INTRODUCTION

The judgement in “NextEra Energy Spain Holdings B. V. v. Kingdom of Spain” has highlighted the importance of arbitration in the management of cross-border energy disputes. Spain, unilaterally, decided to stop subsidizing renewable energy, thereby causing heavy losses to NextEra investors, who sought protection under the Energy Charter Treaty. However, enforcement was difficult within the EU because the EU law was in conflict with itself and even after receiving a highly valued award, NextEra was forced to seek enforcement in the U.S. courts. This case sheds light on challenges that characterize international arbitration within the energy domain, especially taking into consideration legal systems such as the one of the EU.

INTRODUCTION

Arbitration has been an important tool for the resolution of Energy Sector disputes for many years particularly in connection with cross-border investments. It’s an industry with massive capital expenditures, large scale, long gestation periods and significant political and regulatory risks. These factors inevitably lead to disagreements in almost every project. Arbitration offers a more private, more impartial, not to mention often a more expeditious manner in which to resolve such disputes which is why many investors alike and some states prefer it. The most vivid example of the application of arbitration and the mixed opportunities and issues connected with it in the energy field is the case NextEra Energy Spain Holdings B. V. v Kingdom of Spain[1]. This case also serves to highlight the importance of arbitration while not least revealing the challenges that occur when arbitration is conducted on an international level and has to deal with national and supranational laws, specifically those of the European Union (EU) and its member states.

The Background Dispute

This conflict between NextEra and Spain[2] stemmed from the change of Spain’s renewable energy policy that was quite favourable for foreign investors in the initial years promising lucrative subsidies for investment in renewable energy projects. Spain,, like most EU countries, attempted to achieve the goals by providing investors with great opportunities to invest in renewable energy production with the help of numerous incentives. These incentives were important for the major players such as NextEra, which invested greatly into the Spanish renewable energy market.

But with the onset of the global financial crisis and the subsequent worsening of the country’s economic conditions, Spain significantly reduced these subsidies, claiming them to be unmanageable. This policy flip showed the investors negotiated losses, especially NextEra, which sought arbitration against Spain under the Energy Charter Treaty. The ECT is a multilateral treaty governing the energy sector aimed at regulating investments, thus giving legal grounds for an investor to claim compensation through arbitration in case of a negative impact of state measures on business.

THE ARBITRATION PRODECURE

NextEra started an arbitration proceeding against Spain in 2014 under the International Centre for Settlement of Investment Disputes (ICSID) rules, for the ECT arguing that Spain had breached its obligations under the treaty. In a nutshell, NextEra claimed that Spain violated the fair and equitable treatment standard which is guaranteed by the ECT.

Later in the same year, the ICSID tribunal decreed in favour of NextEra and granted the firm more than €290m in compensation. As for the stability of the legal framework, the tribunal concluded that Spain actually breached the ECT by destabilizing the legal framework necessary for investments. The ruling was significant for NextEra and other investors because it restored the principle that states could not change investment conditions for various green projects for arbitrary purposes without compensating the investors involved.

CHALLENGES IN ENFORCEMENT

As earlier noted, the ICSID award went in favour of NextEra, but the process of enforcing the award was daunting especially within the EU. The EU has also been rather clear that it does not recognize arbitration under the ECT within the region as it is unlawful. This view was made more rigid by the European Court of Justice (ECJ) in 2018 Achmea decision which more or less banned arbitration between EU member states and investors of another EU state under the ECT. In essence, such arbitration erodes the judicial of EU law and the jurisdiction of EU member courts and tribunals to determine disputes relating to EU law canvassed in the ECJ. Spain, with help from the ECJ as it were, claimed that ICSID award could not be enforced within the EU, thus beginning a long game of cat and mouse over the recognition and enforcement of the award. The position as to NextEra then worsened when EU courts relying on the ECJ decision declined to enforce the award leaving the company with few avenues of legal redress within Europe.

SEEKING THE ENFORCEMENT IN UNITED STATES

Being an investor in awarded renewable energy projects, NextEra was forced to turn to the United States where awarded contracts could not be enforced in the EU courts. In contrast to the EU which is restrained by the interpretation of the ECT made by the ECJ, the United States is not. Furthermore, there are two bilateral conventions that compel the U.S. courts to recognize and enforce the foreign arbitral awards, i.e., the ICSID Convention and the New York Convention.

The move to seek enforcement in the U.S. highlights a critical aspect of international arbitration: the possibility to obtain the enforcement of awards in more than one jurisdiction. This flexibility is one of the reasons why arbitration is favoured by investors in the energy sector, as it offers a route to redressal where enforcement in the host country is not an option. At the same time, this poses some challenges, where certain states may uphold different perceptions on the legitimacy of the global conventions and awards of arbitration.

BROADER IMPLICATION OF ARBITRATION IN ENERGY SECTOR

The “NextEra Energy Spain Holdings B.V. v. Kingdom of Spain” case is not an isolated instance of the problems that investors encounter when dealing with the energy sector and the relationship between international arbitration and national legislation. However, it casts doubt on the future of arbitration under the ECT and, indeed, within the EU. Grievous as it is, one of the contentious questions to emerge from the ECT includes its compatibility with the provisions of EU law. The ECT was established to offer adequate legal mechanisms to protect the investors, for example, by offering the right to demand arbitration in case of the dispute. Yet, there are constraints inherent in the EU’s legal infrastructure – most importantly, the principles set by the ECJ – regulating the extent of these safeguards within the EU. This has left it to a position where investors such as NextEra, who sought comfort in the ECT protections, having made legal troubles whenever they seek to collect arbitration awards against EU members.

The case also points out a lesson on the need to have legal and regulatory analysis of the host country prior to making large expenditures. Despite these generous provisions, the ECT’s protections may be circumvented by other national or regional laws, which, as seen earlier, includes the EU’s position on intra-EU arbitration. The NextEra case can be seen as an ominous sign for the energy sector which requires long term commitments and stable legal requirements. Businesses may also reduce their investments in countries which lack a clear legal framework on the enforcement of arbitration awards; this may considerably dampen investment in key energy infrastructure.

THE FUTURE OF ARBITRATION IN ENERGY SECTOR

The NextEra case can have long-term consequences for the further development of arbitration concerning the energy industry. The potential outcome may be the pressure on the reform of the ECT to resolve the current issues of inconsistency between the treaty and EU law. Proposals for the modernization of the ECT have already being contemplated in the EU in order to bring it in tune with the EU legal regime and policy direction especially as it relates to climate change.

Another possible evolution of the energy conflicts in the EU is seen in the preferential utilization of domestic courts or alternative methods of solving disputes. However, it is equally important to understand that whereas these alternatives are to some extent effective, they are not as neutral and strongly enforceable as international arbitration is, which would not make them as attractive to investors. In other states beyond EU, arbitration is expected to persist as the main means of solving the energy disputes since there is weak legal framework, and political interference on the resolution of the disputes is common. To the investors in these regions, the capacity to get independent third-party arbitration and enforce awards across international borders is a vital back stop.

CONCLUSION

The “NextEra Energy Spain Holdings B.V. v. Kingdom of Spain” remains an eye opener to the effect that arbitration is pertinent to the energy industry for the resolution of disputes. Arbitration has its strengths, such as neutrality, efficiency, and the fact that an award issued within arbitration is enforceable at the international level although not without difficulties. The case brings into light the requirement for investors to analyze the legal systems of their host nations, and the challenges faced in executing arbitration awards in their host states, especially in a more complex legal system such as the EU.

Energy is an essential sector in each country’s economy and as the sector transforms, there will always be the need for arbitration for solving disputes. In the same respect, the sector ought to timely evolve to meet the emerging shifts in the legal and regulatory frameworks of arbitration in order to continue to be an effective means for the protection of investors, and for the promotion of international cooperation within the energy industry.

[1] NextEra Energy Global Holdings B.V. &NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID Case No. ARB/14/11, Award (May 31, 2019), https://www.italaw.com/cases/2585.

[2] Brief for the United States as Amicus Curiae, NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID Case No. ARB/14/11 (Feb. 2, 2024), https://jusmundi.com/en/document/other/en-nextera-energy-global-holdings-b-v-and-nextera-energy-spain-holdings-b-v-v-kingdom-of-spain-brief-for-the-united-states-as-amicus-curiae-friday-2nd-february-2024.