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Feed-in Tariff Degression and Investor-state Dispute Settlement

Peewara Sapsuwan

Baker & McKenzie (Bangkok)


As more economies move towards renewable energy, an increasingly popular policy mechanism to promote investment in the renewable energy sector is the use of feed-in tariffs (FITs). The price and grid access guarantees afforded under FITs reduce investment risk, making them an attractive option for renewable energy producers. However, over time the payment rates offered under an FIT decrease through a process of “degression;”[i] this can lead to investment claims against the host state.


An FIT is a long-term contract between the government and an energy producer where the price paid to the producer is tied to the cost of energy production. By guaranteeing a set purchase price, this mechanism aims to provide the producer with a degree of price certainty and guaranteed access to the grid; these guarantees, in turn, encourage investment in the otherwise risky renewable energy sector. However, FITs have a built-in roll back mechanism: as the renewable energy sector grows the technology involved becomes more common and cost of production goes down. The power purchase price under the FIT is thus decreased to reflect this change. This is known as “degression” and, occassionally, it can be a source of disputes between investor and state.


At issue is whether degression in FITs amount to a breach of the investor’s legitimate expectations, and thus, a breach of the fair and equitable treatment (FET) standard under the applicable bilateral investment treaty (BIT). The FET standard is common in BITs and is central to many investor-state disputes. Despite the absence of a consensus on the elements constituting the FET standard, arbitral decisions invariably address the issue of legitimate expectation:


When investors acquire rights under the domestic law, the fair and equitable treatment standard will protect legitimate expectations about the use and enjoyment of these rights. This requires a basic level of stability and predictability in the legal framework. Fundamental changes in the legal framework that eviscerate legitimately acquired rights are likely to violate fair and equitable treatment.[ii]



Some BITs may contain provisions permitting the host state to maintain non-conforming measures (such as Article 8(2) of the Canada-China Foreign Investment Promotion and Protection Agreement), while others simply contain a public interest provision; this provision is often disputed during arbitration.


Where the FET standard is invoked, the claimant investor will often argue that the host State’s measures have changed the legal environment in a way that is detrimental to their investment.[iii] For example, an investor may bring a BIT claim against the host state if they feel they were induced to make an investment in reliance of an FIT which was later found to be subject to a degression program, thus significantly impacting the economic viability of the energy production project.


Two elements of “legitimate expectation” that are commonly brought up are:


1) “a stable and predictable legal and administrative framework that meets certain minimum standards, including consistency and transparency in decision-making,”[iv] and


2) the foreign investor’s ability to rely on “specific host state conduct, usually oral or written representations or commitments made by the host state relating to an investment.”[v]



Even though some arbitral decisions note that it would be unreasonable for an investor to assume a completely static legal environment in the host state,[vi] an investor may still be successful in bringing a claim against the host state if an FIT degression or the cancellation of an investment incentive is found to go against the initial undertaking or representation by the government. As such, an investor may claim that the host state has violated their legitimate expectation if they can demonstrate that the host state’s promise or undertaking (e.g., a purchase price or other financial incentives promised under an FIT) has been unexpectedly withdrawn.



In recent times, the issue of stability and predictability has been raised in relation to the withdrawal or modification of FITs against some countries in the context of renewable energy.[vii] In these cases, government efforts to roll back FITs or to withdraw pre-existing subsidies are alleged to be in violation of the investors’ legitimate expectation that there would be long-term governmental support. It is worth noting that in these cases, retroactive measures such as cuts to the FITs were also introduced,[viii] which may have frustrated the financial viability of the investors.


In conclusion, although FITs are a useful mechanism to encourage foreign investment in the renewable energy sector – and thus aid the global effort to reduce CO2 levels – a host state may simultaneously be exposing itself to investor-state dispute settlement claims. To guard against this vulnerability, host states should clearly establish the terms and conditions of the investment incentives, and any subsequent withdrawal of financial support should be brought to the investors’ attention at the outset. This expectation management is important given the nature of the energy sector, where capital expenditure is high, assets are often immovable, and where there are many interdependent long-term agreements. Furthermore, it is crucial for governments to review the existing BITs before designing FIT policies or investment incentives to ensure that such policies would be mutually sustainable for both the host state and the investors.


Peewara Sapsuwan is an Ontario-licensed lawyer currently practicing in Bangkok, Thailand and he has experience in deals spanning across various jurisdictions. Beyond the energy and project financing practice, he also works in technology law such as e-payment, cryptocurrency, and digital platforms. In addition, he has been involved in law reform initiatives in Thailand and in the creation of a national digital trade financing platform.

[i] Agreement Between the Government of Canada and the Government of the People's Republic of China for the Promotion and Reciprocal Protection of Investments, Canada and the People’s Republic of China, 9 September 2012, (entered into force 1 October 2014) Online: <https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/china-chine/fipa-apie/index.aspx?lang=eng> [ii] Newcombe & Paradell, supra note iii at 286. [iii] Elizabeth Whisitt and Nigel Bankes, “The Evolution of International Investment Law and Its Application to the Energy Sector” (2013), Alta L Rev 207 at 223. [iv] Ibid. [v] Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Alphen aan den Rijn, Netherlands: Kluwer Law International, 2009) at 280. [vi] Saluka Investments BV v Czech Republic, UNCITRAL, Partial Award, 17 March 2006 at para 305,“No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor’s expectations was justified and reasonable, the host State’s legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well [...].” [vii] Vyoma Jha, Trends in Investor Claims over Feed-in Tariffs for Renewable Energy (July 2012), online: Investment Treaty News <https://www.iisd.org/itn/en/2012/07/19/trends-in-investor-claims-over-feed-in-tariffs-for-renewable-energy/#_edn15> [viii] Ibid.





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