How investors in renewables can compensate for losses: explanation of a lawyer

The reduction of feed-in tariff rates limits the ability of RES electricity producers to make loan payments, which has a negative impact on Ukraine’s banking system and investment climate.  But investors can apply to investment arbitration and protect their interests.Tetiana Mylenka, Counsel at Hillmont Partners, Head of Energy Practice told on this issue during the discussion session "Energy Vector of Ukraine" organized by Legal High School, Kosatka.Media reports.

Renewable energy projects in Ukraine are implemented by both Ukrainian and foreign investors. The share of foreign investment in existing RES power plants constitutes about 30%, and the volume of foreign investment in the RES sector is approximately EUR 2.5 billion. Most RES projects are constructed with the involvement of loans received from national and international banks, as well as financial institutions. Therefore, the reduction of feed-in tariff rates limits the ability of RES electricity producers to make loan payments, which has a negative impact on Ukraine’s banking system and investment climate. Many investors in renewable energy are currently negotiating with banks to restructure their loans.

"It is worth noting that foreign and Ukrainian investors will have differing opportunities to protect their rights and interests in connection with the reduction of feed-in tariffs. Investors who have signed a Memorandum of Understanding will still have the right to apply to investment arbitration, since the Memorandum is non-binding for its signatories and its signing cannot be interpreted as a waiver of any right or claim. Nevertheless, during arbitration proceedings the arbitrators may potentially raise questions regarding the good faith of the actions of such a claimant," the lawyer said.

Ukraine is a party to a large number of international treaties in the energy sector, as well as in the field of international investment protection. Ukraine is a signatory of the Energy Charter Treaty (ECT), as well as about 80 treaties on foreign investment protection. Therefore, foreign investors can protect their rights through international investment arbitration.

In accordance with the ICSID Convention and the ECT, claims around treatment of a domestic company can be brought if that company is "controlled" by foreign investors. 

Investor damages which can be compensated

Types of damages that may be claimed, include, but are not limited to:

  • Lost profits over the expected lifespan of the investment;
  • Sunk investment costs;
  • Contractual losses under PPAs;
  • Financial costs;
  • Legal fees and costs.

Arbitration procedure

The ECT has a three-month "cooling off" period between the sending of the trigger letter and the initiation of the claim.

"We anticipate a race to establish tribunals. Investment arbitration is a relatively small sector with a limited quantity of qualified arbitrators, and the first claimants will therefore have the opportunity to choose the best arbitrators. Being one of the first claimants also reduces the risk of bad precedents," Mylenka emphasized.

After the "trigger letter" and three-month cooling off period, an investor may initiate arbitration with a Request for Arbitration. After submission of the Request for Arbitration, a tribunal will be constituted in approximately 3 months. 

Each party may provide two written submissions, with a period of document disclosure in between them.  This process generally takes 12 to 18 months from the moment the tribunal is constituted.

Investment arbitration is quite expensive. Costs can vary greatly depending on the complexity of the case and the size of the requested damages. By way of example:

  • NextEra v. Spain case – investor awarded damages of EUR 290 million, incurred USD 12 million in legal and expert fees.
  • OpreaFund v. Spain – investor awarded approximately USD 30 million, incurred approximately USD 3.5 million in legal costs and expenses.  The tribunal awarded the investor 75% of its legal fees. 

In addition to legal and expert fees, the cost of administration (tribunal fees & services) is generally around USD 500,000 for each party in the dispute.

Filing collective claims to reduce costs

It is possible under the ECT to aggregate the claims of multiple investors with similar cases into one arbitration. Each individual claimant must still prove their entitlement to jurisdiction, liability, and damages. Collective claims can mitigate the costs of arbitration for each individual investor. 

Careful consideration should be given to aligning the strengths and weaknesses of individual investors before aggregating claims. 

Raising funds to finance arbitration costs from special funds

The cost of investment arbitration is quite high, therefore investors may be interested in involving special funds not only to reduce the financial costs of arbitration, but also to involve an experienced co-investor to assess the financial prospects of a claim and help ensure the right legal strategy and advisors.

Special funds assess the situation of a particular investor and provide their opinion on the prospects of the claim. As a rule, special funds offer their services in exchange for a share of the damages (funds) awarded to the investor.

Recognition and enforcement of an arbitral award

An arbitration award is a binding and enforceable decision. If the losing party does not voluntarily pay, the investor can have the award "enforced" by the courts.

Enforcement of arbitral awards:

1.The New York Convention:

  • Permits international enforcement.
  • The signatories recognize an arbitral award as a court judgment.
  • Sets maximum standards so that signatories cannot adopt legislation which provides grounds for resisting enforcement.
  • Ukraine is a signatory.

2.Enforcement under the ICSID Convention regime:

  • Specifically established for investment disputes between investors and states.
  • Self-contained, and includes a mechanism for the (limited) review of arbitral awards.
  • No review of the award in national courts.
  • ICSID Member States (including Ukraine) agree that the award will be recognized and enforced in the courts of any ICSID Member State as if it were a final judgment of their own courts.

Enforcing an award against a state:

  • Some states are reluctant to pay the sums due under an award, e.g. Russia in the Yukos case.
  • Enforcement can be sought not only in the state’s courts – an award can be used to seize assets in other countries.

Tracing the losing party’s assets:

  • The award can be enforced in any ICSID signatory country where the losing party has assets.
  • The winning party investigates where assets of the losing party are located and where the procedure will be simplest.

"The prospects of the claim depend on the specific situation of each investor, therefore they should be investigated thoroughly in each individual case," she summed up.

Tags: court, legislation, feed-in tariff, renewables, investments, investors

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