Economic and Financial Issues in Renewable Energy Arbitration

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In summary

This article provides an overview of key economic and financial issues that are frequently encountered in renewable energy arbitration. The challenges of RES investments and the impact on uncertainty are discussed in turn. Thereafter, the key lessons from renewable energy arbitration in Spain are considered. Finally, the economic and financial considerations for the assessment of liability and damages are considered in more detail.

Discussion points

  • Renewable energy source risks
  • Spain’s special regime and relevant cases
  • Liability
  • Damages quantification

Referenced in this article

  • Energy Charter Treaty
  • Eiser Infrastructure Limited and Energía Solar Luxembourg SARL v Kingdom of Spain
  • Charanne BV and Construction Investments SARL v Kingdom of Spain
  • Photovoltaik Knopf Betriebs GMBH v Czech Republic


The deployment of technologies to exploit renewable energy sources (RES) looks set to continue to accelerate in the coming years, driven by policies designed to meet the goal of the Paris Agreement: to limit global warming to around 1.5 degrees Celsius relative to pre-industrial levels.[1] Projections from the International Energy Agency show that a four-fold increase in the solar photovoltaic (PV) and wind energy production capacity relative to 2020 is required worldwide by 2050 to achieve ‘net zero’ emissions.[2] In the European Union, emissions reduction targets that already rely on the rapid expansion of RES production are being extended further to reduce the European Union’s reliance on fossil fuel imports.[3]

However, increasing reliance on RES can be challenging owing to their intermittent production profiles, caused by variations in the weather and climate. To complete the energy transition, investments in RES will increasingly need to be coordinated with network reinforcements, investments in emerging technologies to reduce emissions in heavy industries, and measures to increase overall system flexibility while also phasing out fossil fuels. Balancing the need for secure and reliable energy supplies that are sustainable and competitive is a complex task. The challenges are compounded by the uncertain evolution of the costs and performance of new technologies and the volatility in the supply and pricing of key commodities such as coal, gas and oil, as well as the price of greenhouse gas emissions.

Historically, the governments of Bulgaria, the Czech Republic, Italy and Spain have all had renewable energy arbitration raised against them by investors. Given the complexity and uncertainty of the renewable energy sector, it is likely that it will continue to be prone to legal disputes. In particular, where preferential prices and other incentives are used to encourage RES investment, uncertainty over future market and technology developments can make it appear necessary, from the perspective of policymakers, to subsequently adjust these incentives. While these past challenges are unlikely to be fully representative of future challenges—as they occurred in the context of regulatory regimes that were not already adapted for renewable energy—they still provide a useful guide to the range of economic, financial and regulatory issues that would be expected to feature in future renewable energy arbitration.[4]

This article provides an overview of key economic and financial issues that are frequently encountered in renewable energy arbitration. The challenges of RES investments and the impact on uncertainty are discussed in turn. Thereafter, the key lessons from renewable energy arbitration in Spain are considered. Finally, the economic and financial considerations for the assessment of liability and damages are considered in more detail.

RES challenges

Although renewable energy comes from a wide variety of sources – wind, solar, wave, tidal, hydro and geothermal – they all share several features that make them especially prone to disputes.

First, renewable generation assets are capital-intensive: they have high upfront ‘sunk’ costs, and very low variable costs once constructed as there are often no fuel costs. This means that once a renewable generation asset is developed, even if its revenue falls substantially, it is still commercially advantageous to continue to operate it.

Second, RES assets also typically have long asset lives, and so rely on being operational over long periods of time to recover upfront investment costs. From the perspective of investors, to mitigate the risk of not recovering the upfront costs, a long-term contract is typically required to ensure that the return on investment will be sufficient given the risks involved. Similar considerations apply to RES assets that rely on long-term investment incentives funded by governments.

As RES technologies mature, their costs may decrease rapidly while their technical performance can also improve greatly. While this may de-risk RES assets as a whole over time, and make new investments progressively more attractive, it can also increases the risk of under-recovery of sunk costs for assets that are already in place.

Third, the output from RES is often dictated by changes in weather and climate, and is, therefore, unpredictable. This variability increases the costs of integrating renewable technology into the wider electricity system, owing to a requirement for more transmission network capacity, greater demand-side flexibility, more storage capacity and the retention of some flexible (or controllable) non-renewable plants as a backup. For example, the utilisation of such non-renewable backup plants could be low over extended periods of time, making the overall unit cost of electricity higher than it otherwise would be.

In markets with limited experience of renewable energy technology, the scale of these ‘hidden costs’ is often difficult to estimate. Policymakers looking to attract investment in renewables may, therefore, regret having committed to ambitious renewable energy expansion programmes because of the greater-than-expected whole system costs, including dealing with intermittency.

In liberalised markets, where wholesale electricity prices vary hour by hour, the simultaneous availability of large quantities of renewable electricity (eg, owing to high winds) can decrease average wholesale market prices, particularly energy from renewable sources. Depending on the design of renewable energy support schemes, this may increase the need for RES subsidies. It may also trigger the need for state support for non-renewable plants (ie, conventional fossil fuel generators) if they are not able to earn sufficient revenue in periods when renewable generators operate.

As a result, in markets with ambitious renewable targets and extensive RES support schemes, the rate of growth of subsidy payments may eventually be greater than the rate of growth of renewable generation. This can lead to concerns being raised over the cost-effectiveness of renewable energy altogether.

Given the RES challenges highlighted above and the rate at which RES capacity has expanded in some countries, it is unsurprising that there continues to be a steady stream of new renewable energy disputes.


As the share of RES increases relative to conventional energy production, the challenges of accommodating incremental RES capacity within the wider energy system will further increase.[5]

In particular, the ambition to achieve net zero emissions and reduce fossil fuel consumption is expected to require energy markets and networks to undergo extensive reform to improve their ability to cope with increasingly variable supply. Greater cross-border capacity and market integration are also required to achieve a sufficiently diversified energy mix while also meeting users’ demands as regards system reliability. The potential use of hydrogen to decarbonise the production of cement, chemicals and steel, and the development of carbon capture and storage technologies would intensify the coordination challenges associated with RES expansion.

As a result, market reform and regulation that has the potential to substantially affect the commercial viability of RES investments will also be required. The question is, does this matter?

For RES technology, it depends on their cost-competitiveness against existing plants and other energy production technology that may be introduced in the future. For example, when solar and wind renewable generation technologies were being developed in the 1990s and early 2000s, they were widely considered to be expensive relative to fossil-fuel generation. Therefore, if there is a policy of expanding renewable generation using public subsidies, and if the commitment to the subsidy regime is questionable, then the perceived risk of investment losses could increase.

The absence of robust market mechanisms for the pricing of carbon emissions to address underlying market failures – and instead relying on myriad policies and regulations that are focused on particular technologies – can also increase the likelihood of disputes. If renewable energy support schemes are revised or reduced in response to changing market circumstances, it is more likely that these measure will be seen as discriminatory and breaching standards of fair and equitable treatment. Investors may claim that their legitimate expectations were not met, while governments may claim that reforms were necessary to ensure that the energy market continues to operate efficiently and that the overall costs of energy are affordable.

In these cases, experts are often asked to assess the impacts of such reforms and whether they are aligned with reasonable regulatory practice as well as to value the resulting damages. The development of a robust and credible counterfactual scenario against which to value the losses from a change in regulation can be challenging. In particular, determining what counterfactual policy would have instead been in place involves consideration of the wider energy system as a whole, not just the RES policy.

The cases brought against the Spanish government by investors in solar PV projects illustrate these points.

Spain’s special regime

In 1997, Spain developed a special regime with the Electricity Sector Law (Law 54/1997) to stimulate solar PV investments. The regime was altered in 2004 to improve the stability of the tariffs (RD 436/2004), and again in 2007, this time to introduce best-practice feed-in tariff (FiT) design elements (RD 661/2007).[6] Under the amended regime of 2007, new solar PV energy generators would benefit from, among other things, a generous FiT for a 25-year period (revised every four years), after which certain generators would continue to benefit from approximately 80 per cent of the original FiT rates for the lifetime of the facilities.

Starting in 2010, Spain enacted a series of reforms to the special regime as the costs of the associated subsidies rose dramatically – in large part owing to the growth of the subsidised solar PV installation.[7] These reforms included:[8]

  • the termination of the FiT after 30 years;
  • the introduction of a new remuneration regime in respect of the FiT based on the hypothetical efficient costs of solar PV plants that would ensure a reasonable return to investors;
  • a limit on the operating hours of the plant;
  • a charge to access the transmission grid; and
  • a tax on energy supplied to the electricity grid.

The reforms culminated in a moratorium on support for new solar PV in 2012.[9]

As a result of the changes, foreign investors brought dozens of individual claims against Spain under the Energy Charter Treaty. The claimants essentially argued that they reasonably relied on inducements and promises by the Spanish government, which conferred immutable economic rights protected by the Treaty.

Several arbitral awards have compensated the investors in these claims. The resulting awards have clarified several issues relating to the estimation of damages suffered by the investors – for example, relating to the appropriateness of different approaches to estimate the reduction in fair market value of the investments.

A hotly debated issue in assessing the damages is the appropriate sharing of risks between investors and consumers, and whether the contested reforms fundamentally changed the nature of the regulatory regime, including the allocation of risks. As claimants in these cases, investors have argued that their investments were made with the expectation of a stable regulatory regime, for better or for worse, given the promises made by the Spanish government. For its part, the Spanish government responded by arguing that the claimants were only ever entitled to a reasonable return and that the special regime overcompensated investors. In this context, one of the purposes of EU state aid rules is to establish conditions such that RES investors recoup their investment costs and earn a reasonable rate of return on their investments. An estimate of the cost of capital has typically been used as a benchmark for the reasonable rate of return in state aid cases.[10]

There are multiple sides to the question of appropriate risk-sharing in RES cases involving subsidy schemes and other investment incentives. One side to this issue is the extent to which the regulatory risks were already factored in (or should have been) when the investment decision was taken, and another is whether the rate of return targeted by the Spanish government was reasonable given the nature of the risks inherent to the regime. In the case of Eiser Infrastructure Limited and Energía Solar Luxembourg SARL v Kingdom of Spain (Eiser), the tribunal ruled that the claimants should not have expected drastic changes to the regulatory regime, suggesting that such risk would have needed to be fairly compensated.[11]

Contested reforms seen in RES arbitration in other countries also frequently raise similar issues. For example, taxes and levies may be used to ensure that returns that exceed the government’s expectations are redistributed to consumers to offset rising energy costs. In other cases, the market arrangements may be reformed to enable greater competition and cross-border trading resulting in additional costs or risks that also affect RES. Finally, the subsidy regimes themselves may be reformed to better align with the regulatory practices seen in other markets. When can such reforms be considered reasonable?


From an economic perspective, assessing the reasonableness of individual disputed measures requires trading off the benefits that consumers received as a result of the measures against any costs that were imposed on RES producers, if any.

For example, in the case of Charanne BV and Construction Investments SARL v Kingdom of Spain (Charanne), the tribunal found that the disputed measures introduced in Spain, which included limitations on the number of hours during which solar PV plants would receive a FiT, were not irrational, arbitrary or contrary to the public interest. Although these reforms adversely affected the economic interests of the RES producers and their investors, they were also adopted on the basis of objective criteria and had the benefit of mitigating the increase in the energy costs to consumers.[12]

The economic and financial impacts of contested measures are relevant to determining liability and can involve assessment of:

  • whether the contested measures represented significant departures from the policies or regulations that existed previously, whether allocation of costs and risks was fundamentally altered, and the extent to which investors could be expected to anticipate these changes;
  • whether the measures were ‘justifiable’ in the sense that they pursued a legitimate policy objective. As part of this question, it may or may not be relevant to also consider whether alternative policies could achieve better outcomes; and
  • whether, following the implementation of the reforms, the sharing of costs and risks between investors and consumers remains appropriate and how the returns earned or expected by investors compare to benchmarks of reasonable returns.

Accordingly, the assessment of the reasonableness of individual disputed measures is, in part, based on established regulatory practices in relevant markets. Alongside this, their cumulative impact can also be assessed by comparing the expected financial return to the investor with the ‘required return’ or ‘promised return’ at the time of the investment.

Specifically, this would involve an analysis of the internal rate of return (IRR)[13] that is calculated directly from past or future, or both, cash flows for an investment project. The IRR provides a measure of the overall expected financial return to the investor from their investment, expressed as a percentage. In contrast, the required return is typically measured by the weighted average cost of capital (WACC) at the time of the investment, based on the return demanded by equity and debt investors to incentivise the supply of capital necessary for the investment project.[14] In cases where preferential prices or other investment incentives were set with reference to a promised return, it may be appropriate to compare the IRR to the promised return, which is often broadly aligned with the required return.[15]

The intuition behind the IRR approach is that so long as the IRR (after accounting for the impact of the disputed measures) remains broadly in line with the WACC, then the investors would receive sufficient compensation such that their investment would be economically viable. This means that from an economic perspective, it could be said that the disputed measures were ‘reasonable’ inasmuch as the measures themselves did not make the investment uneconomic.

Furthermore, if measures themselves were also implemented to achieve a recognised policy objective (typically for the ultimate benefit of consumers), then the disputed measures could also be said to be ‘proportionate’ insofar as the interests of consumers were balanced against the investors’ interests. This approach was taken in Photovoltaik Knopf Betriebs GMBH v Czech Republic (Photovoltaik Knopf), where the tribunal used the fact that the IRR remained more than 1 percentage point above the WACC to conclude that the disputed measures still allowed the investors in the renewable power plant to earn a reasonable rate of return.[16] At the same time, the tribunal determined that the reduction in consumers’ electricity bills was proportional to the reduction in the renewable investors’ financial returns.[17]

If disputed measures are not found to be reasonable, it would also be necessary to consider the quantum of damages that may be owed to the claimants, as in the Eiser case.[18]

Damages quantification

In renewables arbitration, two analytical frameworks for the quantification of damages are often used.

The first is the discounted cash flow (DCF) method. In this framework, the damage suffered by a claimant is equal to the difference between the net present value (NPV) of the cash flows to an investment project under two scenarios, with and without the disputed measures.[19]

The IRR approach described in the previous section can also be applied to the calculation of damages. In this framework, damages only arise if an investor’s IRR is below the WACC, which is often considered to be the measure of ‘reasonable return’. In this case, the cash equivalent of the difference between the IRR and the WACC corresponds to the damages.

While there are important differences between the DCF and IRR frameworks that can affect the damages estimate, the selection of which framework to use could also depend on the circumstances specific to an individual case. While some variant of the DCF method is probably the most widely applied valuation framework and tends to be seen as more robust than the IRR method for appraising investment projects,[20] if the objective of the regulatory regime was to allow RES investors to earn a reasonable return on efficiently incurred costs, then it could also be relevant to estimate the value of damages using the IRR approach.

Investors, as claimants, often prefer the DCF method, while governments, as respondents, may prefer the IRR approach.[21] The main reason for this divergence in preferences is often a result of the assumptions implied by the counterfactual. The counterfactual is typically defined as a (hypothetical) scenario in which the disputed measures were not implemented. Conversely, the factual scenario is the one where the disputed measures have been implemented.

The DCF method, as applied to these cases, implies that the investor is entitled to all of the profits lost as a result of the disputed measures, irrespective of whether the investment project’s profitability in the counterfactual would have been very high when compared to the WACC. In general, the more profitable an investment project would have been without any disputed measures, and the more impactful the dispute measures were, the greater the claimant’s damages estimate.

In some cases it is also important to consider the source of the profits in the counterfactual. As discussed earlier in the context of the Spanish solar PV arbitration, to the extent that the regulatory regime had the effect of overcompensating investors then this would also result in a higher damages estimate, other things being equal.

In contrast, under the IRR approach the counterfactual corresponds to the scenario where the IRR is equal to the WACC, implying the investment project is assumed to ‘break even’. Consequently, the DCF method as applied to these cases generally results in higher damages when compared to the IRR approach.

As discussed earlier in this article, the challenges of RES expansion can increase regulatory uncertainty. Indeed, as the number of RES arbitration cases has grown, the frequency of disputes and the magnitude of past claims related to contested measures has, over time, provided an indication of the regulatory risk in this sector.[22] The question is, how should regulators and investors adapt to this uncertainty and the concomitant regulatory risks, and how would this affect the valuation of damages?

If regulators and investors can mitigate uncertainty and the financial consequences of regulatory risk, then damages could also be reduced. If this also reduces the likelihood of future disputes, then this would lower the costs and risks of RES investment and help to complete the energy transition. Accordingly, governments and investors would be expected to consider how they can mitigate the adverse impact of their actions on regulatory risk exposures.

For example, governments can increase the transparency of the regulatory regime by being explicit about the main sources of uncertainty in the sector, their potential impacts on consumers, and the principles for sharing the associated risks between investors and consumers. Guarantees can be provided that limit investors’ exposures to specific risks where this is feasible and desirable.[23] Regulators can also make their regimes more predictable by consulting investors and other stakeholders on incremental reforms when these are required. Furthermore, investors can mitigate the financial impact of regulatory risk by making their investment projects more robust by avoiding excessive financial leverage and procuring insurance against regulatory risk or transferring risk where possible.[24]

The Photovoltaik Knopf case discussed earlier highlights that where the IRR diverges significantly from the WACC, either positively or negatively, then this can increase the probability that tribunals would consider that either investors’ expectations of returns were excessive or the disputed measures themselves were unreasonable.


The growth of renewable energy technologies is expected to accelerate in the coming years driven by policies designed to meet ambitious emission reductions targets and to reduce reliance on fossil fuels. However, RES expansion presents a number challenges for the design of energy markets and the coordination of investments in networks and other facilities needed to increase the flexibility of the wider energy system.

Given that the costs of RES remain uncertain and the challenges of completing the energy transition are significant, it is likely that the renewable energy sector will continue to be prone to legal disputes. Resolution of these disputes will require detailed economic and financial analysis of RES policies and the impact of disputed regulatory interventions on RES investments. Key to the assessment of the reasonableness of individual contested measures is whether they fundamentally altered the allocation of costs and risks, and whether they were implemented in a way that was rational and aligned with a legitimate policy objective. Alongside this, their cumulative impact can also be assessed by considering whether investors’ returns were reasonable.

As regards damages quantification, while the DCF method is widely used, if the objective of the regulatory regime was to allow RES investors to earn a reasonable return on efficiently incurred costs, then it could also be relevant to estimate the value of damages using the IRR approach.


[1] Details on the Paris Agreement can be found here.

[2] International Energy Agency (2021), ‘Net Zero by 2050: A roadmap for the global energy sector’, May.

[3] European Parliament (2022), ‘Revision of the Renewable Energy Directive: Fit for 55 package’, September.

[4] Details of investment arbitration cases instituted under the Energy Charter Treaty and links to awards can be found here.

[5] For an overview of challenges associated with greater RES penetration see: IRENA (2022), ‘RE-organising power systems for the transition’, June; and IRENA (2018), ‘Renewable Energy Prospects for the European Union’, February.

[6] International Institute for Sustainable Development (2014), ‘A Cautionary Tale: Spain’s Solar PV Investment Bubble’, February, pp. 6–7.

[7] For example, in 2009, the costs of solar PV reached more than 50 per cent of all spending on renewable energy, despite solar PV producing less than 12 per cent of RES electricity generation. See International Institute for Sustainable Development (2014), ‘A Cautionary Tale: Spain’s Solar PV Investment Bubble’, February, p. 1.

[8] Royal Decree 1565/2010; Royal Decree Law 9/2013; Royal Decree 413/2014.

[9] International Institute for Sustainable Development (2014), ‘A Cautionary Tale: Spain’s Solar PV Investment Bubble’, February, p. 2.

[10] Friederiszick, H. et al (2006), ‘Applying the Market Economy Investor Principle to State Owned Companies – Lessons learned from the German Landesbanken Cases’, Competition Policy Newsletter, pp. 105–109.

[11] In the Eiser case, the claimants recognised that there could be changes in the regulatory regime and to some extent factored in this risk in their appraisal. In the same case, the tribunal ruled that ‘drastic’ changes were implemented in earlier amendments to the special regime, but not in the 2007 amendment. See ICSID Case No. ARB/13/36, paras. 119 and 387, available here.

[12] See SCC Case No. V 062/2012, paras. 534-536, available here.

[13] The IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. For more information see Gallo, A. (2016), ‘A refresher on Internal Rate of Return’, Harvard Business Review, 17 March, 2016, available here.

[14] The WACC reflects the risks of a given investment project.

[15] In most cases, the preferential prices or other investment incentives offered to RES investors are determined based on policymakers’ estimates of the costs and risks (and therefore policymakers’ estimates of the WACC) for different RES investments.

[16] See PCA CASE No. 2014-21, paras. 365, 369, 490, and 603, available here.

[17] See PCA CASE No. 2014-21, paras. 599-601, available here.

[18] See ICSID Case No. ARB/13/36, para. 486, available here.

[19] The NPV is often calculated by discounting future cash flows by the WACC.

[20] Gallo, A. (2016), ‘A refresher on Internal Rate of Return’, Harvard Business Review, 17 March, 2016, available here.

[21] ICLG (2020), ‘Spanish ECT Awards – To DCF or not to DCF? That is the question’, last accessed 30 August 2022, available here.

[22] In this context, regulatory risk refers to the potential impact of future policy changes and regulatory reforms that could negatively impact on the expected financial performance of an investment project. For a view on how investors perceive risks in the RES sector see: Economist Intelligence Unit (2011), ‘Managing the risk in renewable energy’, October, 2011.

[23] Guarantees may take the form of ‘stabilisation’ or ‘change of law’ clauses.

[24] Gatzer, N. and T. Kosub (2016), ‘Risks and risk management of renewable energy projects: The case of onshore and offshore wind parks’, Renewable and Sustainable Energy Reviews, July.

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