International energy investors could pursue UK for compensation following subsidy cuts, says expert

Energy secretary Amber Rudd has said that as many as 250 planned onshore wind projects are unlikely to go ahead following the government's decision to end the Renewables Obligation (RO) for onshore wind in England, Wales and Scotland one year early. Last week, she announced that small-scale solar power would also be excluded from the scheme, with legislation to take forward both changes planned for the new Energy Bill.

Similar changes to renewable subsidy schemes in Spain, Italy and the Czech Republic have led to investors taking action against the states in question under the Energy Charter Treaty (ECT), a cross-border agreement governing the relationships between international governments and energy investors, according to international arbitration expert John Gilbert of Pinsent Masons, the law firm behind Out-Law.com. He said that the same remedy could be available to international investors into UK renewables.

"European investors, and German companies in particular, have invested many millions into Scotland's renewable sector in the belief that it was a safe investment with limited risk," he said.

"The UK government has attempted to be clever by introducing changes to the RO through primary legislation which has the backing of parliament and therefore cannot be challenged through judicial review. Under the ECT, investors can't challenge the government's decision on subsidies, but they may have a good case for seeking damages on the basis that their investments have been undermined and devalued," he said.

The RO was previously the UK government's main financial support mechanism for larger renewable electricity generation projects, but it is due to be phased out entirely by 31 March 2017. It will ultimately be replaced by the more competitive contracts for difference (CfD) scheme, under which developers of more established generating technologies must bid for a place on the scheme based on the lowest guaranteed price per megawatt hour (MWh) that they are willing to accept.

Both onshore wind generation, and solar photovoltaic (PV) generation below 5MW in generating capacity, will no longer be able to participate in the RO from 1 April 2016, according to the latest announcements. The government has announced that 'grace periods' may be available for developers that had already been granted planning consent, a grid connection agreement and could provide evidence of land rights as of the date that the changes were announced.

"The government seems keen to avoid any compensation claims under investment treaties and that is one of the reasons for introducing this grace period, but I suspect investors who have ploughed significant sums into these projects will be looking to maximise the full protections offered under the ECT," said Gilbert.

The ECT was introduced to protect the transmission of energy into Europe. Investors are able to file claims against member states for violation of their protections under the ECT, and 10 such arbitrations are already underway against Spain.

Scottish Renewables, the trade body which represents more than 300 organisations in Scotland's renewables industry, has predicted that the decision to end the RO for onshore wind alone could result in the loss of a planned £3 billion investment into Scotland and put many of the 5,400 jobs in the industry at risk. Last year, an estimated £1.04bn was invested into Scottish renewables, £702 million of which was invested in onshore wind, according to Scottish Renewables.