The reasonable rate of return applicable from 2020 to renewable energy facilities is approved

On 22 November 2019, the Spanish Council of Ministers approved the Royal Decree-Law 17/2019, which establishes, for the second regulatory period (2020-2025), the reasonable rate of return applicable to facilities producing electricity from renewable sources, cogeneration and waste at 7.09%, reducing it from the 7.398% applicable during the first regulatory period (2014-2019). The Royal Decree-Law 17/2019 also creates an exceptional remuneration regime, applicable to those plants affected by the remuneration cuts approved between 2011 and 2013, allowing them to continue to benefit from the rate of return of the first regulatory period for 12 years, until 2031, provided that they abandon the legal or arbitration proceedings brought against Spain.

Until 2011, Spain had established a generous system of incentives for investments in the renewable energy sector, which guaranteed its investors a high return through the payment of a subsidized remuneration, applicable throughout the useful life of the installation. The increase in the Spanish public deficit as a result of the financial crisis that began in 2008 led Spain to substantially reduce the incentives. In 2013 a new regulatory regime was approved, still in force today with modifications, guaranteeing those facilities a reasonable rate of return before taxes of 7.398%, a value set for a ‘standard’ plant based on the profitability of the Spanish 10-year bond and a risk premium of 300 basis points, which in theory had to be recalculated for each new regulatory period of 6 years.

As a result of these remuneration cuts, a significant number of investors initiated actions for liability of the Administration, which were rejected by the Spanish Supreme Court, as were the appeals of unconstitutionality against the reforms of the remuneration system. The arbitrations promoted by some 45 foreign investors against Spain based mainly on the Energy Charter Treaty have had different results: most of the arbitration awards have been were decided in favour of the investors. However, those who have obtained a favourable award are encountering serious difficulties in obtaining its enforcement, since, under the terms of the European Court of Justice ruling of 6 March 2018 (Case C-284/16, Achmea), Spain interprets arbitrations based on the Energy Charter Treaty as invalid and, therefore, cannot be enforced in the European Union. Investors with awards are only left with the possibility of finding assets owned by Spain located in a non-EU country and requesting their execution there.

In view of this situation, the Royal Decree-Law 17/2019 slightly reduces the reasonable rate of return for renewable installations during the second regulatory period (2020-2025) to 7.09%. Following the proposal of the National Commission for Markets and Competition, the calculation method based on the Spanish 10-year bond, which would have resulted in a return of around 4.7%, is abandoned. At the same time, those facilities which, at the time the Royal Decree-Law 9/2013 came into force, had a recognised generation premium (i.e. those that were disadvantaged by the remuneration cut) are allowed to continue to benefit from the same reasonable rate of return of 7.398% for the first regulatory period (2014-2019) until 2031, i.e. with a slight improvement on the 7.09% applicable to the second period and without the uncertainty of what the return will be for the third period (2026-2031). If it so wishes, the facility affected by this exceptional remuneration regime may waive it by notifying the Administration up to 31 March 2020.

This exceptional remuneration regime is not applicable when arbitration or legal proceedings have been (or will be) initiated against Spain (whether by the facility, its investors or the assignees of the legal actions) based on the remuneration cuts that have taken place since 2011, unless, before 30 September 2020, evidence is provided to the Administration of the early termination of the proceedings, the waiver of their resumption or continuation, or the waiver of the compensation already awarded, as the case may be. In other words, the exceptional regime constitutes an offer of settlement to those who are or have been party to arbitrations against Spain with cause in the remuneration cuts, aimed at putting an end to them. Those facilities that have not initiated any proceedings or these have been dismissed do not need to expressly opt for the exceptional regime.

In fact, the exceptional remuneration regime is not an incentive for investors who have initiated arbitration to abandon their claims: it simply maintains the same reasonable rate of return that was applied between 2014 and 2019 to those who choose not to go to international arbitration. On the contrary, the Royal Decree-Law 17/2019 entails a remuneration cut in addition to those already produced until 2013, a cut that only applies to those facilities that decide to continue their claims already filed or initiate them in the future, and therefore acts as a penalty for them. And given that the arbitrations that determine whether or not the exceptional regime will be applied are not only those initiated by the facility, but also by its investors, conflicts may arise between the foreign shareholders, perhaps interested in continuing with the claim, and the Spanish investors, who cannot resort to the means provided by the Energy Charter Treaty and would prefer the former to abandon the arbitration. However, the Royal Decree-Law 17/2019 has been well received in the sector, especially as it has abandoned the method of calculating the reasonable rate of return based on the Spanish 10-year bond.

Authors: Carlos Fernández, Fernando Lozano and Axel Roth