Mitigating the Risk of Disputes in the Renewable Energy Sector in North Africa: Lessons Learned from Solar Energy Claims Brought against European States

In North Africa, climate change is projected to increase temperatures in the 21st century, with the strongest warming projected to take place close to the Mediterranean coast and in inland Algeria, Libya and Egypt. Reports predict that North African countries (notably Morocco, Algeria and Tunisia) are expected to become global hotspots for drought by the end of the 21st century. As a result, as part of their policy to increase its renewable-based power capacity, North African States are deploying substantial efforts to attract foreign investments in renewable energy. However, the success of the energy transition hinges on getting the right approach to translating it into efficient and investor-friendly legislation.¹

Some European States have been leading the energy transition efforts for almost 15 years ago by either:

(i) implementing ambitious legislation (via the introduction of highly attractive and subsidised feed-in tariffs) to attract foreign investments (in the case of Spain, Italy and the Czech Republic); or (ii) adopting legislation banning the use of particular sources of energy such as coal or nuclear energy (in the case of Germany and the Netherlands). These policies, whether by their roll-back (in the case of the roll-back of the incentives by Spain) or by their implementation (in the case of the Netherland’s plan to phase out the coal-fire based power) have attracted a barrage of claims by foreign investors that have been impacted by these measures. As a result of these claims, States such as Spain and Italy have been condemned to pay hundreds of millions of US Dollars in compensation to foreign investments. The novelty of these claims is that they are brought against capital-exporting States, such as the Kingdom of Spain, the Republic of Italy, The Czech Republic, as opposed to developing countries which are usually on the receiving end of investment of capital.

The author proposes to draw lessons from the various cases brought by foreign investors against European States, in order to examine how international arbitral tribunals have interpreted these States’ obligations towards these investors and to draw lessons from which North African States (ie, Egypt, Libya, Tunisia, Algeria and Morocco) could benefit in the implementation of its energy transition policy.

Against this background, the author takes a deep dive into over 60 publicly available awards rendered in connection with disputes arising out of investments in the solar energy sector on the basis of initially favourable local legislation by European States such as the Kingdom of Spain, the Italian Republic and the Czech Republic, as they were (and still are) the recipients of the lion share of claims brought by foreign investors.

This article explores arbitral tribunals’ approach to the State’s power to implement wide-ranging regulatory changes to existing legislation which were relied upon by foreign investors when deciding to invest in these countries (Section 2). Against this background, the author also considers the contours of a State’s right to regulate and the extent of its margin of appreciation under international law to freely amend its own internal legislation without being found in breach of its international obligations (whether under customary international law or bilateral/multilateral investment treaties) (Section 3).

This section examines how arbitral tribunals have approached the well-established legal standards and cause of action on which foreign investors have relied in bringing their claims against the European States. First, we will consider the contours of fair and equitable treatment. Secondly, we will examine how arbitral tribunals approached the concept of full protection and security in the context of investments in the solar energy sector. Thirdly, we will take a close look at how the test for indirect expropriation has been analysed by arbitrators. Finally, the author will set out how the arbitral tribunal approached the issue of valuation of damages and compensation due (or not) to the foreign investor.