration hearings are famous for their sage decisions, in which investors tend to walk away with something.

Spain’s approach is what is known in legal circles as bifurcation. The first step is to establish whether the state is responsible, and only then calculate an investor’s loss. The idea is to save time and money, because if the state is not considered responsible, then there is no point in commissioning expensive reports from expert witnesses to assess damages.

Spain has rejected ICSID’s competence to rule on the claims by foreign investors, a move that has been dismissed as a delaying tactic. This has allowed the government to halt arbitration brought by RREEF, Deutsche Bank’s real estate investment arm. But in recent decisions in three other cases, arbitrators have rejected that the issue of jurisdiction should be a prior concern and will rule on the matter at the same time as dealing with the one in hand, which is also considered a blow to Spain.

In at least two cases, judges have rejected the presence of the European Commission as a non-interested party in this phase of the process – a further setback to Spain.