The Supreme Court has once again endorsed the electricity reform promoted by the Popular Party during the 2011-2015 legislature. This reform included a radical cut in the subsidies for renewable energy installations in Spain, something that has generated multiple complaints and a legal battle that is still ongoing. In one of its most recent rulings, issued on September 5, the court rejected the appeal filed by 25 photovoltaic installations in Castilla-La Mancha against the 2014 regulations, which directly affected their profitability.
Renewable energy cuts and legal controversy
One of the key issues that has generated controversy is whether the regulatory change violated the principles of non-retroactivity and legal certainty established in the Spanish Constitution. The affected photovoltaic companies argued that they had not been able to foresee this legislative change, which had destroyed their long-term profitability forecasts. However, the Supreme Court rejected these allegations, stating that the regulatory change, although drastic, did not violate these principles.
The court based its decision on the need to adjust the laws to the "economic circumstances" of the country at that time, derived, in part, from the high tariff deficit accumulated in the electricity sector.
This deficit, which had reached unsustainable levels, was one of the main reasons that pushed Mariano Rajoy's government to implement these changes. In fact, the adjustments in the remuneration regime for renewable energies were not only for solar plants, but affected the entire sector, including cogeneration and other green energies.
ICSID and the Energy Charter
A few months before the Supreme Court's decision, the arbitration tribunal of the International Centre for Settlement of Investment Disputes (ICSID) issued an award in favour of foreign investors in a case related to the Spanish electricity reform. In this award, the ICSID ordered Spain to compensate the Eiser company with 128 million euros due to the violation of the Energy Charter.
This international treaty, signed in 1994, establishes that governments must guarantee fair and equitable treatment to foreign investors in the energy sector. The arbitration court found that Spain had violated this principle by radically changing the system of subsidies for renewable installations, which significantly affected the profitability calculations originally planned by investors.
However, despite this international ruling, Spanish courts have continued to support national legislative changes. According to the Supreme Court, in its ruling of 5 September, the ICSID award is not applicable in judicial proceedings that are resolved under Spanish and EU law, since these appeals are governed by national laws.
Tariff deficit as a key argument
The tariff deficit of the Spanish electricity system has been one of the central points in the Government's argument to justify the cuts to renewable energy. For years, the costs of electricity generation and distribution in Spain were higher than the income obtained by electricity companies through tariffs. This generated an accumulated deficit that, at the time of the reform, stood at around 26.000 billion euros.
In 2013, the Rajoy government considered it essential to reform the system to prevent this deficit from continuing to grow. The solution proposed through Royal Decree-Law 9/2013 was a radical change in the remuneration system for renewables. Instead of the fixed premiums that had been granted since 2006, the new system guaranteed a reasonable return calculated on the basis of 10-year bonds plus a spread, which drastically reduced the economic expectations of renewable energy producers.
Reactions from producers and the legal battle
The producers' response was not long in coming. From the outset, the Executive was accused of having created legal uncertainty and of violating the principles of legitimate trust and non-retroactivity. These arguments were presented both in national and international courts.
At the local level, the affected installations appealed to the Supreme Court and other administrative courts, arguing that many of them had financed their projects with long-term loans, relying on the stability of the premiums provided for in 2007. Under the new system, many photovoltaic plants saw their profitability reduced to almost zero.
At the international level, foreign investors, under the Energy Charter, have turned to ICSID and other arbitration mechanisms. As we have already mentioned, there have been favourable awards such as that of Eiser, but there have also been cases in which international courts have dismissed claims, as occurred in 2016 with the award in favour of Spain in the case brought by Charanne BV.
Contradictory rulings: Double standards?
One of the most controversial issues is the apparent contradiction between the rulings issued by national and international courts. While the former, led by the Supreme Court, continue to affirm that the electricity reform is in accordance with Spanish law, international courts have been more critical.
In many of these cases, international courts have held that Spain, by introducing drastic and retroactive cuts to premiums, violated the fair and equitable treatment that must be guaranteed to investors. However, national courts argue that the State has the right to modify its policies if they are economically unsustainable.
Furthermore, from the point of view of the Spanish courts, there is no vested right to receive a certain return for the future. Therefore, changes in the premiums are not considered retroactive, but simply necessary adjustments to ensure the sustainability of the electricity system.
Environmental issues in the electricity reform
One of the great ironies of this situation is that the same electricity reform that was intended to guarantee the economic sustainability of the system has had a negative impact on the development of renewable energy, one of the key pillars in the fight against climate change.
Many renewable energy plants, especially in the photovoltaic sector, have stopped their activities or are in very difficult financial situations. The reduction in premiums has directly affected the viability of many projects, which has slowed the growth of clean energy in Spain.
However, the reform also coincided with a context of global economic crisis that was already forcing many companies in the sector to adjust their plans. Although some experts point out that the impact of the reform was decisive in halting new projects, others argue that the slowdown was inevitable, given the global context of economic recession and the fall in the price of fossil fuels.
Dissenting opinions: The legal debate within the Supreme Court
Within the Supreme Court itself, not all judges shared the decision to reject the appeals filed by solar energy producers. In the ruling of September 5, Judge Eduardo Espín Templado presented a dissenting opinion, arguing that there had indeed been a retroactive action contrary to law, and that the cuts should have been applied only to new plants.
In addition, Judge María Isabel Perelló Doménech also presented a dissenting opinion, describing the situation of photovoltaic producers as an “example of legal uncertainty” that had led many companies in the sector to a critical situation.
These dissenting votes indicate that, even within the Spanish judicial system itself, there is no full consensus on the legality of the reforms promoted by the Popular Party government. The fact that these opinions are presented from within the Supreme Court adds an important nuance to the complex situation facing the renewable energy sector in Spain.
Future of renewable energy in Spain
Despite all the problems arising from premium cuts and legal battles, the renewable energy sector in Spain still has enormous potential. According to the strategic plans of the Government and the European Union, renewable energies will be essential to meet the objectives of decarbonising the economy in the coming decades.
The country has exceptional geographical conditions for the production of solar and wind energy, and it is foreseeable that the development of these technologies will continue to be promoted in the near future. However, experts point out that it will be crucial to establish a stable and reliable legal framework that guarantees legal certainty and investor confidence, something that has been strongly questioned since the 2013 reform.
With the change in energy policies and the leading role of renewable energy in the fight against climate change, it is foreseeable that future governments will have to review the system of incentives to attract new projects.
Finally, it should be stressed that the development of renewable energies is a priority not only from an economic point of view, but also from an environmental point of view. As the effects of climate change accelerate, the need to invest in clean, safe and sustainable technologies becomes ever more pressing.