Enabling Foreign Direct Investment in the Renewable Energy Sector Reducing Regulatory Risks and Preventing Investor-State Conflicts © 2023 The World Bank Group and the Energy Charter Secretariat 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Some rights reserved. This report is a product of the World Bank Group and the Energy Charter Secretariat. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. 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ISBN 978-905948-246-3 (pdf) 2 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Contents Acknowledgements4 Abbreviations and Acronyms 5 Executive Summary 6 Chapter 1: Introduction 9 Chapter 2: Investment in Renewable Energy 13 Total investment in renewables 15 Foreign direct investment in renewables 17 Political risk in renewable energy projects 18 Reducing regulatory risks 21 Chapter 3: Investor-State Disputes in Renewable Energy 23 Claimants24 Subsectors25 Main causes of disputes 26 Instruments invoked 29 Outcome of proceedings 29 Chapter 4: Existing Measures for Managing Conflicts between Investors and the Host Country 34 Mechanisms in international investment agreements 34 State-to-state cooperation through bilateral institutional mechanisms 38 Mechanisms to prevent or manage grievances at the national level 40 Mechanisms established through contractual arrangements 44 Chapter 5: Mechanisms to Reduce Regulatory Risks, Prevent Conflicts and Disputes in the Renewable Energy Sector 55 Appendixes61 Appendix A: Additional figures, Chapter 1 61 Appendix B: Foreign direct investment in renewable energy 64 Appendix C: Damages claimed and damages awarded 65 Appendix D: Additional examples of contractual arrangements to resolve investor grievances 66 Appendix E: Analysis of the probability of having disputes in renewables sector according to country-level characteristics 70 References72 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 3 Acknowledgements This report was prepared by the World Bank Group Charter Industry Advisory Panel, Corporate Chief and the Energy Charter Secretariat. Economist and Strategy Director, Dow), Iaroslav Gregirchak (Deputy Business Ombudsman The World Bank team led by Priyanka Kher 2015-2022, Ukraine) and the Energy Commission of (Private Sector Specialist, World Bank Group) Nigeria for their excellent inputs and suggestions. comprised Mariana De La Paz Pereira Lopez The team expresses its appreciation to renewable (Senior Economist, World Bank Group) and energy companies-members of the Energy Siddharth Ramalingam (Consultant, World Bank Charter Industry Advisory Panel, as well as Group). nonmember companies, that took part in the industry survey of this report. The team would The Energy Charter Secretariat’s core team also like to thank other colleagues who provided comprised Yuriy Pochtovyk (Legal Official, Energy various inputs during the preparation of the Charter Secretariat) and Ishita Pant (Investment report—Arti Grover (Senior Economist, World Bank Official, Energy Charter Secretariat). Group), Eloise Obadia (Consultant, World Bank Group), Lien Anh Pham (Senior Operations Officer, The report was prepared under the guidance of International Finance Corporation), Daniela Gomez Mona Haddad (Global Director, World Bank Group), Altamirano (Private Sector Specialist, World Bank Asya Akhlaque (Practice Manager, World Bank Group), Ana Goicoechea (Senior Economist, World Group), Ivan Nimac (Lead Private Sector Specialist, Bank Group). World Bank Group) and Alejandro Carballo Leyda (General Counsel, Energy Charter Secretariat). The report was edited by Kathryn McCarthy and Marcy Gessel. Tim Lyon designed the cover The team is very grateful to the peer reviewers and interior pages. Aarushi Sinha (Private Sector Ashish Khanna (Practice Manager, World Bank Specialist, World Bank Group) provided editorial Group), Arsh Sharma (Senior Energy Specialist, assistance and managed the publishing process. World Bank Group), Marcus Williams (Global Head The team also thanks Anju Lamichhane and Ngan and Sector Manager, Multilateral Investment Nguyen for their assistance in preparing this report Guarantee Agency), Volkan Celen (Senior Counsel, and supporting the project. Multilateral Investment Guarantee Agency), Pedzi Mukumbe (Senior Energy Specialist, World The report was prepared with support from the UK Bank Group), Rafael Cayuela (Chair of the Energy Government and the European Commission. 4 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Abbreviations and Acronyms AC Alternating current IWG Inter-departmental Working Group (Ukraine) ASEAN Association of Southeast Asian Nations JIC Joint Coordinating Committee (Bangladesh) BIT Bilateral investment treaty kWh Kilowatt-hours BOC Business Ombudsman Council (Ukraine) LCOE Levelized costs of electricity BOO Build, own, operate MCIT Ministry of Commerce, Industry, and Tourism (Colombia) BOOT Build, own, operate, transfer MIGA Multilateral Investment Guarantee Agency BOT Build, operate, transfer MtCO2 Metric tons of carbon dioxide BPDB Bangladesh Power Development Board MW Megawatt CAPEX Capital expenditure NAFTA North American Free Trade Agreement CEO Chief Executive Officer OECD Organisation for Economic Co-operation and CEPA Closer Economic Partnership Arrangement Development (China–Hong Kong) O&M Operation and maintenance CETA Comprehensive Economic and Trade Agreement (Canada–EU) PCA Permanent Court of Arbitration CFIA Cooperation and Facilitation Investment PCE Private capital-enabling (and private capital Agreement enabled) CLFME Change in Law Force Majeure Event (Pakistan) PGCB Power Grid Company of Bangladesh CPER Commissioner for the Protection of PIC Private Investment Committee (Rwanda) Entrepreneurs’ Rights (Uzbekistan) PPA Power purchase agreement CPTPP Comprehensive and Progressive Agreement for Transpacific Partnership PPFME Pakistan Political Force Majeure Event DEA Department of Economic Affairs (India) PPP Public-private partnership ECT Energy Charter Treaty PV Photovoltaic EIC Ethiopian Investment Commission RCEP Regional Comprehensive Economic Partnership EMDE Emerging Market and Developing Economies RCREEE Regional Center for Renewable Energy and Energy Efficiency EPA Economic partnership agreement RDB Rwanda Development Board EPC Engineering, procurement, and construction RESCO Renewable Energy Service Company EU European Union RISE Regulatory Indicators for Sustainable Energy FDI Foreign direct investment R&D Research and development FIA Foreign Investment Agency (Vietnam) SAR Special Administrative Region (China) FIDIC International Federation of Consulting Engineers SCC Stockholm Chamber of Commerce FIO Foreign Investment Ombudsman (Republic of Korea) SDG Sustainable Development Goal FIT Feed-in tariff (and feed-in tariffs) SICRECI State Coordination and Response System for International Investment Disputes (Peru) FTA Free trade agreement SIFAI System Enabler to Attract Investment (Colombia) GAFI General Authority for Investment and Free Zones (Egypt) SME Small and medium enterprise GW Gigawatts SOE State-owned enterprise IA–CEPA Indonesia–Australia Comprehensive Economic SPV Special purpose vehicle Partnership Agreement STEPS Stated Policies Scenario IAP Industry Advisory Panel TWh Terawatt-hours ICSID International Centre for Settlement of Investment Disputes (of the World Bank Group) USMCA United States-Mexico-Canada Agreement IEA International Energy Agency UNCITRAL United Nations Commission on International Trade Law IGM Investor Grievance Management UNCTAD United Nations Conference on Trade and IIA International investment agreement Development IPA Investment promotion agency UNEP United Nations Environment Programme IPP Independent power plant WGI Worldwide Governance Indicators IRENA International Renewable Energy Agency Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 5 Executive Summary Increasing private investment is critical to meeting Electricity demand has been growing steadily, the growing energy needs in developing countries with an annual 3 percent increase during the past and, more broadly, achieving the Sustainable 20 years. By 2050, according to estimates from the Development Goals (SDGs). Foreign direct IEA, demand is expected to double against the investment (FDI) can contribute significantly—by level exhibited in 2020. 3 Currently, renewables can bridging the financing gap but also by facilitating only cover 33 percent of this value. To achieve net knowledge and technology transfer. A key factor zero greenhouse gas emissions4 and comply with impeding the ability of countries to attract and the commitments under the Paris Agreement, retain FDI is political risk, measured as a disruption an increasing share of renewables in electricity in business operations caused by sudden political generation is required. Moreover, the increasing changes or actions (World Bank 2019). One kind of competitiveness of renewables, with the costs risk (more specifically, a subset of political risks)— of electricity sharply decreasing over the past 10 regulatory risks caused by regulatory actions—can years, generates further incentives to pursue this also lead to costly legal disputes between investors type of investment for electricity generation. and states. This report explores these risks in the renewable energy (power generation) sector, the Recent events such as the war in Ukraine have prevalence of investor-state disputes associated caused disruptions in the demand and supply with such risks, the fiscal and reputational patterns of energy in the European and global implications of disputes, and policy options for energy markets, particularly in the case of fossil governments to prevent them. Indeed, reducing fuels, and, consequently, have affected energy risk for the private sector to enable greater prices for final consumers and businesses. The investment ultimately also contributes to private effects of these short-term shocks reinforce the capital-enabling (PCE)1 targets. need for ramping up investments in renewables and energy efficiency, in line with the net zero According to estimates from the International goals. Under the net zero scenario, the total share Energy Agency (IEA), by the end of 2022, of renewables in total electricity generation is 774 million people around the world, mainly expected to increase globally, from 28 percent in concentrated in Africa and Asia, still live without 2021 to an estimated value of 61 percent in 2030 access to electricity (IEA 2022d). 2 Moreover, the and 88 percent in 2050 (IEA 2022d). 5 Developing energy crisis we are currently facing has led, for the countries must see significant investments in first time in decades, to an increase in the number renewables to achieve these figures. Estimates of people without access (20 million increase indicate that building the required capacity to against 2021). Over the next 10 years, the world’s reach the net zero goals in 2050 would require population will grow from today’s 7.9 billion to an increase in average annual investments in around 8.5 billion (United Nations, 2022). Estimates renewables for electricity generation from around indicate that under the current and announced US$390 billion a year (between 2016 and 2022) policy scenario, by 2030, about 663 million people to US$1,300 billion a year by 2030 (IEA 2022d). will still be without access (IEA 2022d). Ensuring Both public and private capital, domestic and everyone is connected to the grid will remain international, is expected to provide the funding central to discussions on climate change and required for these projects, with a significant achieving the SDGs. amount coming by way of FDI. 1 PCE is the amount of private capital enabled by Maximizing Finance for Development-enabling projects and aimed at demonstrating upstream efforts that would lead to the mobilization of private capital. 2 See IEA, “SDG7: Data and Projections” at https://www.iea.org/reports/sdg7-data-and-projections. 3 See figure A.1. 4 Net zero greenhouse gas emissions means balancing the emissions produced and the emissions reabsorbed and removed from the atmosphere. This requires not only that emissions be cut as close to zero as possible, but also, given that in some sectors it is too complex or expensive to cut emissions, residual emissions be removed. Under the Paris Agreement, the states undertook to reach net zero emissions by 2050. 5 See also IEA, “Renewables” at https://www.iea.org/fuels-and-technologies/renewables. 6 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Over US$2.9 trillion was invested in renewable risks7 (including the subset of regulatory risk) energy by investors of all types during 2013–21. may be more salient for certain types of FDI Geographically, Asia and Oceania’s share in than others. Political risk is the probability that investments has risen over the past decade – 5 business operations are disrupted by political of the top 10 countries receiving the largest forces or events, especially by government actions, investments in 2019 lie in the region. Around often leading to the cancellation of projects, 86 percent of total renewables investment in withdrawal of investment, or disputes with host electricity generation is undertaken by the countries. For instance, political risks tend to private sector, and this value has been relatively arise in economic sectors that have high levels steady during the past six years. The role of the of state intervention. Further, in many countries, public sector is very limited (IRENA and CPI some sectors are considered of “public interest” 2020), with investments being needed largely and are subject to close state supervision (for to trigger private sector investment by reducing example, utilities, water and electricity distribution, initial risks. Renewable investment projects are telecommunications, finance, and transportation). generally characterized by relatively high upfront Specifically, companies in the utilities sectors, investment costs and lower operating costs over including renewable energy, experience more time. That is, even though their overall costs have frequent adverse regulatory changes and significantly decreased over time, these large initial expropriation, perhaps because utility assets tend investments explain the much higher participation to be geographically specific investments with of the private sector and FDI in the case of large few alternative uses, a situation that reduces their renewable projects. FDI has played an integral part private bargaining power against the state once in funding renewable energy projects globally—in investments are completed. 2019, more than 50 percent of all investment projects globally were in renewable energy, Sustaining the high levels of FDI in renewable and foreign companies sponsored almost 40 energy needed to achieve development and percent of all renewable energy power generation climate goals will require sound strategies projects during that year (UNCTAD 2020). This to minimize or eliminate risks. The first set of figure is even larger for developing countries and strategies involves creating incentive structures transition economies, where the share of FDI in like auctions, feed-in tariffs (FIT), carbon pricing renewable investment exceeds 70 percent; in instruments, and tax instruments. The second set some developing countries, it is even higher.6 involves risk mitigation, especially of political risk, Although the COVID-19 pandemic has negatively through the choice of legal entities (for example, affected investment projects across sectors using joint ventures) and localization (that is, hiring globally, renewable energy projects have remained local workers and reinvesting profits), among somewhat resilient. others. Political risk insurance is also an important proactive measure that can be adopted. However, Attracting FDI in renewable energy is challenging disputes still arise between investors and host because of substantial investments at the initial countries, and both parties may take recourse stages of projects and low working capital, both under investment treaties and contracts. of which lead to increased project risks. Because of these characteristics, long-term contracts In studying different types of disputes and have played a key role in facilitating investment conflicts in renewable energy (power generation) in renewables, especially in the case of solar projects, this report identifies 1198 investor-state photovoltaic and wind (IEA 2021b). Many of these arbitration disputes. Most of the proceedings contracts are linked to incentive schemes that were instituted against states in Western Europe, were put in place when the costs of renewable Eastern Europe, and Central Asia. Although such energy were high. Therefore, in the context disputes currently involve a number of developed of the decreasing costs of renewables, some countries, developing economies are increasingly governments became locked into contracts becoming exposed to the risks of disputes, given with high rates and had incentives to raise prices the rising volume of FDI in renewable energy. Solar to consumers. Evidence suggests that political power generation stands out as the subsector with 6 World Bank and Energy Charter Secretariat calculations using data from UNCTAD (2021b) and IEA (2021c). 7 The Multilateral Investment Guarantee Agency covers risks arising from expropriation, breach of contract, currency inconvertibility and transfer restrictions, adverse regulatory changes, terrorism, war, civil disturbance, and failure to honor sovereign financial obligations (World Bank 2009). 8 Instituted until February 1, 2022. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 7 the most proceedings (due to the technology’s and mediation. Yet, given the specialized nature market dominance and the spread of measures of renewable energy transactions, more targeted particularly aimed at such technology), followed by efforts can be made towards the prevention hydropower and wind energy. The analysis shows of disputes in the sector. This includes taking that the most common political risk raised in the systemic measures to improve regulatory proceedings is adverse regulatory changes—26 measures as well as institutional initiatives to types of adverse measures were identified. Almost handle investor grievances—at a sector level but all proceedings were instituted on the basis of a also in individual contracts. bilateral or multilateral investment treaty. Almost half of the identified proceedings are still pending. Countries can draw from well-established The most common substantive treaty protection good practice principles on regulatory reform invoked is fair and equitable treatment, followed to minimize potential conflicts with foreign by protection against unreasonable/arbitrary or investors—such as a transparent and consultative discriminatory measures. rule-making process, regulatory monitoring, and impact assessments. Where mechanisms Although there are no specific mechanisms to such as FIT and auctions are being used, their prevent investor-state disputes (or to defuse design needs to be tailored to country-specific conflicts) for renewable energy investors, there conditions.9 To prevent the escalation of investor are legal instruments—at the international grievances into full-scale legal disputes, experience (international investment agreements (IIAs)), points to the importance of having a lead agency national (domestic laws and institutions), and with political support, legal mandate and technical contractual levels—to avoid and manage conflicts expertise to implement grievance mechanisms. between foreign investors and the host country. Such a mechanism should have clearly articulated For example, IIAs include a “cooling-off” period, systematic operating procedures and regular state-to-state cooperation arrangements, and a monitoring and evaluation of its performance. requirement that countries establish grievance Governments may choose to make this management mechanisms in their national mechanism available across the sector or as part of frameworks. In contracts, parties often provide standard contracts between investors and public for mutual consultations, expert determination, agencies. 9 For example, design of FIT needs to take into account the market prices, the trends in renewables costs, and the maturity of the market. 8 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Chapter 1: Introduction This report explores political risks—more access (IEA 2022d). Ensuring everyone has access specifically, regulatory risks (a subset of political to electricity will remain central to discussions on risk) caused by regulatory actions in the renewable climate change and achieving the SDGs. energy (power generation) sector, the prevalence of investor-state disputes caused by such risks, Electricity demand has been growing steadily, and policy options for governments to prevent with an annual 3 percent increase during the disputes. From power generation to transmission past 20 years. By 2050, according to estimates and distribution, energy forms the bedrock of from the IEA, it is expected to double against society and economies. According to the IEA, in the level exhibited in 2020 (figure A.1). As shown 2022, 774 million people around the world, mainly in figure 1.1, renewables can currently cover only concentrated in Africa and Asia, still lived without about 33 percent of this value. To achieve net zero access to electricity (IEA 2022d). Furthermore, greenhouse gas emissions10 and comply with the during the next 10 years, the world’s population commitments of the Paris Agreement, countries will grow from today’s 7.9 billion to around 8.5 will need to increase the share of renewables in billion (United Nations, 2022). Estimates from the electricity generation. These commitments mean IEA also indicate that under the Stated Policies that renewables should be able to satisfy the Scenario (STEPS), which considers current or growing demand and, at the same time, substitute announced policy, by the decade ending in 2030, for other energy sources. yet about 663 million people will still be without Figure 1.1: Electricity demand and production of renewables, 2000–21 25,000 20,000 Demand and supply of energy (TWh) 15,000 10,000 5,000 0 2000 2003 2006 2009 2012 2015 2018 2021 Renewables production Demand Source: World Bank—Energy Charter Secretariat calculations using consumption data from the IEA and production of energy from IRENA. Renewables include onshore and offshore wind, renewable hydropower, solar photovoltaic, solar thermal energy, and other renewables. Note: TWh = terawatt-hours. 10 Net zero greenhouse gas emissions means balancing the emissions produced and the emissions reabsorbed and removed from the atmosphere. This requires not only that emissions be cut as close to zero as possible, but also, given that in some sectors it is too complex or expensive to cut emissions, residual emissions be removed. Under the Paris Agreement, the states undertook to reach net zero emissions by 2050. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 9 Country-level analysis shows heterogeneity energy efficiency, in line with the net zero goals. in both the magnitude and drivers of the gap In this context, the IEA expects an incremental between electricity demand and the electricity growth of renewables capacity in the European supply from renewables. High-income countries Union (EU) with the aim of reducing its power like Canada and Germany have significantly sector dependence on the Russian Federation’s reduced this gap by limiting consumption growth natural gas (IEA 2022). and, at the same time, increasing the supply of renewables (See figure A.2). In contrast, in the case As shown in figure 1.2, which analyzes the levelized of middle-income countries like China (upper- costs of electricity (LCOE), making it possible middle-income) and India (lower-middle-income), to compare costs across different technologies, though renewables capacity has increased sharply, the cost of electricity generated by renewable especially during the past decade, it has not technologies has reduced sharply over the past 11 been able to keep up with the demand growth, years. This decline is observed primarily in the case and thus, the gap has been widening. On the of solar technologies, as solar photovoltaic (PV) other hand, in some other upper-middle-income costs declined by 87 percent during this period countries like Mexico, the gap has widened while concentrating solar power decreased by 66 because the supply of renewables has grown at a percent. Onshore and offshore wind technologies very slow rate. exhibited decreases of more than 50 percent. As a result, newly installed renewable electricity Recent events such as the war in Ukraine have capacity is currently cheaper than the lowest-cost caused disruptions in the demand and supply alternatives based on fossil fuels (IRENA 2021a). patterns of energy particularly in the case of fossil According to IEA (2022a), even though the costs fuels, and, consequently, affected energy prices of solar PV and wind-based capacity have recently for final consumers and businesses. The effects increased as a result of different shocks and are of these short-term shocks reinforce the need expected to remain high in 2022 because of for ramping up investments in renewables and high prices of commodities, raw materials, and Figure 1.2: Levelized costs of electricity (LCOE) by source 0.40 0.35 0.30 Mean LCOE (US$/KWh) 0.25 0.20 0.15 0.10 0.05 0.00 2000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Solar photovoltaic (a) Onshore wind Offshore wind Concentrating solar power (b) Gas peaker (c) Nuclear Coal Fossil fuels cost range Source: World Bank-Energy Charter Secretariat calculations using data from IRENA and Lazard (2021) for fossil fuels. Note: KWh = kilowatt-hours. (a) Solar photovoltaic (PV) refers to the use of solar cells to convert sunlight directly into electricity. (b) Concentrating solar power (CSP) technologies use mirrors to reflect and concentrate sunlight onto a receiver. This concentrated light is converted into heat which drives a heat engine connected to an electrical power generator. (c) Gas peaker refers to power producers that rarely run but operate during periods of high electricity demand or shortfalls in electricity supply balancing, therefore, the fluctuations in power requirements of the electricity network. 10 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts freight costs, the competitiveness of renewables However, like investments in tertiary services, is improving as natural gas and coal prices sharply FDI in renewable energy is very susceptible to a increase. subcategory of risks—political risks.12 Political risk is the probability that business operations are According to the International Renewable disrupted by political forces or events, especially Energy Agency (IRENA) (2022), the renewables by government actions, often leading to the sector created 5.4 million jobs between 2012 cancellation of projects, withdrawal of investment, and 2021, reaching a total of 12.7 million jobs in or disputes with host countries.13 this sector in 2021, including direct and indirect employment. Currently, employment in the solar Chapter 2 of this report explores the rise in PV sector accounts for 4.3 million jobs, including the relevance of renewable energy in recent employment from large power installations decades. Renewable energy has been growing in feeding into the grid and off-the-grid applications significance over the past decade, both in terms of enabling remote communities to access electricity. new projects and money invested and its share in Wind sources employ about 1.4 million people, new generation capacity. More than US$2.9 trillion with increased employment in the offshore wind was invested in renewable energy by investors subsector as a factor. of all types during 2013–21. Geographically, Asia and Oceania’s share in investments has risen During the past two decades, we have observed an over the past decade—five of the top 10 countries increasing role of developing countries in electricity receiving the largest investments in 2019 lie in the generation, mainly led by China, especially in the region. FDI has played an integral part in funding case of nonrenewable energy. However, given the renewable energy projects globally. In 2019, more growing competitiveness of renewables and the than 50 percent of all investment projects globally environmental targets, we have also observed were in renewable energy, and foreign companies significant renewable sector growth in other sponsored almost 40 percent of all renewable developing countries during the past 10 years (See energy power generation projects during that figure A.3). Under the net zero scenario, the total year (UNCTAD 2020). This figure is even larger for share of renewables in total electricity generation developing countries and transition economies, is expected to increase globally, from 28 percent where the share of FDI in renewable investment in 2021 to an estimated value of 61 percent in 2030 exceeds 70 percent. In some developing countries, and 88 percent in 2050 (IEA 2022d).11 Developing it is even higher.14 Although the COVID-19 countries must see significant investments in pandemic has negatively influenced investment renewables to achieve these figures. projects across sectors globally, renewable energy projects have remained somewhat resilient. According to the IEA (2022d), achieving net- The United Nations Conference on Trade and zero-in-2050 would require a total of 7,360 Development (UNCTAD 2021a) data show that gigawatts (GW) in new energy capacity to be investment activity fell sharply across all SDG built between 2020 and 2030, including all types sectors except renewable energy, where growth by of renewables. Building the capacity needed for way of new projects continued, albeit at less than achieving the net zero goals in 2050 would require one-fifth of the pre-COVID-19 rate. an increase in average annual investments in renewables for electricity generation from around Renewable energy, therefore, remains an US$390 billion a year (between 2016 and 2022) important sector in international project finance to US$1,300 billion a year by 2030 (IEA 2022d). despite pandemic-related setbacks. Attracting Both public and private capital, domestic and FDI in renewable energy is challenging because international, is expected to provide the funding of substantial investments at the initial stages required for these projects, with a significant of projects and low working capital, leading to amount coming from foreign direct investment increased project risks. Further, companies in the (FDI). Like all FDI, investments in renewable utilities sector experience higher political risks than energy are susceptible to a range of project risks. other sectors for a range of reasons. Sustaining 11 See https://www.iea.org/fuels-and-technologies/renewables. 12 MIGA covers risks arising from expropriation, breach of contract, currency inconvertibility and transfer restrictions, adverse regulatory changes, terrorism, war, civil disturbance, and nonhonoring of sovereign financial obligations (World Bank 2009). 13 Regulatory risks are a subset of political risks and cover risks caused by regulatory actions. 14 World Bank calculations using data from UNCTAD (2021b) and IEA (2021c). Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 11 the high levels of FDI in renewable energy needed • Mechanisms in International Investment to achieve development goals will require sound Agreements (IIAs): Chapter 4 examines strategies to minimize or eliminate risks. The 131 IIAs—including bilateral investment first set of strategies involves creating incentive agreements (BITs), economic partnership structures like FIT, carbon pricing instruments, agreements (EPAs), and free trade agreements auctions, and tax instruments. The second set (FTAs) with investment provisions—that were involves risk mitigation, especially for political risk, signed from 2015 to 2020.15 We have examined through the choice of legal entities and measures the agreements to identify the applicable like staying in arrears on contracts and localization, mechanisms, such as the “cooling-off” among other measures. Political risk insurance period, compulsory exhaustion of nonjudicial is also an important proactive measure that can administrative remedies in parallel to the be adopted. However, disputes still arise between cooling-off period and before recourse to investors and host countries, and both parties arbitration, and the use of neutral third-party may take recourse under investment treaties and mechanisms during (or before) the cooling-off contracts. period. In studying different types of disputes and • State-to-state cooperation through bilateral conflicts in renewable energy projects, Chapter institutional mechanisms: Recent IIAs have 3 identifies 119 investor-state arbitration disputes. enhanced the role of intergovernmental Most of the proceedings were instituted against dialogue and state-to-state cooperation in states located in Western Europe, Eastern Europe, investment dispute prevention by establishing and Central Asia. Although such disputes currently bilateral governmental arrangements such as involve several developed countries, developing joint committees for the administration of IIAs economies have become increasingly exposed and national focal points or ombudspersons. to the risks of disputes, given the rising volume of FDI in renewable energy. Most claimants are • Investor grievance management mechanisms small and medium enterprises (SMEs), followed at the national level: Governments have by holdings and individual investors. Solar power established mechanisms to address investor generation stands out as the subsector with the grievances at two stages before they become most proceedings (because of its technology’s disputes—(a) before a grievance arises between market dominance and the spread of measures the investor and the host country and (b) at the particularly aimed at such technology), followed by start of a grievance between the investor and hydropower and wind energy. The analysis shows the host country. that the most common political risk raised in the proceedings is adverse regulatory changes. The • Mechanisms established through contractual report identifies 26 types of adverse measures. arrangements: Besides negotiating the Almost all proceedings were instituted on the commercial and operational aspects of a project, basis of a bilateral or multilateral investment treaty. parties to a contract can identify and decide Almost half of the identified proceedings are still upon mechanisms that can help them avoid pending. and de-escalate differences in the underlying contract itself. The available options include Chapter 4 finds that although there are no specific ongoing monitoring and evaluation of the mechanisms to address investor-state disputes (or project’s performance, mutual consultations, defuse conflicts) for renewable energy investors, referral of the problem or disagreement to there are legal instruments—on the international the senior management of each party, expert (international investment agreements), national determination, and mediation. (domestic laws and institutions), and contractual levels—to avoid and manage conflicts between Chapter 5 provides an overview of possible options foreign investors and the host country. Those legal countries can explore to address investor conflicts instruments include the following: and ultimately prevent investor-state disputes in the renewable energy sector. 15 The only international agreement reviewed outside this time frame is the ECT because of its pivotal role in energy investment protection and dispute resolution. 12 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Chapter 2: Investment in Renewable Energy The sharp increases in electricity generation from additions of 633 GW of solar PV and 390 GW of renewable sources are, of course, accompanied by wind by 2030, which is equivalent to four times significant rises in global capacity.16 Between 2000 the record levels reached in 2020 (given a constant and 2021, the total capacity multiplied almost annual growth in this capacity). According to by four, from 837 gigawatts (GW) to 3,278 GW. IRENA (2022), building the capacity needed for This increase comes mainly from solar and wind achieving the net-zero-in-2050 goals would require technologies, which at the beginning of this period an increase in average annual investments in had negligible participation in total renewables renewables for electricity generation from US$390 capacity (2 percent), while in 2021, they have a billion a year (between 2016 and 2022) to US$1,300 share that slightly surpasses 50 percent (panel a of billion a year by 2030 (IEA 2022d), considering figure 2.1).17 that renewables’ costs are expected to keep declining over time.18 These sizeable investment The rise in renewable energy capacity and the figures represent enormous opportunities for concomitant increase in power generation are the upcoming decades. Battery storage systems reflected in their global capacity and generation are also expected to become critical, given the shares. The share of renewable power in global need for flexibility in the renewables market. power capacity increased from 20 percent in 2000 The capability of storing renewable energy to 40 percent in 2021 (IEA 2022d), and the share not only leads to higher use of power system of renewable power in global power generation assets but also reduces risks and increases increased from 18.6 percent to 28.4 percent, revenues. Furthermore, the costs of these storage between 2000 and 2021 (IEA 2022d). technologies are also declining, leading to significant investment opportunities in the future According to the International Energy Agency (IEA 2019). (IEA) (2022d), under the net-zero-in-2050 scenario, including all types of renewables, between 2020 Although private capital and, to a lesser and 2030, a total of 7,360 GW in new energy extent, public investment, both domestic and capacity will need to be built (panels a and b of international, will be required to address this Figure 2.1). Renewables are, therefore, expected need, a significant proportion is expected to be to increase their current participation in electrical channelled through FDI—in fact, about 40 percent capacity from 40 percent to 81 percent in 2050 of all renewable energy power generation projects (IEA 2022d). The two main renewable technologies in 2019 were sponsored by foreign companies, driving electricity generation growth, solar according to UNCTAD (2020). photovoltaic (PV) and wind, need to reach annual 16 Power capacity refers to the maximum level of electric power (electricity) that a power plant can supply, under certain conditions, at a specific point in time. Power generation measures electricity produced over time. For this report, renewables focus mainly on independent power producers (owners or operators of facilities to generate electricity but who are not utilities) and include solar energy (excluding residential rooftops), wind energy, biomass and waste, and other sources (including hydropower). 17 Capacity in solar technologies multiplied by almost 700 over this period, while wind technologies multiplied by almost 50 between 2000 and 2021. 18 In US$ of 2019. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 13 Figure 2.1 Global capacity in renewable power (a) Global capacity in renewable power, 2000–21 3,500 3,000 Electrical capacity of renewables (GW) 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Solar Wind Biomass & waste Other renewables (including hydropower) (b) Global capacity in renewable power, net zero scenario 30,000 26,568 25,000 Electrical capacity of renewables (GW) 20,732 20,000 15,000 10,293 10,000 5,000 0 2030 2040 2050 Year Solar Wind Biomass & waste Other renewables (including hydropower) Source: World Bank–Energy Charter Secretariat calculations using data from IEA (IEA Net Zero by 2050 for estimates). Note: GW = gigawatts. 14 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Total investment in risen over the past decade, mainly led by China. renewables Furthermore, in 2019, five of the top ten countries, in terms of investment in renewables, were from that region. Therefore, in 2019, the Americas, During 2013–21, about US$2.9 trillion was invested Europe, and Asia and Oceania accounted for in renewable energy projects across the globe, 26 percent, 19 percent, and 50 percent of all including private and public, as well as domestic investments in renewable energy, respectively. and international investors, with wind and solar projects receiving almost 90 percent of these When renewables investment is broken down investments (figure 2.2). An additional US$472 according to development, data show that billion is expected for 2022 (IEA 2022b).19 With advanced economies account for 46 percent of those investments, renewables, grids, and storage the total value between 2015 and 2022, 21 while now account for more than 80 percent of the China accounts for 34 percent and the rest of the power sector investment. Emerging Market and Developing Economies (EMDE) have a share of 20 percent (IEA 2022b). Globally, investments in renewable energy increased from US$44.8 billion in 2004 to US$301.7 About 86 percent of total renewables investment billion in 2019, peaking at US$331.4 billion in 2017, in electricity generation is undertaken by the excluding large hydropower projects, which private sector, and this value has been relatively represent between 5 percent and 6 percent of total steady during the past six years. Though the role renewable investments (BloombergNEF, UNEP, of the public sector is very limited (IRENA and and Frankfurt School, 2020). 20 The geographical CPI 2020), its investment is needed to trigger composition of investments has changed over private sector investment by reducing initial risks. the years, as can be seen in figure 2.3. In 2004, The public sector is key to covering early-stage the Americas, Europe, and Asia and Oceania development risks, addressing specific barriers accounted for 19 percent, 52 percent and 28 to attracting private capital, and leading new percent, respectively. Asia and Oceania’s share has Figure 2.2 Renewable energy capacity investment, 2013–21 Wind, 37.4% Biofuels, 1.2% Biomass & Geothermal, Solar, 50.8% Hydro, 5.8% waste, 4.4% 0.5% Marine, 0.1% Source: IRENA and IEA. Data for 2020 and 2021 are estimates. 19 In prices of 2021. 20 For the purposes of this chapter, investments in renewable energy include expenditure on technology advancement (venture capital, government R&D, corporate R&D), scale-up (private-equity expansion capital, public markets), and projects (asset finance). 21 Values for 2022 are estimates. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 15 markets to maturity. Public investment occurs Furthermore, rising borrowing costs present a mainly through development finance institutions challenge. Still, as IEA indicates, even in the context (67 percent of public investment). In the case of of some increasing costs of renewables (due to developing countries, there is a relatively higher higher costs of raw materials), increasing fossil fuel participation of public investment. According prices might represent an opportunity for oil- and to UNCTAD (2022), almost half of the projects in gas-dependent economies to accelerate the developing countries require some form of public energy transition. involvement. Renewable investment projects are generally According to IEA (2022b), in EMDEs, about half of characterized by relatively high upfront investment energy investments occur through state-owned costs and lower operating costs over time. That is, enterprises (SOEs). SOEs tend to be highly even though, as we have shown, their overall costs indebted. Despite the job-creation potential have significantly decreased over time, these initial of investing in renewables, and even though investments explain the much higher participation the COVID-19 shock has shown the resilience of the private sector and FDI in the case of large of the renewable sector with continuing and renewable projects. According to UNCTAD (2020), increasing investments and only some delays in almost 40 percent of all renewable energy power their execution, the current global outlook and generation projects carried out in 2019 were the further fiscal strain put by the crisis leave less sponsored by foreign companies. room for public investments in increasing capacity. Figure 2.3 Global trends in renewable energy investment (2004–19) 350 300 Total new investment (US$ billions) 250 200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year Americas Europe Middle East & Africa Asia & Oceania Source: BloombergNEF, United Nations Environment Program (UNEP), and Frankfurt School 2020. Note: New investment volume adjusts for reinvested equity. Total values include estimates for undisclosed deals. Excludes large hydropower projects. 16 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Foreign direct investment in In terms of destination countries for FDI in renewables renewable energy, Europe, and Central Asia attracted the most FDI projects from 2003 to 2021, with 2,473 projects. They were followed by East According to UNCTAD (2020), foreign companies Asia and the Pacific, and Latin America and the sponsored almost 40 percent of all renewable Caribbean (See table B.3). At a country level, while energy power generation projects in 2019. This the United States and the United Kingdom are the is all the more salient because, over the past 10 top hosts for FDI in renewable energy, developing years, investments in renewable energy have economies like Brazil, Chile, Mexico, and India grown manifold. In 2019, more than 50 percent of attracted a significant number of projects as well all investment projects globally were in renewable (see table B.4). energy projects. The COVID-19 pandemic has negatively affected Figure 2.4 captures the global trend in renewable investment projects across sectors globally. As energy FDI across subsectors. Total FDI increased per the World Investment Report (UNCTAD 2020), sharply from 2006 to 2009 on the back of large in April 2020, there was a drop in new project investments in wind energy. Since 2010, overall FDI announcements of more than 50 percent from has shown an upward trend, driven mainly by wind March 2020 and more than 40 percent from and solar energy investments. the monthly average in 2019, driven mostly by a drop in developing economies. Across sectors, Between 2003 and 2021, FDI in renewable energy there has been an increase in the number of was made in 5,634 projects across countries and reported project delays and cancellations, mainly regions. The top source region for FDI in renewable caused by travel limitations, disrupted supply energy was Europe and Central Asia, with 3,751 chains of construction materials, nonavailability projects, followed by East Asia and the Pacific, of laborers because of lockdown measures, with 815 (table B.1). Many projects within Europe delayed or cancelled tender processes, lower and Central Asia were sponsored by entities from demand projections because of COVID-19, other countries in the region, like Germany, Spain, and government budget reallocation to tackle France, and Italy. the COVID-19 pandemic (World Bank 2020a). Figure 2.4 Global trends in renewable energy FDI (2003–20) - US$, billions 120 100 Renewable energy FDI (US$ billions) 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Wind electric power Solar electric power Geothermal electric power Biomass power Marine electric power Hydroelectric power Other electric power generation (renewable energy) Source: fDi Markets, a Financial Times data set (https://www.fdimarkets.com/). Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 17 Despite the dampening effect of the pandemic, countries with financial resources to engage in renewable energy projects have remained FDI in renewable energy projects. However, a somewhat resilient. UNCTAD’s (2021a) data show wide range of risks demotivates foreign investors that investment activity fell sharply across all SDG despite supportive policies and mechanisms such sectors except in renewable energy, where growth as deregulation, FIT, and Clean Development in new projects continued, albeit at less than one- Mechanisms (Shimbar and Ebrahimi 2020). fifth of the pre-COVID-19 rate. Renewable energy remains the most important sector in international Research suggests that for energy at the project finance despite pandemic-related setbacks aggregate level, FDI is affected by political risks to projects in Africa and transition economies. that are caused by investment profile (contract These facts mean that even though the cost of viability/expropriation, profits repatriation, and green technology has been falling over the years, payment delays), law and order, religious tensions, renewable energy projects have been larger in size and corruption. These risks are moderated across than other projects. 22 countries by other factors such as gross domestic product, economic freedom, and energy demand within host countries (Jiang and Martek 2021). Political risk in renewable energy projects Attracting foreign investors towards long- term investments in renewable energy is Achieving effective energy transition, especially in challenging because, in contrast to investments developing countries with a paucity of investable in conventional electricity generation, renewable financial resources, is key to achieving SDG aims energy projects entail large investments at the and combatting climate change. In this regard, the initial stages of projects and low working capital. 23 Kyoto Protocol and the Paris Agreement encourage This fact translates into increased project risks for Table 2.1 Overview and description of renewable energy risk categories Risk category Description Country risk Political stability, level of corruption, economic development, legal system, and exchange rate fluctuations. Social acceptance risk Negative impacts on installations from “Not-In-My-Backyard” (NIMBY) effects: local communities may benefit from a project and even be in favor of the benefits of renewable energy but are opposed to energy installations being located close to their residence. Administrative risk Absence of clear and structured procedures and mechanisms and corruption that can increase lead times in obtaining permits. Financing risk Risk of capital scarcity when local financial markets are underdeveloped or unhealthy, or there is global financial distress. Technical and management risk Insufficient local expertise, inability to operate the projects, inadequate maintenance of the plants, lack of suitable industrial presence, and limitation of infrastructure. Grid access risk Inadequate grid infrastructure for renewable energy, suboptimal grid operation, lack of experience of the operator, and the legal relationship between a grid operator and plant operator. Policy design risk Support mechanisms are needed for renewable sources to be competitive, as there is often a cost gap between renewable and conventional energy technologies. Uncertainties arise when policy design does not account for all revenue risks, such as wind yield, demand, and price fluctuations. Market design and regulatory risk Uncertainty regarding governmental energy strategy and power market deregulation and liberalization. Sudden policy change risk Unexpected, sudden, or even retrospective changes to policies or policy design features. Source: Noothout et al. 2016. 22 This statement does not apply to large hydroelectric projects, for which the unit cost varies significantly and is not proportional to size. Even though, in general, only small hydroelectric projects are considered renewable energy, we include them in the analysis because the FDI data do not allow us to separate them correctly. Still, as most of the growth in renewables has come from wind and solar, its inclusion in the statistical analysis should not affect the conclusions. 23 In recent years, costs in renewable power generation, especially wind and solar, have been falling because of technological developments. 18 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts investors. According to Noothout et al. (2016), nine international revenue, and the number of countries risk categories can be associated with renewable the firm is operational in—the number of countries energy, as follows: country risk, social acceptance the firm operates being the most important risk, administrative risk, financing risk, technical determinant. The Multilateral Investment and management risk, grid access risk, policy Guarantee Agency (MIGA) surveys (2009–13) show design risk, market design and regulatory risk, and that investors engaged in FDI attribute greater sudden policy change risk. This list covers risks that weight to government conduct as a source of may be generated at a broader macroeconomic, political risk than to other types of risk, such as war, sectoral, or specific project level. Table 2.1 terrorism, or civil unrest. summarizes the key characteristics of these risks. According to the 2019/2020 Global Investment Of those nine risks, a subset falling within the Competitiveness Report (World Bank 2020b), category of political risks (including sudden policy nearly 9 in 10 respondents considered political change, policy design risk, and market design and stability, macroeconomic stability, and a regulatory risk) are of great significance. Diesendorf country’s legal and regulatory environment to be and Elliston (2018) argue that the principal “important” or “critically important” for investment barriers to renewable electrification are neither decisions, ranking them ahead of concerns such technological nor economic; they are primarily as low tax rates, low labor and input costs, and political, institutional, and cultural, suggesting access to resource endowments. Further, as can the existence of a whole range of project risks be seen in figure 2.5, data from the same survey that can be clubbed together as political risks. highlight investor sensitivity toward political Smith (1997) defines traditional political risks risks. A significant number of survey respondents across all investments and project types, both at would consider cancelling a planned investment the economy and the industry level. He identifies in a country in response to irregular government the risks as related to expropriation, currency conduct. convertibility and transferability, political violence, and regulatory risks, including rules contained The 2017/2018 Global Investment Competitiveness in contracts with governments, in laws, and in Report (World Bank 2018) found that while the other regulatory instruments. Another definition frequency of expropriation and breach of contract of political risk includes expropriation, breach of has declined over the past decade, risks associated contract, currency inconvertibility and transfer with transfer and convertibility restrictions have restrictions, adverse regulatory changes, terrorism, remained middling. Lack of transparency and war, civil disturbance, and refusal to honor predictability in dealing with public agencies, sovereign financial obligations (World Bank 2009). delays in obtaining the necessary government permits to start or operate a business, and sudden, Political risk imposes additional transaction adverse regulatory changes are the top reasons for costs and risks for businesses, therefore affecting FDI withdrawals and cancellations. long-term investment decisions. This view has been borne out empirically. Research shows that Evidence suggests that political risks may political risk has a significant negative effect on be more salient for certain types of FDI than and creates uncertainty about FDI inflows (Asiedu others. For instance, political risks tend to arise 2006; Busse and Hefeker 2007; Kher and Chun in economic sectors that have high levels of 2020; Krifa-Schneider and Matei 2010; Sekkat state intervention. Further, in many countries, and Veganzones-Varoudakis 2007; Walch and some sectors are considered of “public interest” Wörz 2012). Conversely, research suggests that and are subject to close state supervision, for the quality of a country’s regulatory and legal example, utilities, water and electricity distribution; environment is positively associated with FDI telecommunications; finance; and transportation. (Akame, Ekwelle, and Njei 2016; Buchanan, Le, Specifically, companies in the utilities sectors, and Rishi 2012; Globerman and Shapiro 2002; including renewable energy, experience more Vogiatzoglou 2016; Hebous, Kher, and Tran 2020). frequent adverse regulatory changes and expropriation and more delays in obtaining Al Khattab, Anchor, and Davies (2008) interviewed permits, thereby negatively affecting investment Jordanian international firms and found that (Kusek and Silva 2018; Barradale 2010; Luthi and the level of institutionalization of political risk Prassler 2011; Nemet 2010). These regulatory assessment within a firm is positively and changes are likely because utility assets tend to significantly correlated with a firm’s total assets, be geographically specific investments with few Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 19 alternative uses. Investors, therefore, have reduced recent evidence (IRENA and CPI 2020) suggests private bargaining power against the state once that energy generated using solar and wind investments are completed. energy, especially onshore wind, is cheaper than conventional power generation. In fact, in 2018, Further, renewable-scale technologies, such as IRENA reported that solar PV and onshore wind wind farms, are characterized by high fixed costs had become cheaper than conventional power and low marginal operating costs. As a result, generation, even without subsidies. policy makers may be incentivized to reduce investor returns by ex-post reducing regulated Research suggests that sustaining high levels of rates or through other policy changes, knowing FDI in renewable energy projects will be difficult that investors will continue to operate as long unless countries develop, implement, and enforce as marginal operating costs are recovered. Also, sound regulations to reduce political risk in a the general public consuming the services of transparent manner (Komendantova et al. 2012). renewable energy utilities frequently regards Conversely, Su, Umar, and Khan (2021), through them as essential services to which they have a study of seven Organisation for Economic “natural rights.” This viewpoint makes pricing such Co-operation and Development (OECD) countries, services highly politicized, opening a window show that as government stability, corruption, for governments to engage in political arbitrage law and order, democratic accountability, and (Holburn 2012). Additionally, renewable energy investment profile improve, and research and firms are subject to specific regulatory risks. They development (R&D) in renewables increases, often need support through subsidies or other the relative consumption of renewable energy policies, and this need places additional demands increases, suggesting increasing avenues for on the government’s political and economic investment in renewable energy. priorities (Schilling and Esmundo 2009). However, Figure 2.5 Types of government conduct inducing investors to cancel a planned investment or withdraw an existing investment Sudden change in the laws and regulations with a negative impact on your company Expropriation or taking of your property or assets by the government Breach of contract by the government Restrictions on your ability to transfer and convertibility currency Delays in obtaining necessary government permits and approvals to start or operate a business 0% 5% 10% 15% 20% 25% Percentage of total respondents Manufacturing Services Source: 2019–20 World Bank Global Investment Competitiveness survey. Note: The results shown are the percentages of the total respondents. 20 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Reducing regulatory risks There are two key ways by which FDI in potential to significantly reduce costs. Auctions renewables can be increased. The first method can also contribute to other objectives such involves creating the right incentive structures. as “timely project completion, solar and wind Feed-in tariffs (FIT) have been the most significant integration, and supporting a just and inclusive policy instrument to attract FDI in renewables energy transition (IRENA 2019).” Between 2017 globally (Wall et al. 2019), though in recent years, and 2018, about 55 countries used auctions to we have observed an increasing role of auctions as procure renewables-based electricity, and by a mechanism to reveal competitive prices (IRENA the end of 2018, 106 countries had implemented 2019). Research has also found some evidence that this mechanism at least one time. Auctions are carbon pricing instruments helped attract FDI in very flexible mechanisms that can be adapted OECD and non-OECD countries. However, public to the different circumstances of the countries investments such as government funds proved (IRENA 2019). If well designed, they can lead to not as attractive to foreign investors. cost efficiency and improve the predictability of the market. Still, in the context of very high Given the previously mentioned upfront competition, they entail the risk of leading to investment required for renewable technologies, underbidding, reducing financial returns, and long-term contracts have played a key role in sometimes leading to incomplete projects. facilitating investment in renewables, especially in the case of solar PV and wind (IEA 2021b). These As explained in Jenner, Groba, and Indvik contracts, which include guaranteed payments (2013), market context and the design of these and prices, significantly reduce uncertainty about mechanisms (both FIT and auctions) are crucial the returns of energy investment. FIT can be because implementing poorly designed policies designed with decreasing payment levels (a “tariff is not necessarily better than having no policy. degression”)24 and yearly revisions, allowing parties The design of auctions needs to be tailored to avoid lock-in effects in existing technologies and to the country-specific conditions as well as encouraging innovation and technology diffusion to accomplish the main objectives beyond (Frondel et al. 2010; Böhringer et al. 2017; Ma et al. revealing prices. The design of FIT needs to take 2021). However, there is a trade-off between the into account the market prices and the trends adjustments of these payments because large in renewables costs, as well as the maturity of reductions could disincentivize investments by the market. As mentioned in Vinci et al. (2014), lowering investors’ expected returns. Degression “it can be challenging to set support levels rates include an unpredictability component. appropriately enough to spur market activity Though evidence indicates that FIT have indeed and low enough to avoid unintended windfall increased investment in renewables in European profits for developers.” The second method for countries, where they were the main incentive increasing FDI in renewables involves reducing instrument over the past two decades, whether risk, especially political risk. According to Sieck these instruments can induce renewable (2010), multinational companies actively reduce innovation in the private sector critically depends expropriation risk through the choice of legal on the efficient design of the degression rates. It entity. Common corporate structures include is important to note that many of these FIT were joint ventures, strategic alliances, and other implemented when LCOEs were high. Therefore, in types of cross-holdings between foreign and the context of decreasing the costs of renewables, domestic stockholders. Apart from using different governments were led by poor design or the legal entities, multinational companies also use lack of degression rates to become locked into “defensive measures” to reduce risks. Defensive contracts with high rates when the market costs measures often include limiting assets held in were much lower. the host country’s jurisdiction. Another common “mutually beneficial” measure is localization, In the case of auctions, this mechanism has wherein companies reinvest profits in the exhibited increasing use in recent years, especially host country and also employ local workers because of its ability to reveal prices and its (Vanhonnaeker 2015; Sieck 2010). Technology 24 A tariff degression is a mechanism according to which the FIT decreases over time. The purpose of this degression mechanism is to encourage technological costs reductions (Clark 2017). Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 21 transfers and domestic training programs can had relied on government and regulatory bodies, also be used to sufficiently align host and home and 40 percent had used lawyers or litigation countries’ interests. Finally, political risk insurance experts. The survey found that while many large is a key proactive defense measure. 25 energy companies have a dedicated in-house risk management function, a significant proportion According to Sieck (2010), when disputes between also relies on outside support for managing risk. investors and host governments arise, negotiation Further, smaller firms are generally less likely to is often not an option because of the imbalance have an in-house risk management function. of power involved in FDI. Once infrastructure Notwithstanding differences between firms of improvements or projects are completed, the different sizes, all firms predominantly (61 percent) only way investors may have to resolve disputes felt they are competent in assessing the scale is through formal proceedings. Legal recourse is and scope of risk and mitigating risk. However, rarely realistic in the host country, and arbitration fewer (50 percent) respondents transfer their risk proceedings must be initiated before a tribunal successfully to third parties, and some renewable at the International Centre for Settlement of energy firms are less confident about how well Investment Disputes (ICSID) or another arbitration they manage risks specific to renewable energy institution. Bilateral and multilateral investment assets, especially political and regulatory risks and treaties and FTAs with investment chapters are weather-related volume risks. among the primary vehicles used by countries to ensure investment protection in host countries. The EIU survey also documents measures taken In addition, investors may be able to compel by renewable energy firms to mitigate political arbitration through multilateral investment treaties risk. Fifty-nine percent of survey respondents are like the 1994 Energy Charter Treaty (ECT). improving environmental audits; 56 percent are implementing strict environmental standards; A survey by the Economist Intelligence Unit (EIU) 51 percent are engaging in more detailed and (2011) examines how investors in renewable energy frequent communication with policy makers, minimize political risk. According to the survey, 55 regulators, and industry bodies; 41 percent are percent of the energy companies surveyed had engaging in more communication with the media, used insurers in the past three years to mitigate consumers, and environmental groups; 39 percent risk. As explained by IRENA (2016), political risk are adopting stricter monitoring of subcontractors’ insurance can be a crucial instrument as it environmental practices; and 24 percent are can provide broad coverage of risks related to seeking redress from governments for the impact government action. Further, 51 percent had used of adverse policy decisions. external risk and security consultants, 46 percent 25 It is widely recognized that, from a historical point of view, political risk insurance sector (Ziegler 2010) evolved in response to the need for mechanisms to mitigate and minimize the risks inherent in cross-border investment projects. In fact, in MIGA- guaranteed projects, MIGA provides an umbrella deterrence effect in potential disputes. It helps resolve potential disputes to the satisfaction of all parties, enhancing investor confidence and encouraging the flow of FDI. 22 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Chapter 3: Investor-State Disputes in Renewable Energy Political risks not addressed early enough can identified proceedings were instituted between lead to investor-state disputes. This chapter aims 2013 and 2016 (53 percent). The rapid increase to utilise publicly available information to develop in the number of proceedings was primarily a profile of investor-state disputes arising from triggered by regulatory changes in incentive renewable power generation projects. 26 programs for renewable power generation enacted in 2008—14 by several European The report identifies a total of 119 arbitration states. It is worth noting that while arbitration proceedings in investor-state disputes arising out proceedings arose primarily in developed of renewable power generation projects that were nations, the lessons learned from these can be instituted before February 1, 2022. Because the beneficial for developing countries navigating existence of arbitration proceedings may be kept similar challenges in scaling up renewable power confidential, the actual number of investor-state generation. With the rapid fall in the cost of disputes in renewable power generation that renewables, technological developments, and escalated into arbitration is likely to be higher. digitalization of networks, the role of renewable power generation in developing countries is The very first arbitration proceedings were growing substantially. Countries with emerging instituted in 1998. Of those cases, three involved renewable energy markets, therefore, need to project companies commencing arbitration offer investors predictable and resilient enabling proceedings against Indonesia for suspending frameworks, well-structured incentive programs, geothermal electricity projects amid the Asian viable de-risking instruments, and robust dispute financial crisis. 27 As shown in figure 3.1, most of the prevention mechanisms. Figure 3.1 Number of disputes by year of the start of proceedings 30 25 20 Number of Disputes 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year Source: World Bank–Energy Charter Secretariat analysis, 2022. 26 Data for this chapter were collected using open-access databases, specialized reporting services (for example, Global Arbitration Review, Investment Arbitration Reporter), as well as other publicly available governmental, industry, and media sources. Whenever possible, information on specific arbitration proceedings was extracted from arbitration awards, decisions, orders, parties’ submissions, and other procedural documents. Where such documents were absent, other sources were used. While every effort was made to create complete profiles of the identified arbitration proceedings, the chapter misses details of some of the proceedings because of the lack of public information. 27 Himpurna California Energy Ltd. v. Indonesia, UNCITRAL; Karaha Bodas Company LLC v. Indonesia, UNCITRAL; and Patuha Power Ltd. v. Indonesia, UNCITRAL. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 23 As shown in figure 3.2, most of the identified holdings (37 percent) and individual investors (9 proceedings have been instituted against states percent). The share of banks, investment funds, in Western Europe (55 percent) and Eastern and large corporations is marginal (4 percent total). Europe and Central Asia (25 percent). The share of respondent-states from other geographic regions Figure 3.3 Nationality of claimants, by region is less than a quarter of the total number of cases. The substantial number of European respondent- states is explained by the 2013–16 rise in renewable disputes shown in figure 3.3. 28 88.8% Figure 3.2 Geographic distribution of disputes by region 4.3% 1.6% 2.3% 1.6% 0.9% 0.4% 25% 55% 6% Western Europe South America Eastern Europe Central America 4% and Central Asia and the Caribbean South and East Asia Middle East 3% and the Pacific and North Africa 5% North America 1% Source: World Bank—Energy Charter Secretariat analysis, 2022. 1% Note: Both nationalities of a claimant-dual national in WalAm Energy LLC v. Kenya, ICSID Case No. ARB/15/7, are taken into account. Western Europe South America Eastern Europe Central America Some of the identified proceedings are instituted and Central Asia and the Caribbean by foreign-controlled local companies against South and East Asia Middle East and the Pacific and North Africa states of their nationality (sometimes together North America Sub-Saharan Africa with foreign parent companies as co-claimants). Source: World Bank–Energy Charter Secretariat analysis, 2022. Municipal law and the nature of a business Note: The classification of the geographic regions is based on the World Bank’s regional system, which is used by the ICSID. operation sometimes require that a foreign investor undertake its investment activities The majority of the identified proceedings through a company incorporated in the host were instituted against states with developed country. This condition is particularly relevant for economies (73 percent). 29 Developing economies investments in renewable energy, which local accounted for 21 percent of the identified project companies often operate. The ICSID proceedings, whereas economies in transition Convention, the ICSID Additional Facility Rules, accounted for only 6 percent of the cases. and some international investment agreements contain provisions allowing juridical persons to bring investment treaty claims against their home Claimants state because of foreign control or ownership. For instance, in Hydrika 1 S.A.C. and others v. Peru, six The majority of claimants 30 in identified Peruvian subsidiaries of a US company developing proceedings are SMEs (49 percent), followed by 28 This distribution is based on publicly available information, and there may be other unreported cases involving developing countries. 29 For the purposes of this chapter, states are assigned to classification categories based on the groupings prepared by the Economic Analysis and Policy Division of the Department of Economic and Social Affairs of the UN Secretariat for the World Economic Situation and Prospects report in 2022. 30 For the purposes of this chapter: “Individual investor” means a natural person. “Small or Medium Enterprise” (SME)—in the absence of universal, internationally accepted criteria—means any legal person that does not fall within any of the categories below. “Holding” means a legal person whose principal activity is holding shares of other companies and/or other assets. “Bank” means a financial institution that provides basic financial services to the general public and companies, among other things. “Investment fund” means a legal person used by one or more investors for making investments in various assets. “Large corporation” means a legal person included in the Platts Top 250 Global Energy Company Rankings, 2020, or the UNCTAD’s World’s Top 100 Non-financial MNEs Ranked by Foreign Assets, 2018. 24 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts hydropower projects have instituted contract- Figure 3.4 Distribution by subsector based ICSID arbitration against Peru. 31 Most of the claimants are natural or legal persons from states with developed economies (95 18.9% percent). The share of claimants from states with developing economies and economies in 36.2% transition remains marginal (5 percent total). 32 Subsectors 14.2% The vast majority of the identified proceedings (figure 3.4) concern solar power generation (49 11.8% percent), followed by hydropower (19 percent) 0.8% % 1 .6 0.8% % and wind energy (16 percent). The total share of 1 .6 % % 1 .6 4.7% 5.5% 2 .4 other technologies (or subsectors) remains minor (16 percent total). Except for hydropower, the distribution of identified proceedings by subsector Solar (PV) Offshore wind Hydro Solar (lack of public appears to match the shares of respective information)** technologies in the renewable energy market Onshore wind Bioenergy (biogas) (see Chapter 2). The large portion of proceedings Solar (CSP) Bioenergy (biomass) concerning solar technology, especially PV, Lack of public information* Bioenergy (biofuel) Geothermal Hybrid solar (PV)/wind could be attributed to the technology’s market dominance as well as the spread of measures Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: Cases concerning more than one subsector are included in all of the (for example, reductions and phase-out of FIT categories concerned. programs) particularly aimed at such technology * In seven cases, it has not been possible to identify particular renewable (see figure 3.6). energy sources used. ** In two cases, it was not possible to identify the particular solar technology employed. Figure 3.5 illustrates the evolving distribution by CSP = concentrating solar power; PV = photovoltaic. sectors (fossil fuels, renewables, and nuclear) of arbitration proceedings under the ECT. Figure 3.5 Distribution of arbitration cases under the ECT by sector (145 cases) 30 25 Number of Arbitration Cases 20 15 10 5 0 2003 2006 2009 2012 2015 2018 2021 Year Fossil fuels Renewables Nuclear N/A Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: In five cases, it was not possible to identify particular energy sources involved; one case involves more than one form of energy source. 31 Hydrika 1 S.A.C. and others v. Peru, ICSID Case No. ARB/18/48. 32 States are assigned to classification categories based on the groupings prepared by the Economic Analysis and Policy Division of the Department of Economic and Social Affairs of the UN Secretariat for the World Economic Situation and Prospects report (2022). Also, both nationalities of a claimant-dual national in WalAm Energy LLC v. Kenya are taken into account. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 25 Main causes of disputes As can be seen in figure 3.7, the vast majority of identified proceedings concern adverse regulatory This section provides an overview of the changes in the renewable energy sector (67 underlying transactions, the nature of issues, and percent), predominantly in the form of reductions specific adverse measures involved in the disputes. and phase-out of FIT programs. Breach of contract As seen in figure 3.6, most identified proceedings 33 by the host country or the state entity involved concern national incentive programs for is argued in 10 percent of the proceedings. In renewable power generation (64 percent). The 8 percent of the cases, the claimants allege claimants in these cases allege violations of expropriation, typically as a result of the promised conditions under national or subnational cancellation of the implementation agreement or incentive programs for renewable power other contractual arrangement. Another 8 percent generation embodied in laws and regulations. of the cases concern abuse of authority by the Other disputes are based on implementation host country’s government or a state agency. The agreements (15 percent) and power purchase overall percentage of other types of political risk is agreements (10 percent). The overall share of other insignificant (7 percent). Only risks connected with types of arrangements giving rise to disputes is government conduct were identified. relatively insignificant (9 percent total). Figure 3.7 Underlying issues Figure 3.6 Underlying transactions 10% 8% 15% 8% 10% 67% 5% 3% 1% 5% 1% 64% 1% 1% 1% Adverse regulatory changes Lack of public information* Breach of contract Prosecution of individual Incentive program Lack of public information* investors Implementation agreement Land and/or water use Expropriation Local opposition agreement Abuse of authority Power purchase agreement Shareholders agreement Procurement procedure Financing term sheet Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: Cases concerning more than one category are included in all of the Source: World Bank–Energy Charter Secretariat analysis, 2022. categories concerned. Note: Cases concerning more than one category are included in all categories concerned. * In six cases, it was not possible to identify underlying political risk because of a lack of public information. * In six cases, it was not possible to identify underlying transactions because of a lack of public information. PPA = power purchase agreement. 33 For the purposes of this report, “underlying transaction” means the primary investment transaction or source of the claimant’s legal right under which a dispute arises. 26 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Box 3.1 Industry perspective—Main types of conflicts The International Energy Charter Industry Advisory Panel (IAP) comprises leading global energy companies. In preparing this report, consultations were conducted with the renewable energy companies-members of the IAP, as well as nonmember companies, to determine the nature of investment conflicts faced by the private sector in the renewable energy sector, that is, disagreements that have not yet culminated into legal disputes. The respondents indicated delays in permits, licenses, and approvals (5 out of 8 respondents); arbitrary, unpredictable, or retroactive regulatory changes (5); and taxation issues (5) as the main types of conflicts they face when investing in the energy sector in a foreign country. See figure B3.1.1. Figure B3.1.1 Conflicts faced by the private sector by category Expropriation Restriction on transferability/convertibility Lack of transparency Discriminatory treatment Customs Abuse of authority Breach of contract Arbitrary, unpredictable or retroactive regulatory changes Taxation issues Delay in permits, licenses and/or approvals 0 1 2 3 4 5 Number of respondents Source: Survey of the renewable energy companies-members of the IAP, as well as nonmember companies, conducted by the Energy Charter Secretariat,2022 (IAP Survey). The proceedings show that foreign investments percentage (3 percent or less of each type); see the in renewable energy can potentially be subjected note under figure 3.8. to a multitude of adverse governmental measures. The chapter identifies 26 types of In the majority of the identified proceedings, adverse measures alleged (figure 3.8), among the adverse measure was taken at the stage which the most common are changes in FIT of investment implementation or operation programs for renewable electricity generators (51 (57 percent), followed by investment entry, percent). The significant number of such cases establishment, or construction (20 percent). Only explains the 2013–16 rise in renewable-energy three proceedings (3 percent) concerned the disputes shown in figure 3.1. Other measures that investment planning stage or decision to invest34 investors complained about include acts and —because most treaties do not cover the pre- omissions by the state entity involved (6 percent), establishment phase. taking of assets (5 percent), and cancellation of concession agreements (4 percent). The remaining 22 measures identified constitute a marginal 34 (1) in Zhinvali Development Ltd. v. Georgia, ICSID Case No. ARB/00/1, the claimant sought to recover pre-investment expenditures incurred in connection with a proposal for the rehabilitation of a hydropower plant; (2) the case of Gamesa Eólica, S.L.U. v. Syria, PCA Case No. 2012-11, arose out of the host country’s call upon a bank guarantee posted by the claimant-company as part of the tendering process following cancellation of the wind project; (3) the claimants in Jetion Solar Co. Ltd and Wuxi T-Hertz Co. Ltd. v. Greece, UNCITRAL, alleged certain difficulties with the licensing of a potential solar project. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 27 Figure 3.8 Main types of adverse measures Change in a feed-in-tariff Taking of assets 7% program Lack of public information* Cancellation of concession 6% agreement Acts and omissions by state Other adverse measures** 5% entity involved 4% Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: Cases concerning more than one category are included in all of the categories concerned. 51% * In seven cases, it was not possible to identify adverse measures complained of due to a lack of public information. ** Other adverse measures were as follows: change in green certificates program (4 cases); fines, penalties, or sanctions (3 cases); land use restriction (3 cases); suspension of a project (3 cases); cancellation of a 27% license, permit, or other right (3 cases); cancellation of a PPA (2 cases); nonissuance of a license, permit, or approval (2 cases); delays in permitting or approval processes (2 cases); introduction of public auctions for offshore wind (2 cases); ban on waste imports (1 case); breach of preliminary agreement (1 case); cancellation of intergovernmental agreement (1 case); electricity tariff-capping (1 case); harassment and abusive criminal proceedings (1 case); moratorium on development of offshore wind (1 case); nonhonoring of arbitration award (1 case); nonhonoring of settlement agreement (1 case); nonpayment under contract (1 case); prohibition of electricity arbitrage for renewable self-generator (1 case); reduction of electricity tariffs (1 case); reduction of ethanol price (1 case); and unfair and nontransparent administration of a FIT program (1 case). Box 3.2 Industry perspective—Effects of conflicts on investments The respondents indicated cancellation of a planned investment as the main negative consequence of a conflict with the host state (3 respondents out of 8). Delaying planned investment (2), withdrawal of an existing investment (2), and considering delaying or cancelling investment (1) were also selected among the effects of conflicts faced by investors. See figure B3.2.1. Figure B3.2.1 Consequences of conflict, reported by survey respondents, by category Consider delay/cancellation Withdrawal of existing investment Delay planned investment Cancel planned investment 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Source: IAP Survey. 28 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Instruments invoked Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Spain36 was annulled by The vast majority of identified proceedings (94 an ICSID annulment committee. The dispute percent) have been instituted on the basis of a was resubmitted to a new tribunal. A total of bilateral35 or multilateral investment treaty (ECT, six proceedings were discontinued. Five cases North American Free Trade Agreement (NAFTA), were discontinued at the request of claimants, or Eurasian Investment Agreement); they are including two cases for the reason of settlement. seldom invoked together with contracts (3 cases) The circumstances of the discontinuance of the and domestic law (1 case). Four proceedings (4 remaining case are unknown. percent) were brought solely under a contract; two proceedings (2 percent) were instituted Figure 3.10 Outcome of final awards (61 awards) pursuant to the respondent domestic investment law. Among the instruments invoked, the ECT has been the most-invoked treaty (70 percent; in 6 percent of those cases, it was invoked together with a BIT, and one proceeding was brought under the ECT, BIT, and domestic investment law), 44% 29% followed by the NAFTA (5 percent). Outcome of proceedings Figure 3.9: Case status 15% 2% 3% 7% Breach found Settlements 51% 43% Breach not found Breach found but no damages awarded No jurisdiction Outcome unknown Source: World Bank–Energy Charter Secretariat analysis, 2022. Claimants and respondents have been relatively equally successful in the identified proceedings (figure 3.10). Claimants have prevailed in 44 percent of cases. In two cases (3 percent), damages were not awarded despite breaches 5% being found. Respondents have prevailed in 15 1% percent of cases on the issue of jurisdiction and 29 percent on the issue of merits. In four cases Award rendered ICSID award annulled - resubmission proceeding pending (7 percent), the arbitration proceedings were Pending Arbitration discontinued concluded with an award, by settlement: in three Source: World Bank–Energy Charter Secretariat analysis, 2022. cases, the settlement agreements were embodied ICSID = International Centre for Settlement of Investment Disputes. in the awards, whereas in one case, the award dismissed the claims with prejudice as a result of As shown in Figure 3.9, as of 1 February 2022, the settlement. The outcome of one case remains almost half of the identified proceedings were unknown because of lack of public information. still pending (51 cases or 43 percent). A final On average, successful claimants were awarded award resolving the issues of jurisdiction or less than half of their initial claim of damages. 37 merits (or a settlement award) was rendered in See box 3.3. 61 cases (51 percent). The final award in one case, 35 For the purposes of this chapter, “bilateral investment treaty (BIT)” includes bilateral FTAs with investment provisions: Peru—USA FTA and Central America—Panama FTA. 36 ICSID Case No. ARB/13/36. 37 Damages claimed and damages awarded are shown in appendix C. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 29 Box 3.3 The potential fiscal cost of claims On average, the amounts awarded in investor-state disputes considered in this chapter could represent about 0.35 percent of public expenditure in a respondent state in a given year (for countries where we have the data available on the amounts awarded). Though the amounts claimed in these disputes are relatively high, as shown in appendix C, considering cases for which this information is publicly available, claimants receive, on average, 25 percent of the value claimed. Moreover, in some cases, the claimants and a respondent state may reach a settlement agreement either during an ongoing arbitration proceeding or afterwards when an award of damages is rendered in favor of the claimants. Such a settlement agreement may reduce the amounts to be paid to the claimants or provide for certain nonmonetary remedies and, therefore, further lower the economic impact of a dispute on the respondent state.a Governments in countries where incentive programs for renewable power generation were not correctly designed, are no longer in line with the actual market prices and where equity issues and high electricity prices have become a burden for the consumer – may decide to modify these programs. This decision would come at the expense of getting involved in disputes with investors and generating political risk and uncertainty that could affect future investments. It is important to note that the designs of incentive programs have evolved over time and are currently more flexible, so governments can envisage degression mechanisms to adapt to the changing market conditions and regulate public expenditure. Note: The results on values awarded are based on 48 cases (including 30 countries) where this information is publicly available and do not account for legal representation and arbitration costs. These costs could be sizeable, and depending on the circumstances of each case, both disputing parties, prevailing and losing, may need to bear part of them. For arbitration awards on jurisdiction and/or merits where arbitration costs are publicly available (46), the average is approximately US$867,000 (median–US$766,000). On average, the respondent state’s costs in investment arbitration were US$3.6 million (median–US$2.2 million) for the subset of cases where this information is publicly available (39). These values are relatively aligned with previous estimates (not specifically for the case of renewables) that, according to Hodgson, Kryvoi, and Hrcka (2021), are on average, US$1 million (median- US$760,000) on arbitration costs and US$4.7 million (median-US$2.6 million) in respondent state’s costs. a. For example, in the cases of Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/1, RREEF Infrastructure (GP) Limited and RREEF Pan-European Infrastructure Two Lux S.à.r.l. v. Spain, ICSID Case No. ARB/13/30, and The PV Investors v. SpainPCA Case No. 2012-14, the claimants renounced their right to collect damages in exchange for a new incentive scheme under Royal Decree-Law 17/2019. The most common substantive treaty protection percent of cases each. The share of the remainder invoked (figure 3.11) is fair and equitable treatment of the invoked substantive protections remains (about 27 percent), followed by protection against small (14 percent total). In addition, while the case unreasonable/arbitrary or discriminatory measures of WalAm Energy LLC v. Kenya38 was brought (17 percent). The protection against expropriation solely under a contract, the claimant reportedly is invoked in approximately 15 percent of cases, alleged expropriation and a breach of the whereas the “umbrella clause” and the standard minimum standard of treatment under customary of full protection and security appear in about 14 international law. 38 ICSID Case No. ARB/15/7. 30 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Figure 3.11: Substantive protections invoked Figure 3.12 Treaty breaches found 8% 13.7% 6% 26.5% 3% 17.1% 5.7% 0.5% % 83% 1.4 0.5% 14.2% 0.5% 14.7% 2.8% 2.4% Fair and equitable Effective means for assertion of claims Fair and equitable treatment Umbrella clause treatment and enforcement of rights provision Unreasonable/arbitrary or Stable, equitable, favorable, Full protection and Expropriation discriminatory measures and transparent conditions security provision Unreasonable/ Transfer of funds provision arbitrary or Source: World Bank–Energy Charter Secretariat analysis, 2022. discriminatory Note: Based on 29 awards and interim decisions on liability in which a measures breach was found and such information is publicly known. Umbrella clause Ensure a state enterprise conducts activities in a manner consistent with a Contracting Party's obligations National treatment Performance requirements Most-favored-nation Stable, equitable, favorable, and treatment transparent conditions provision* Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: Based on 60 cases (as of 1 February 2022, some of them were still pending). The remaining 59 cases are not considered because of a lack of public information. * First sentence of Article 10(1) of the ECT. The most common treaty breach (figure 3.12) found is the violation of the standard of fair and equitable treatment (83 percent). The protection against unreasonable/arbitrary or discriminatory measures, the “umbrella clause,” and stable, equitable, favorable and transparent conditions provision39 account for 8 percent, 6 percent, and 3 percent of cases, respectively. No other breaches have been established. See box 3.4 for information about the main factors in disputes. 39 First sentence of Article 10(1) of the ECT. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 31 Box 3.4 Country-level factors associated with disputes An analysis of disputes and country characteristics indicates that the main factor clearly associated with disputes has to do with political risk (that is, sudden and unexpected changes in regulations). An initial factor that could be thought to be potentially correlated with a higher level of disputes is the length and the value of FIT. Using data from the International Energy Agency-Organisation for Economic Co-operation and Development (IEA-OECD), we observe that there is no correlation between the total number of disputes that a country has in a given renewable technology and the length or the value of the FIT. Instead, as shown in figure B3.4.1, disputes are more related to sudden changes (of length or value) in regulations. If we define period “zero” as the moment in which the value of the FIT changes in an event-study-like setting, we observe that the number of disputes tends to be relatively low for periods before the change in FIT. When the change happens, the number increases sharply, and more disputes come after two periods, and it takes at least five years to reach a level of new claims similar to before the change. Figure B3.4.1 Timing of changes in feed-in tariffs and the number of disputes (a) Changes in the value of feed-in tariffs 40 Before the change After the change 30 Total number of disputes 20 10 0 -5 -4 -3 0 1 2 3 4 5 6 7 8 Years before and after the change in FIT value (timing of the change=0) (b) Changes in the length of feed-in tariffs 20 Before the change After the change 15 Total number of disputes 10 5 0 -2 -1 0 1 2 3 4 5 6 7 8 Years before and after the change in FIT length (timing of the change=0) Source: World Bank–Energy Charter Secretariat calculations using data from IEA-OECD on FIT and data from the Energy Charter Secretariat, 2022. Note: The x-axes of these graphs indicate the years before (negative), and after (positive), the FIT change was instituted at 0. For example, a value of –5 means 5 years before the FIT change, while a value of 5 means 5 years after the FIT change. FIT = feed-in tariff 32 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts In table E.1, we analyze a set of different country-level characteristics that could potentially be correlated with the number of disputes in the renewable sector. First, we analyze a set of risk measures based on the 2019/2020 Global Investment Competitiveness Report (World Bank 2020b). We explore three different country-level measures of regulatory risk. The first concerns transparency regarding the content and the process of making laws and regulations that apply to investors. The second deals with the extent of legal protection provided to investors against arbitrary, unpredictable, or nontransparent government actions. The third is about access to effective mechanisms at the domestic level for recourse in case of grievances or disputes. We use this information for a large set of countries (depending on the availability of these risk indicators) and define a dependent variable that takes a value of one if a country has had disputes and a value of zero if it has not had any.a Then we estimate a probit model analyzing the probability of a country having disputes over these regulatory risks, controlling by GDP per capita and initial renewable capacity (total electrical capacity in 2000). Each of the coefficients of these estimations (shown in table E.1) can be interpreted as the rise in the probability of having disputes, given a one-unit increase in the risk indicator for countries with similar characteristics (other risks, GDP per capita, and initial renewable capacity). These results, of course, do not have a causal interpretation but are merely correlations between these risks and the probability of having disputes. As shown in the table, the only factor that is correlated with the probability of having disputes is recourse. Still, this correlation is negative, meaning that higher risk is correlated with fewer disputes. Although, in principle, this finding might seem counterintuitive, it makes sense because, in the context of a lack of mechanisms for recourse, claims are not even made. Analyzing factors from the Regulatory Indicators for Sustainable Energy (RISE), which are directly associated with renewables, we see in columns 4 and 5 that none of the subindexes related to the characteristics of the renewable energy sector are associated with a higher probability of disputes. The only factors that are weakly and negatively correlated with disputes are the “Attributes of financial regulatory incentives” and “Planning for renewable,” which might be somewhat related to the causes of the sudden changes in FIT conditions. Still, these coefficients are not statistically significant. Finally, when we analyze Worldwide Governance Indicators (WGI), we observe that better “Rule of law” and better “Control of corruption” are correlated with fewer disputes. On the other hand, “Voice and accountability” and “Regulatory quality” are positively correlated with claims. These findings, once again, signal being in a context where it is feasible to file these claims. In conclusion, the main factor clearly associated with disputes has to do with political risk—the sudden and unexpected changes in regulations. Lower recourse risk, Voice and accountability, and regulatory quality are associated with a higher probability of disputes as they are preconditions for having the possibility of making claims. a. We do not use the total number of disputes by country because there is not a lot of variation in this variable (that is, most countries have only one dispute) Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 33 Chapter 4: Existing Measures for Managing Conflicts between Investors and the Host Country Given the impact of irregular government conduct This chapter examines 131 IIAs signed from 2015 on investor decision-making, governments to 2020 (available on the UNCTAD Investment worldwide are now developing policy responses Policy Hub)—including BITs, EPAs and FTAs to anticipate disagreements with foreign with investment provisions—to identify conflict investors and address grievances before they prevention mechanisms. The only international develop into full-scale disputes. This chapter agreement reviewed outside this time frame is the identifies measures that countries have taken ECT because of its pivotal role in energy disputes. at the international, national, and contractual levels to avoid and manage conflicts between “Cooling-off” period foreign investors and the host country (see box A cooling-off period is the time between 4.1). One of its key findings is that despite the the notification of a dispute and the actual increasing significance and amount of investment commencement of arbitration (request in renewable energy, host countries have not yet for arbitration according to the applicable established specific and targeted mechanisms arbitration rules), during which the foreign dedicated to addressing issues or grievances investor and the host country must try to settle specifically of renewable energy investors at their dispute amicably. It is the most common the international and national levels. Dispute conflict de-escalation option found in IIAs. All avoidance clauses and institutional arrangements pre-arbitration consultations, negotiations, and in IIAs and domestic legal frameworks invariably nonbinding third-party mechanisms to amicably apply to all “investments” across different sectors. resolve investor-state differences usually fall within That said, it is important to note that the conflict the cooling-off period. Of the 131 IIAs reviewed, prevention mechanisms discussed in this chapter, 110 contain a cooling-off period with durations although generic, still apply to renewable power ranging from 60 days to 12 months (including IIAs generation projects and are used by energy signed by countries that previously did not always investors and host countries. include a definite time frame, such as Australia). The most prevalent time frame is six months— mentioned in more than 85 of the IIAs analysed. Mechanisms in international investment agreements A unique example is the Nigeria–United Arab Emirates BIT which sets different cooling-off time Over the past years, there has been an increase in frames for each party’s investors. For investments the number of dispute prevention and avoidance in the United Arab Emirates, if the parties cannot provisions in IIAs. Countries are employing resolve a conflict amicably in three months, the different options to resolve conflicts with foreign investor must exhaust local remedies in foreign investors without recourse to adversarial the United Arab Emirates for six months before processes. Such options include direct negotiation recourse to arbitration. On the other hand, for an and consultation and the use of mediation, investment made in Nigeria, an aggrieved foreign conciliation, good offices, and other nonbinding investor can submit a dispute for arbitration if third-party procedures. A few IIAs also establish three months of amicable negotiations fail to inter-institutional dispute prevention and conflict resolve it. resolution arrangements between the contracting parties, set up information-sharing arrangements Apart from defining the time frame, some IIAs also on foreign investment issues, or appoint a lead describe the information that must be included in agency to deal with investor grievances. the cooling-off period notice and other minimum requirements that the parties must meet. For instance, to commence the cooling-off period, the Kenya–United Kingdom EPA requires an 34 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Box 4.1 Industry Perspective – Measures to mitigate potential disputes The IAP Survey found that six out of eight respondents had undertaken measures to mitigate potential disputes before investing in a foreign country. Among such measures, the following were specified: • Conducting due diligence, including legal, regulatory, and country risks • Investing in countries that are parties to IIAs and intergovernmental agreements • Entering into host government agreements • Deploying carefully drafted contractual provisions, including dispute resolution provisions and waiver of sovereign immunity provisions; subjecting the contract to the governing law other than the one of the host country; using a familiar jurisdiction or home jurisdiction for dispute resolution; and providing arbitration clauses (international arbitration) The IAP Survey also shows a preference for amicable settlement discussions as a tool for conflict and dispute prevention. Direct negotiations (referring here to amicable settlement discussions) with the state agency or department immediately involved had been used by six out of ten respondents. Four respondents had engaged in direct negotiations with a governmental authority different from the agency or department directly involved. Also, four respondents had tried to involve their embassies in discussions. Three respondents indicated that engaging in direct negotiations with the state agency or department immediately involved or governmental authority different from the agency or department directly involved was the most effective tool for preventing or managing conflicts and disputes (figure B4.1.1). Figure B4.1.1: Tools used for conflict, dispute prevention Energy Charter Secretariat Joint commission of a bilateral investment treaty Good offices of a third party Involving the embassy in discussions Direct negotiations with a governmental authority different from the agency/department directly involved Direct negotiations with the state agency or department immediately involved 0 1 2 3 4 5 6 Number of respondents Source: IAP Survey. Among the challenges in using those tools for conflict and dispute prevention, the respondents indicated the following: • Lack of political and legal authority or mandate to resolve conflicts • Delays and long or undetermined timelines • Absence of any operating guidelines or procedures • Lack of political will of the host country’s government to proceed in good faith • Reluctance of authorities of the host country to respond to problems on time Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 35 aggrieved party to give the other party a written Use of neutral third-party mechanisms during notice requesting consultations. The notice must (or before) the cooling-off period stipulate (a) the place of the consultations, (b) the Out of the 131 IIAs examined in this chapter, time frame for concluding the discussions, and nine encourage the use of nonbinding third- (c) the obligation of the parties to maintain the party mechanisms before initiating arbitration confidentiality of the process.40 Some recent IIAs proceedings but do not specify what these may also name the governmental body or institution be.43 This approach is reminiscent of earlier IIAs that can receive consultation requests from an that referred to an amicable resolution in a general investor. This provision is beneficial because it manner. On the other hand, a higher number saves time and effort in identifying the state actor of recent IIAs specify the nonbinding, third- responsible for resolving the investor’s grievance. party procedures the parties can refer to before One such example is the Trilateral China–Japan– submitting a matter for arbitration (as part of the Republic of Korea Agreement to promote, cooling-off period or even preceding it). Twenty- facilitate, and protect investments.41 one IIAs expressly allow the investor and the state to enter mediation before arbitration,44 while 18 Compulsory exhaustion of nonjudicial IIAs require compulsory conciliation at this stage.45 administrative remedies in parallel to the Nine IIAs mention good offices46 as an option to cooling-off period and before recourse to resolve investor-state conflicts before arbitration.47 arbitration Some IIAs require the investor to exhaust internal Although the use of nonbinding neutral third- nonjudicial administrative remedies—usually party mechanisms during the cooling-off period parallel to the cooling-off period—before recourse is voluntary and at the parties’ discretion in most to arbitration.42 For instance, the Ghana–Türkiye cases, this requirement may be more stringent in BIT (not in force at the time of writing) requires some IIAs. For example, the Hong Kong, Special an investor to submit a claim for an internal Administrative Region (SAR), China–United Arab administrative review in the host country before Emirates BIT, signed in 2019, allows an investor submitting it to domestic courts or international to pursue arbitration only after it has attempted arbitration. Such an administrative review should to (a) amicably settle the dispute through direct be concluded within six months from its initiation negotiations and (b) undertaken mandatory by an investor. The BIT further provides that an conciliation. Another IIA that makes conciliation investor may initiate consultation, negotiation, an obligatory precondition to arbitration is the or mediation parallel to the review. Similarly, the Indonesia–Australia Comprehensive Economic FTA between China and the Republic of Korea Partnership Agreement (IA–CEPA) FTA. See figure allows an aggrieved Party to pursue investment 4.1. arbitration only after it has (a) tried to settle the matter amicably for four months and (b) exhausted the domestic administrative review procedure when applicable. 40 Other IIAs of a similar nature are Azerbaijan–Turkmenistan BIT; Argentina–United Arab Emirates BIT; Singapore–Sri Lanka FTA; Colombia–United Arab Emirates FTA; Moldova–United Arab Emirates BIT; Armenia–United Arab Emirates BIT; and Islamic Republic of Iran –Slovak Republic BIT. 41 See Article 15.2 of the China–Japan–Republic of Korea Trilateral Investment Agreement. 42 Singapore–Sri Lanka BIT; Colombia–United Arab Emirates BIT; Ghana–Türkyie BIT; China–Republic of Korea FTA; India–Kyrgyz Republic BIT. 43 Argentina–Japan BIT; United Arab Emirates–Uruguay BIT; Belarus–India BIT; Central America–Republic of Korea FTA; Israel–Japan BIT; Islamic Republic of Iran–Slovak Republic; Honduras–Peru FTA; Republic of Korea–New Zealand FTA; Armenia–Japan BIT. 44 Japan–Morocco BIT; EU–Vietnam Investment Protection Agreement; Australia–Hong Kong SAR, China Investment Agreement; Agreement between the United States of America, Mexico, and Canada; EU–Singapore Investment Protection Agreement; Argentina–United Arab Emirates BIT; Kazakhstan– United Arab Emirates BIT; Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); Central America–Republic of Korea FTA; Australia–Peru FTA; Colombia–United Arab Emirates BIT; Rwanda–United Arab Emirates BIT; China–Hong Kong SAR, China Closer Economic Partnership Arrangement (CEPA); ASEAN–Hong Kong SAR, China Investment Agreement; Chile–Hong Kong SAR, China BIT; Canada–EU Comprehensive Economic and Trade Agreement (CETA); Armenia–United Arab Emirates BIT; Ghana–Türkiye BIT; Trans-Pacific Partnership; Eurasian Economic Union–Vietnam FTA; Burkina Faso–Canada BIT. 45 Japan–Morocco BIT; Colombia–United Arab Emirates BIT; Rwanda–United Arab Emirates BIT; Angola–United Arab Emirates BIT; Chile–Hong Kong SAR, China; Armenia–United Arab Emirates BIT; Trans-Pacific Partnership; Eurasian Economic Union–Vietnam FTA; Hong Kong SAR, China–United Arab Emirates BIT; Australia–Hong Kong Investment Agreement; IA–CEPA; Agreement between the United States of America, Mexico, and Canada; Argentina–United Arab Emirates BIT; ASEAN–Hong Kong SAR, China Investment Agreement; Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); Mali–United Arab Emirates BIT; Central America–Republic of Korea FTA; Australia–Peru FTA. 46 A trusted third party helps to establish contact between the disputing parties and explore ways to reach an amicable settlement. This move is usually a preliminary mechanism that could lead to a structured negotiation or to mediation. 47 Japan–Morocco BIT; Australia–Hong Kong SAR, China Investment Agreement; Agreement between the United States of America, the United Mexican States, and Canada; Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); Australia–Peru FTA; Chile–Hong Kong SAR, China BIT; ASEAN–Hong Kong SAR, China Investment Agreement; Trans-Pacific Partnership; Eurasian Economic Union–Vietnam FTA. 36 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Figure 4.1: Use of neutral third-party differences through consultations initially. If the mechanisms during the cooling-off period parties cannot resolve the matter within 180 days, the disputing party may initiate a conciliation process (this step is mandatory for the disputing 6% investor). Only after the completion of this two- 14% step cooling-off period may the parties initiate arbitration proceedings. 12% The lack of a specific reference to nonbinding neutral third-party mechanisms does not mean 62% the parties cannot use these mechanisms to resolve their conflict during the cooling-off 6% period (or even in parallel to the arbitration or domestic proceedings). On the contrary, it may indicate greater discretion and autonomy for an investor and the host country. For example, the ECT does not constrain the parties from employing any specific third-party mechanism. Instead, it gives them the freedom to pursue Nonspecific third-party procedures Good offices “amicable settlement” for three months using the Mediation None mechanisms they find most appropriate. In 2014, Conciliation the Energy Charter Conference49 mandated the Source: World Bank–Energy Charter Secretariat analysis. Energy Charter Secretariat to assist with good offices, mediation, and conciliation. In keeping Some IIAs take a “fast-track” approach by allowing with this mandate, the Secretariat provides the mediation, conciliation, or good offices during the necessary support through its Conflict Resolution negotiation and consultation phase,48 whereas Centre. 50 In 2016, the Energy Charter Secretariat, others envisage a multi-layered cooling-off with the support of United Nations Commission period. For example, the Hong Kong SAR, China– on International Trade Law (UNCITRAL), United Arab Emirates BIT sets out a two-tiered International Center for Settlement of Investment system where parties must first try to resolve Disputes (ICSID) and several prominent arbitration the grievance through consultations (without and mediation institutions, developed the Guide specifying the tools to be used). If this fails within on Investment Mediation to assist governments six months, the host country can require that the and companies in seeking the amicable resolution matter be submitted for compulsory conciliation of investment conflicts. The Energy Charter before arbitration can be considered (however, Conference endorsed the Guide, encouraging the conciliation is not compulsory if the investor ECT’s contracting parties to resort to voluntary decides to file the complaint before the local mediation at any stage of investment disputes courts). The IA–CEPA, like the Hong Kong SAR, and to use the good offices of the Energy Charter China–United Arab Emirates BIT, also requires Secretariat. 51 the investor and the host country to resolve their 48 Chile–Hong Kong SAR, China BIT; Eurasian Economic Union–Vietnam FTA; Japan–Morocco BIT; Australia–Hong Kong SAR, China Investment Agreement; Agreement between the United States of America, the United Mexican States, and Canada; Australia–Peru FTA. 49 The Energy Charter Conference is the governing and decision-making body under the ECT. The Energy Charter Conference and its permanent supporting body, the Energy Charter Secretariat, are informally referred to as International Energy Charter. See https://www.energycharter.org/who-we-are/ energy-charter-conference/. 50 See https://www.energychartertreaty.org/conflict-resolution-centre/overview/. 51 See Decision of the Energy Charter Conference (CCDEC201612) of July 19, 2016, Guide on Investment Mediation at https://www.energycharter.org/ fileadmin/DocumentsMedia/CCDECS/2016/CCDEC201612.pdf Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 37 State-to-state cooperation the dispatch of electricity generated by state through bilateral institutional entities over that produced by the US investors in mechanisms renewable power generation and further hinder the ability of US companies to operate renewable power generation projects by delaying, denying, Recent IIAs have enhanced the role of and revoking certain permits. It is also reported intergovernmental dialogue and state-to-state that Canada has launched consultations with cooperation in investment dispute prevention by Mexico on the same grounds. 53 establishing bilateral governmental arrangements such as consultations, joint committees, national Joint committees for the administration of focal points, and national ombudspersons. international investment agreements Joint committees are established under IIAs Consultations to enhance state-to-state cooperation. A joint Certain IIAs may include provisions on state-to- committee represents the interest of all the state consultations to be requested on an ad hoc parties to the agreement and ensures that they basis by one of the state parties with respect to the jointly monitor and review the agreement’s measures of another party that may be in breach implementation. The contracting parties to an IIA of the agreement at issue. The consultations are may make the joint committee responsible for called upon with the view of avoiding a possible sharing investment-related information between legal dispute and recourse to the applicable them and investors. 54 It may also be empowered to dispute settlement mechanism. invite nongovernmental entities to discuss specific issues and hold meetings with the private sector. Under Article 31.4 of the United States–Mexico– IIAs signed by Japan are particularly notable in Canada Agreement (USMCA), state parties this respect. Out of Japan’s 13 IIAs (signed from may request consultations with another party 2015 to 2020), nine allow their respective joint on several grounds, including when an actual committees to establish subcommittees that or proposed measure of such party may be will enhance cooperation in different areas and inconsistent with obligations under the USMCA share information with investors on encouraging or when the state otherwise failed to observe favorable investment conditions. 55 an obligation under the agreement. The parties should make every attempt to arrive at a mutually Some countries have expanded the general satisfactory resolution of a matter. If the matter cooperation functions of joint committees to cannot be resolved by means of consultations, include handling investment disputes expressly. a consulting state party may request the The most significant example in this respect is establishment of a dispute settlement panel under Brazil’s cooperation and facilitation investment Article 31.6. agreements (CFIA). 56 The CFIAs grant joint committees the right to “resolve the issues In July 2022, the United States requested or controversies related to investments of the consultations with Mexico under the USMCA investors of the Parties in an amicable manner.”57 regarding several measures favoring Mexican state Apart from the Brazilian CFIAs, seven other IIAs entities, which were adopted in the course of an have taken a similar approach and expressly energy reform. 52 According to the United States, granted joint committees or similar institutional such measures, among other things, prioritize bodies the task of facilitating the consultation, 52 See Office of the United States Trade Representative, ‘United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies’ July 20, 2022) at https://ustr.gov/sites/default/files/US%20Cons%20Req%20Mexico%20energy_072022.pdf. 53 See Government of Canada, ‘Statement by Minister Ng on Canada launching Canada-United States-Mexico Agreement consultations on Mexico’s new energy policies’ (July 21, 2022) at https://www.canada.ca/en/global-affairs/news/2022/07/statement-by-minister-ng-on-canada-launching-canada-united- states-mexico-agreement-consultations-on-mexicos-new-energy-policies.html. 54 Japan–Mongolia EPA; Japan–Uruguay BIT; Japan–Ukraine BIT; Thailand–United Arab Emirates BIT; Brazil–Mozambique CFIA; Brazil–Angola CFIA; Brazil– Mexico CFIA; Brazil–Malawi CFIA; Brazil–Colombia CFIA; Brazil–Chile CFIA; Islamic Republic of Iran–Japan BIT; Chile–Hong Kong SAR, China BIT; Morocco– Nigeria BIT; Israel–Japan BIT; Intra-MERCOSUR Cooperation and Facilitation Investment Protocol; Armenia–Japan BIT; Brazil–Ethiopia CFIA; Japan–United Arab Emirates BIT; Brazil–Suriname CFIA; Argentina–Japan BIT; Brazil–Guyana CFIA; Brazil–United Arab Emirates CFIA; EU–Vietnam Investment Protection Agreement; EU–Singapore Investment Protection Agreement; Brazil–Ecuador CFIA; Brazil–India CFIA; Fiji–USA TIFA; Regional Comprehensive Economic Partnership Agreement (RCEP); Kenya–UK EPA; Japan–Jordan BIT. 55 Japan–Mongolia EPA; Japan–Uruguay BIT; Japan–Ukraine BIT; Armenia–Japan BIT; Argentina–Japan BIT; Islamic Republic of Iran–Japan BIT; Israel–Japan BIT; Japan–United Arab Emirates BIT; Japan–Jordan BIT. 56 Brazil–Guyana CFIA; Brazil–United Arab Emirates CFIA; Brazil–Morocco CFIA; Brazil–Suriname CFIA; Brazil–Ethiopia CFIA; Brazil–Chile CFIA; Brazil– Mozambique CFIA; Brazil–Angola CFIA; Brazil–Mexico CFIA; Brazil–Malawi CFIA; Brazil–Colombia CFIA. 57 Brazil–India CFIA; Brazil–Ecuador CFIA. 38 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts negotiation, and amicable settlement of foreign investors and assess, in consultation with investment disputes. 58 the relevant government authorities, suggestions and complaints received from foreign investors. The procedure under the CFIAs is available It can also make recommendations to the joint exclusively to the contracting parties, and committee on actions to improve the investment there is limited direct recourse available to environment. More prominently, the CFIAs investors in this process. Therefore, although the mention that an ombudsperson must seek contracting parties can use the CFIA’s provisions to prevent differences in investment matters, to prevent disputes through consultations and collaborate with government authorities and negotiations before submitting the matter to relevant private entities, and report to the joint the joint committee for examination, investors committee. Ombudspersons also facilitate the cannot unilaterally trigger this procedure. Only exchange of information on regulatory issues the investor’s home country is eligible to submit affecting all investments or specific projects. to the joint committee a specific matter that affects its investors. To initiate the process, the Brazil’s CFIAs stipulate a two-staged dispute investor’s home country must submit its request prevention procedure. In the first stage, an for consultations in writing, specifying the affected ombudsperson examines a foreign investor’s investor’s name, details of the incompatible grievance and recommends specific actions regulatory measure, and the factual and legal to resolve it. The joint committee operates at grounds that motivate the written request. The the second level when it receives a written CFIA’s joint committee must meet within 60-90 inquiry about a government measure’s days to resolve the matter. It is at this time that incompatibility with the invoked CFIA. Only if the affected investor may participate in the joint the contracting parties to a CFIA cannot resolve committee’s proceedings. An investor dissatisfied the conflict through the ombudsperson and with the outcome of the joint committee’s the joint committee can they initiate arbitration examination must then convince its home country proceedings. to file for arbitration—a recourse not available to the investor by itself. Brazil has also broadened access to its ombudsperson (called the Direct Investments Sometimes IIAs that establish joint committees to Ombudsman (DIO)) to include investors from support dispute de-escalation outline the scope all counties even in the absence of a ratified and conduct of the proceedings. An example is the Cooperation and Facilitation Investment Nigeria–Morocco BIT, whose Article 26 on “dispute Agreement with a particular country. In April avoidance” sets out the procedure followed by the 2019, the Brazilian government issued Decree No. joint committee in resolving investor conflicts that 9770 establishing the DIO covering all investors are brought to it before they are submitted for regardless of their nationality. DIO’s two main formal dispute settlement. functions are to address (i) inquiries to provide information to potential and existing investors National focal points or ombudspersons concerning legal and regulatory procedures to Although several countries have established enter and operate in the country and (ii) investors’ ombudsperson authorities to address foreign grievances (that is, issues with public agencies). investors’ grievances, these authorities are Both inquiries and grievances are jointly addressed primarily domestic. 59 Brazil has taken a proactive with the public agency responsible for the specific approach by establishing an “Ombudsperson” matter at the federal, state or municipal level with through its CFIAs and giving it a substantial role in the help of a Network of Focal Points designated the dispute prevention process. The CFIAs make across the government. it a treaty-level obligation for each contracting party to appoint and name the body that shall Two IIAs signed by the Association of Southeast act as ombudsperson within its territory. The Asian Nations (ASEAN) stand out for taking primary responsibilities of an ombudsperson the midway approach by granting substantive are to follow up on the requests and inquiries of protection to investments throughout their life 58 Türkiye–UK FTA; Kenya–UK EPA; EU–Vietnam Investment Protection Agreement; EU–Singapore Investment Protection Agreement; Morocco–Nigeria BIT; Thailand–United Arab Emirates BIT; China–Hong Kong Closer Economic Partnership Arrangement (CEPA)t; Japan–United Arab Emirates BIT; Canada–EU Comprehensive Economic and Trade Agreement (CETA). 59 See section “Mechanisms to prevent or manage grievances at national level” below for a more detailed discussion. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 39 cycle and including provisions on addressing on conflict “prevention” rather than conflict investor issues before a dispute. The older ASEAN– “management.” Hong Kong SAR, China Investment Agreement of 2017–expressly obliges its contracting parties to • Stage 2: After a grievance has commenced establish one-stop investment centers so investors between an investor and a host country. can approach these entities for assistance and At this stage, the investor faces an actual advisory services on investment-related matters. problem and approaches the government authorities for its resolution. The government The Regional Comprehensive Economic authorities make coordinated, inter-institutional Partnership Agreement (RCEP) of 2020 goes efforts to manage and respond to the conflict. further. It requires that contracting parties “endeavor” to establish or maintain contact points, None of the countries examined in this report has one-stop investment centers, focal points, or other identified or created dedicated mechanisms to entities that assist investors, among other things, address grievances for renewable energy investors. in amicably resolving complaints or grievances That said, Rwanda appears to take a more against government bodies. For this purpose, specific approach than others. Rwanda’s leading they may receive and, where appropriate, consider government authority on investor grievances—the any investors’ complaints relating to government Rwanda Development Board (RDB)—has a activities affecting their investments. The RCEP multisector mandate extending, in the energy also stipulates that each party may, to the extent sector, to independent power plants (IPPs), stand- possible, consider establishing intergovernmental alone solar systems and solar, hydropower, and mechanisms to identify and address recurrent biomass mini-grid systems. issues affecting foreign investors. At the same time, the respective competent authorities in each Policy measures for stage 1: Before a grievance contracting party should facilitate the exchange has arisen between an investor and a host of knowledge and hold regular consultative country meetings. Practices adopted during this stage include mapping international legal obligations undertaken by the host country, monitoring Mechanisms to prevent or sensitive sectors, compiling and analyzing data manage grievances at the on foreign investors in the country, and studying national level problems, conflicts, and disputes the host country experienced in the past. Some countries implement stand-alone conflict (1) Develop and maintain a comprehensive prevention policy measures at the domestic level, database of international legal obligations while others address them in combination with undertaken by the host country, including all international and contractual mechanisms.60 the investment treaties, investment contracts, and any other special arrangements with Usually, governments can address investor foreign investors. A lead agency should collect, grievances at two stages before they become centralize, and update the database and disputes: periodically review the related obligations. • Stage 1: Before a grievance has arisen Typically, countries will designate a ministry between an investor and a host country. to develop such a database. For instance, in At this time, the government adopts upfront Colombia, the Ministry of Commerce, Industry, best practices even though no grievance and Tourism (MCIT) maintains the primary is brought to its attention. The emphasis is database of IIAs signed by the government.61 The Office of International Legal Affairs of 60 In some instances, the distinction may not be clear. For instance, the Indian Ministry of New & Renewable Energy (MNRE) has set up a Dispute Resolution Committee (DRC) consisting of eminent persons to deal with disputes between MNRE’s Renewable Energy Implementing Agencies and renewable energy developers. The DRC deal with disputes relating to specific requests for (1) extension of time due to recognized force majeure events, (2) requests of extension of time not covered under the terms of the contract, and (3) disputes other than those pertaining to the extension of time. This is an example of a situation where ministerial orders (national-level mechanisms) and contractual mechanisms co-exist and can be seen as an intermediate step before the parties resort to arbitration or litigation. Please note that all mechanisms discussed in this section of the report are based on publicly available information. The section only maps available measures and mechanisms but does not assess their efficacy and efficiency in practice. 61 See http://www.tlc.gov.co/acuerdos/a-internacional-de-inversion. 40 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts the MCIT coordinates with the Ministry of work permits, visas, and other registered Foreign Affairs in preparing and interpreting investment enterprises’ documents. It also international treaties. It permanently monitors monitors investment projects to ensure that the dispute settlement schemes agreed incentives are directed to projects that conform upon between foreign investors and public with the RDB’s requirements and comply with authorities. Similarly, under the Ministry of the initial business plan submitted to it. Finance, the Indian Department of Economic Affairs (DEA) maintains a database of all (3) Analyze potential incompatibilities between IIAs signed by the country.62 It also leads the investment-related domestic legal provisions negotiations, inter-ministerial coordination, and and international treaties binding on the host the conclusion of BITs with other countries and country. the investment chapter of some FTAs. Invariably, this activity is undertaken by the Peru has established the State Coordination ministry responsible for the investment and Response System for International and trade-related matters or the ministry Investment Disputes (SICRECI)—attached to of justice. For instance, in Colombia, the the Ministry of Economy and Finance—that Foreign Investment and Services Directorate operates and maintains a centralized electronic of the MCIT identifies trade and investment database of the country’s IIAs, contracts, regulations that need to be adjusted according licenses, and treaties with investor-state dispute to Colombia’s international commitments. settlement mechanisms.63 (4) Strengthen links between local governments (2) Create and analyze a database of foreign that deal with investors and the central investors present in the country, historical data government that negotiates the IIA. on conflicts with foreign investors, and patterns To this end, governments can facilitate of noncompliance by foreign investors in communication and information sharing executing investment licenses and permits. among public authorities and create robust inter-institutional links. Colombia has established a public/private tool—the System Enabler to Attract Investment Peru’s SICRECI sets out a detailed information- (SIFAI)—to identify and centralize issues faced sharing mechanism to facilitate intra- by investors in conducting business. The governmental cooperation in resolving investor database allows government authorities to complaints. It operates an online information- take a targeted approach to resolving sectoral sharing portal through the Ministry of Economy problems and formulate solutions at the initial and Finance. This online portal allows the stages of the conflict continuum. SIFAI is central government to keep the provincial managed by a technical committee consisting and municipal authorities and state agencies of the Minister of Commerce, Industry and continually informed of the international Tourism, the Senior Adviser of Public and commitments it undertakes (including IIAs and Private Management, the National Planning the related obligation, investor-state dispute Director, the President of PROCOLOMBIA, and settlement cases, and dispute settlement the President of the Private Competitiveness clauses in contracts). The platform also allows Council (private sector representative). subnational government authorities to inform the central government of potential disputes In Rwanda, it is the investment authority and seek higher-level involvement at the initial responsible for gathering information on stages of a dispute. Investors can also raise investor conflicts. RDB ensures the daily issues with the central government authorities monitoring of registered investors’ operations. and seek solutions through the information It keeps records of all investment certificates, system. 62 See https://dea.gov.in/. 63 See https://www.mef.gob.pe/es/acerca-de-las-asociaciones-publico-privadas-apps/sicreci. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 41 collects information, analyses the investor issue Policy measures for stage 2: After a grievance regarding its legal implications and economic has commenced between an investor and a impact, shares information with other agencies, host country and engages in problem-solving. It maintains Governments employ different institutional records on all investor issues and monitors their arrangements based on their existing legal resolution process. It also records the amount framework, needs, and specific situation, to of investment at risk because of investor issues facilitate and streamline their response to investor and the amount retained as a result of effective grievances. issue resolution. (1) Establish a systematic investment retention In the Republic of Korea, the Foreign mechanism (also called a dispute prevention Investment Ombudsman (FIO) is the lead mechanism or Investment Grievance authority that requires public agencies to Management Mechanism (IGM)) wherein a cooperate and resolve complaints received lead agency manages and coordinates the from foreign investors and foreign capital resolution of issues and grievances of foreign invested companies. The FIO is commissioned investors. This lead agency communicates by the president and mandated to address between public authorities, coordinates investor grievances under Article 15 of the information collection and dissemination, and Foreign Investment Promotion Act. The public leads discussions with the affected investor agencies must present the results of resolving (World Bank 2019). See Chapter 5 for further complaints or their opinion on such matters details. within seven days. Rwanda has designated its investment The Peruvian SICRECI ensures a timely and promotion agency, the RDB, to facilitate the appropriate response to an investor’s complaint amicable settlement of conflicts between and coordinates the necessary actions among an investor and a state organ.64 Rwanda also the concerned public authorities. SICRECI is established the Private Investment Committee composed of the Ministry of Economy and (PIC) to discuss investors’ issues and propose Finance (Coordinator), the Special Commission, acceleration measures to resolve them. Both and all the public authorities that sign treaties, RDB and PIC’s mandates come from a legal agreements, and contracts establishing instrument, the Law on Investment Promotion mechanisms to resolve disputes between and Facilitation, so it has authority to ensure foreign investors and the country. SICRECI interagency collaboration in resolving a centralizes information on IIAs signed by Peru grievance. The RDB works directly under the as well as on emerging investment conflicts President’s Office’s supervision and is governed and disputes. It acts as an alert mechanism by a board of directors comprising global against the emergence of potential conflicts entrepreneurs and experts. and defines the coordination procedure between the public entities involved. Ethiopia set up a Investor Grievance Management Unit within the Ethiopian Brazil broadened access to its ombudsperson Investment Commission (EIC). The unit is in (called the Direct Investments Ombudsman charge of identifying and resolving investor (DIO)) to include investors from all counties issues that could lead to potential investor- even in the absence of a ratified Cooperation state disputes or withdrawal or cancellation of and Facilitation Investment Agreement investments. The unit has its legal foundation with a particular country. In April 2019, the in the Investment Proclamation. Sections 25–27 Brazilian government issued Decree No. 9770 of the Investment Proclamation allow investors establishing the DIO covering all investors to lodge complaints. It also clarifies that the regardless of their nationality. DIO’s two main Ethiopia Investment Board, an inter-ministerial functions are to address (i) inquiries to provide body, will serve as the escalation mechanism information to potential and existing investors to resolve issues needing higher-level political concerning legal and regulatory procedures decisions. The unit registers investor issues, to enter and operate in the country and (ii) 64 See Article 16 of the Rwanda Law No. 006/2021 of February 5, 2021 on Investment Promotion and Facilitation at https://rdb.rw/wp-content/ uploads/2021/04/New-Investment-code-2021.pdf. 42 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts investors’ grievances (that is, issues with public In Rwanda, the investment promotion agency agencies). Both inquiries and grievances are can hear appeals from investors. Rwanda’s jointly addressed with the public agency Law Relating to Investment Promotion and responsible for the specific matter at the Facilitation empowers the RDB to hear appeals federal, state or municipal level with the help for reconsidering decisions regarding the of a Network of Focal Points designated across cancellation of investment certificates. Where the government. the investor is not satisfied with the decision taken, he or she may appeal against it to the (2) Identify the public entities involved in the head of the RDB within 10 working days as of conflict and transmit the case to the suitable the date of notification of the decision. Each agency. case should be decided within 10 working days of the date the appeal was filed. In some cases, a designated authority may collect investor grievances, identify the Egypt’s Investment Law No. 72 of 2017 allows for agencies directly involved in the matter, and an administrative review by three specialized forward the complaints to them for resolution. committees: the Grievances Committee, under For instance, the Greek Investor Ombudsman the General Authority for Investment and is an impartial mediator that provides these Free Zones (GAFI), entertains complaints filed services upon investors’ request. However, it against administrative decisions of GAFI or only deals with private investment projects of other administrative authorities on the issuance €2,000,000 or more, facing delays, disputes, of the approvals, permits, and licenses.66 or other difficulties arising at any stage of The Ministerial Committee for Investment the licensing procedure. The Ombudsman Disputes Resolution investigates applications, identifies the competent public authorities complaints, or disputes between investors, related to the complaint about each case. state bodies, authorities, or companies. The Ministerial Committee for Investment Contracts (3) Empower a government authority to consider Disputes Settlement resolves disputes arising investors’ appeals against administrative from investment contracts to which the state decisions taken by public agencies during or one of its bodies, authorities, or companies is investment activities. a party. An example of this policy measure is In Ukraine, the Business Ombudsman Council Uzbekistan’s Commissioner for the Protection (BOC) is a specialized multi-stakeholder of Entrepreneurs’ Rights (CPER),65 which Alternate Dispute Resolution mechanism considers investors’ appeals about problems jointly set up by the government, the European arising while carrying out investment Bank for Reconstruction and Development, activities. If necessary, the commissioner of OECD, and the largest local business the CPER can request state bodies and local associations. It is empowered to investigate government bodies, enterprises, institutions, and facilitate the pretrial resolution of business and organizations to give it all the relevant malpractice instances on the part of public information needed to consider investors’ authorities, as specified in the complaints appeals. After its assessment, the CPER makes lodged by businesses. As of the date of this recommendations to resolve these appeals. report, the BOC has received more than Once the state bodies and local government 10,500 complaints from investors since May bodies receive the CPER’s recommendations, 2015 and secured direct financial impact for they must provide a written response on complainants exceeding HRV 19.5 billion. The the results achieved. Apart from these tasks, BOC receives and investigates complaints the CPER Is empowered to help investors from businesses concerning acts or omissions, address emerging issues in court and pretrial including decisions of state and municipal procedures. authorities, businesses within their scope, and their officials. Investors can approach the BOC after exhausting at least one instance of an 65 See https://biznesvakil.uz/uz/menu/legal_basis/. 66 See https://www.investinegypt.gov.eg/flip/library/LawsAndRegulations/PDFs/Law72_and_Exec_reg_en.pdf. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 43 administrative review appeal, but before a court of 74 cases. BOC’s direct intervention resulted or tribunal can hear the case. in the conclusion of 44 investigations. In five of the 74 concluded investigations, the BOC The BOC can request the state and municipal issued individual recommendations that it authorities to provide all the information, continues to monitor. In 15 instances, the BOC Documents, and other data needed to process closed its investigation without achieving a and address an investor’s complaint. The successful outcome for the complainant. BOC is not vested with binding authority. But because of its reputation, state and municipal If the investor who lodges a complaint with authorities are likely to implement specific the BOC also sends a notice of arbitration, the remedial steps recommended by the BOC Ministry of Justice would invite a representative and provide a detailed explanation of the of the BOC to sit in an Inter-departmental investigation status and the steps to resolve Working Group (IWG) (which operates not the issues. The latest example is the situation as a permanent body but as an ad hoc resolved in the first quarter of 2022. The state platform with varying composition tasked enterprise “Guaranteed buyer” owed HRV 3 to seek possible reconciliation and develop billion to DTEK Renewable Energy (DTEK VDE) a defense strategy). The ministry usually Group of companies for electricity it sold in invites a representative of the BOC even in 2020–21 at the “green” tariff (FIT). The BOC cases not being formally investigated by the sent its extensive and detailed legal position latter. Most of the IWG’s meetings comprise to state bodies responsible for resolving nonconfidential and confidential parts: the the complainant’s issue. After two years of former is designed to enable the investor and negotiations, correspondence, and meetings, its counsel to present the case (or otherwise the state enterprise finally transferred HRV 3.03 ensure that its position is heard) in front of billion to DTEK VDE. the representatives of the public authorities appointed to the respective IWG. Currently, the It is noteworthy that the BOC received 8,524 BOC is represented in at least two IWGs set complaints as of February 26, 2021. Businesses up in connection with a notice of arbitration lodged almost 111 complaints from the “energy lodged by investors in the renewable energy and utilities” category. The BOC rejected 34 sector. complaints and concluded the investigation 44 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Mechanisms established rights, and obligations and allocate the project through contractual risks between the different parties. Not all of arrangements these contracts require the government’s direct involvement. For example, lending agreements and shareholders’ agreement between the project Although most investor-state arbitration cases company shareholders and the subcontractors identified in this report concern national incentive of the operating contract and the construction programs for renewable power generation contract determine the relationship between the (68 percent), it is noteworthy that 12 percent project company and the special purpose vehicle relate to concessions and five percent to members exclusively. This report examines only power purchase agreements (PPAs). Therefore, the types of contracts that directly involve the government authorities and investors involved in government or state-owned utilities, which are the such contractual arrangements often establish following types: methods to address issues in the underlying contract. This approach helps ensure that • An implementation or public-private partnership problems are dealt with early on and do not (PPP) agreement. This type of agreement is become severe over time, leading to a breakdown between the government and the project of relations between the investors and the company (and its shareholders). Such an host country. Including measures for dispute agreement’s contractual structure can vary prevention within the contract can be especially depending upon the needs and requirements useful for two reasons. First, the contractual parties of the project and the parties (figure 4.2). For will want to avoid adversarial processes that can instance, it can be structured as a concession damage relations, halt the project, and result in to develop, build, and operate a power plant, financial losses for all the stakeholders. Second, known as BOO (Build, Own, Operate), which can the resolution of business and technical disputes be amended for BOT (Build, Operate, Transfer) requires expertise, and business managers can and BOOT (Build, Own, Operate, Transfer). The better control the costs, quality, and other aspects more robust the host country’s regulatory of their business relationships. Using internal framework, the narrower the scope of the dispute prevention, de-escalation, and resolution implementation agreement will be. techniques allows the parties to remain in control • A land and or water use agreement. of the conflict. • A PPA is between the project company/ A typical contractual structure of renewable seller and the buyer/purchaser/offtaker. In energy projects involves multiple players, including such an arrangement, the project company/ the following: seller’s primary responsibility is to deliver the agreed amount of electricity. In turn, the buyer/ • The host country purchaser/offtaker is obliged to purchase the • Buyer/purchaser/offtaker (often a state-owned energy produced and pay the agreed tariff for a utility or public-sector agency that is owned or pre-agreed time. The electricity sold can be from authorized by the government) an existing or a new power generation facility (requiring the project company/seller also to • Project company/seller (owner of the build, operate, and maintain the facility). Various independent power plant [IPP])67 elements of renewable energy PPAs depend • Investors (that is, shareholders of the project on the underlying incentive scheme. Usually, company) and contractors (for the construction the government will provide a grid connection or operation and maintenance of the power and a site, but the parties may amend this facility) arrangement in off-grid projects. A PPA may be awarded through competitive or administrative • Lenders bidding.68 The pricing framework in PPAs Renewable energy projects have multiple typically covers capacity-related charges and contracts that define the parties’ relationship, energy charges. Capacity charge is payable by 67 The project company is usually set up as a SPV. It may be fully owned by the project developer or established as a joint venture (with an investor and lenders). At some point in time, the project developer will usually sell the SPV to the investor. 68 In countries with deregulated energy markets, power producers also build merchant power stations. A merchant power plant is built or purchased from private equity and does not have a PPA in place. Instead, the producer sells electricity in the open market and takes the market price. This type of arrangement generally does not require an agreement between the project company and the government. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 45 the offtaker in consideration of the power plant an amended form because there is no specific operator making generation capacity available to model for renewable energy projects. There the offtaker and is usually the channel to recover may be no need for EPC contracting in small fixed cost. Energy charge is usually referenced to projects, and there may be different supply and the volume of electricity actually delivered and is installation agreements. intended to cover the project company’s variable • In cases where a project company does not costs.69 wish to undertake the operations itself, it may • A turnkey or an engineering, procurement, and enter into an operation and maintenance (O&M) construction (EPC) agreement is between a agreement with a contractor to carry out the project company and a contractor. Usually, the necessary activities. parties base the contractual terms on the red • A financing agreement is between the project and yellow books of the International Federation company and the lenders. of Consulting Engineers (FIDIC) and use them in Figure 4.2: Structure of a public-private partnership Ownership & control Government BOT/Implementation Agreement, Government Guarantee etc. Private Investors Equity Off-take Agreement State-Owned Project Off-Taker Company $ (Utility) Loans Commercial & Official Lenders Commercial Contracts EPC Contractor O&M Contractor Source: Multilateral Investment Guarantee Agency (MIGA), World Bank. It should be noted that none of the contracts Option 1: Ongoing monitoring and evaluation examined in this report use the term “conflict of the project’s performance prevention” or “investor grievance or issue Because of the considerable number of steps redressal” explicitly. Existing conflict prevention involved in renewable energy projects, the procedures in contracts are typically part of parties usually establish mechanisms to ensure the “dispute resolution” process. However, in that the day-to-day operations run as planned. substance, the purpose of these procedures is These mechanisms aim to resolve problems and to de-escalate a problem early. Therefore, even disagreements as and when they occur and not let though contracts use the term “disputes,” the them accumulate over time. The nature and need de-escalation options mentioned as follows are of these mechanisms will vary according to the all used by the parties (1) when the matter is still scope of the contract. For instance, where PPAs in a conflict stage and (2) before they resort to and implementation agreements require a project arbitration or other adversarial proceedings. company to design and build a power facility, the parties will define a role for the engineer70 to monitor and evaluate time and cost variations and run tests before the facility’s scheduled 69 See https://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-agreements/power-purchase-agreements. 70 Also referred to as “owner’s engineer.” 46 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts commercial date of operations, among other the engineer’s appointment terms and conditions things. In other cases, parties may insert joint should require them to act impartially, based on review clauses in the contract to assess the work’s their expertise, experience, and knowledge on all progress and address any issues that may come to referred matters. their attention early on. Contracts that require the project company to operate and maintain a power As mentioned previously, apart from providing generation facility may establish committees for an engineer, some agreements may also set specifically to support the parties in setting up oversight committees for specific works. For operating procedures and ensuring the plant’s safe instance, Pakistan’s Standard Energy Purchase and smooth functioning. Therefore, mechanisms Agreements for solar, wind, and small hydro- in each contract will vary depending upon the powered generation complexes require a seller work to be done, and not all contracts have (or to operate and maintain the power generation should have) all of the mechanisms in place. complexes constructed under the respective agreements. For this, each PPA establishes an In 2015, the Tanzanian Ministry of Energy and Operating Committee that advises the parties on Minerals issued Model PPAs for seven energy the following: technologies, including solar, wind, hydro, and • Coordination of the programs and procedures geothermal. Each PPA envisages an independent for the construction, operation, and engineer to continually monitor and evaluate the maintenance of the seller’s interconnection agreement’s performance.71 The parties must facilities, the power generation complex, the appoint an independent engineer72 before the purchaser’s interconnection facilities, and the scheduled commercial operation date of the related equipment power generation plants. Among other things, the engineer monitors and evaluates any cost • Steps to be taken in case a force majeure event variations that occur due to geological conditions, affects a party, the power generation complex, cost escalations in the civil works associated or the grid system with the facility’s construction, and resettlement • Steps to be taken in case of a shutdown or costs. The engineer must prepare monthly reduction in the complex’s capacity for any reports on these matters before the power reason affecting the purchaser, including plant’s commissioning tests. The reports allow interconnection facilities, the grid system, the the parties to get a provisional and final valuation complex, or any related equipment of the seller’s costs and time spent on variations. If the parties are dissatisfied with the engineer’s • Safety matters affecting the complex, the valuation, payment, opinion, or certification, they purchaser’s interconnection facilities, the grid may ask them to redetermine the findings. The system, the parties, or their contractors engineer should make any redetermination only • Review and revision of protection schemes in consultation with the parties. The engineer’s • Development of testing procedures for the decision at this stage is binding upon the parties. purchaser’s interconnection facilities and the seller’s interconnection facilities Because the engineer’s involvement in the project is continual, Model PPAs require the engineer • Any other matter agreed upon by the parties to be available six months before the plant’s scheduled commencement date until the parties Option 2: Mutual consultations decide to discharge them. The seller recruits the Once a disagreement arises, contracts will engineer through a competitive selection process generally grant parties the right to resolve and with the purchaser’s approval. The engineer it amicably through mutual discussions, must work to the highest professional standards consultations, and negotiations. Although this and exercise the duty of care toward the seller and step is usually a mandatory one that should be purchaser. The Model PPAs explicitly mention that undertaken to de-escalate a dispute, most clauses 71 The PPAs relating to solar, wind, and geothermal power are for the designing, engineering, construction, insurance, commissioning (as defined in the respective PPA), operation, and maintenance of the generation plants covered under each PPA. The Model PPA relating to hydropower is for the sale of power from a hydropower generation plant of installed capacity more than 10 MW. See https://www.ewura.go.tz/2015/08/28/ the-model-power-purchase-agreements-for-different-power-generation-technologies-2/. 72 An “Independent Engineer” is defined identically in all the Model PPAs as “an independent consulting engineer, or engineering Seller, of international repute acceptable to the Purchaser, the Seller and the Finance Parties selected from the list included in Schedule [-] for the purposes of monitoring the construction and certifying the results of Commissioning.” Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 47 require that the parties only make “best efforts” or discussions between previously uninvolved “reasonable endeavours” to resolve the dispute at senior management representatives. To ensure this stage. structured discussions, parties must flesh out the relevant contractual clause by indicating who will The Bangladesh Implementation Agreement engage in discussions at this stage, defining the relating to a 50 MW (AC) Grid Tied Solar Power steps involved and setting the time frame for each Project (Bangladesh Sample Implementation step. Agreement),73 the 2018 PPA on waste to energy,74 and the 2019 PPA for the 50–60 MW solar power Examples of this option are the Open Solar plant75 set out multilayered dispute escalation PPA Model Agreement and the Open Solar processes that start with a discussion between Implementation Agreement which envisage the the parties on any disagreement or dispute. The possibility of structured high-level negotiations. parties must attempt, in good faith, to settle any As per these agreements, if a matter cannot be dispute through consultations within 30 days. settled through mutual consultations within The exception to this clause is a dispute involving 14 days, the parties may refer it in writing to invoice amounts, in which case the matter may a Management Committee comprising one be referred to an expert if it is not resolved after 10 senior manager of each disputing party. The days of mutual discussions (the role of an expert Management Committee must meet within in dispute de-escalation is covered in a separate 14 business days to consider the information section below in this chapter). available and then provide a written opinion on the matter within 28 days of the referral. If all The Land Use Agreement Model for Renewable the Management Committee members sign Energy Electricity Generating Facilities in the a decision resolving the issue, it is considered Regional Center for Renewable Energy and Energy final and binding on the parties. However, any Efficiency (RCREEE) Member States76 requires the other kind of opinion, award, or findings by the contractual parties to make reasonable endeavors Management Committee is not binding. toward settling any dispute or difference amicably. The agreement requires the parties to continue Option 4: Expert determination performing their obligations while the amicable Project participants can also agree on expert settlement procedure is in progress. Although determination clauses to reach a swift resolution of the agreement does not allow the parties to technical and commercial conflicts. initiate arbitration proceedings before completing the amicable settlement procedure, there is an Because of the complex nature of renewable exception to this rule. A party may cut short or energy disputes and the substantial costs involved, bypass the amicable settlement procedure if it parties typically consider the following key points has a good cause to avoid damage to its business when including an expert determination clause in or protect or preserve any right of action it may an agreement: have. The agreement, however, does not define • Specify the types of disputes that will fall under how the parties will determine if the conditions the expert’s authority. to use this exception exist and who will make this determination. • List the qualifications and skills the expert should possess or create mutually agreed terms Option 3: Raise the problem or disagreement of reference based on the types of disputes. with the senior management of each party For instance, an expert on billing disputes Some contracts have an “internal referral” should possess different qualifications from an mechanism that allows the parties to settle expert ruling on operating procedures, facility a disagreement through executive-level commissioning tests, and other technical matters. 73 The agreement is for a project company to design, engineer, manufacture, insure, finance, acquire, construct, complete, permit, test, commission, own, and operate a solar power project with a capacity of 50 MW to supply electric power to the Bangladesh Power Development Board. See https://www.bpdb. gov.bd/bpdb/IPP%20Solar%20Power%20Project/Netrokona/Final%20IA%20for%2050%20MW%20Solar.pdf. 74 PPA relating to a 5 MW (net) Waste to Power Generation Facility. 75 PPA relating to a 50–60 MW (AC) Grid Tied Solar Power Project. 76 The 17 Member States of the RCREEE are Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, West Bank and Gaza, Somalia, Sudan, the Syrian Arab Republic, Tunisia, and Yemen. See https://rcreee.org/sites/default/files/ land_use_agreement_model_for_reegf_rcreee_ms.pdf. 48 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Box 4.2 Defining technical and valuation disputes under renewable energy contracts At the outset, it is important to understand that there is no “straitjacket” definition of what constitutes a technical or valuation dispute and can thus be referred for expert determination. The concerns will differ on the basis of each project’s deliverables and the nature of each dispute. India Under the Open Solar Model Implementation Agreement, each time there is a conflict, the parties must go through a Technical Dispute Determination Optiona to decide if it fits within the definition of a technical dispute.b Because no issues are recognized as prima facie “technical,” the parties must always use the Technical Dispute Determination Option to decide if a conflict can be classified as a technical dispute. Another agreement, the Open Solar Model PPA Agreement, takes a slightly different approach. Apart from carrying a generic definition of technical disputes, similar to the one in the Open Solar Model Implementation Agreement, it also identifies some matters as having a technical nature, such as disputed payments, the determination and amount of deemed energy payments,c and the power plant’s operating and dispatch procedures. Disputes on these matters are subject to expert determination without going through the Technical Dispute Determination Option. PwC Australia PwC Australia Model PPA envisages the possibility of expert determination where a dispute relates to any industry or technical standard or any rules, practices, or customs of any trade or profession. However, it does not specify any prima facie “technical disputes.” Georgia Georgia’s Implementation Agreement for the Nenskra Hydroelectric Projectd sets out multiple criteria to assess if a matter may be referred to an expert determination. It defines a “technical dispute” as one having the following: a technical nature, an aggregated claim of maximum US$1,000,000, relation to the issuance of a takeover certificate, or a specific mention in the agreement as capable of a referral to expert determination. That said, the agreement also recognizes some issues as clearly within the expert’s purview, such as the following: delays in financing the project or its refinancing, land parcels that the government must give to the project company, specifications of the transmission line and connection facilities, the metering and check-metering devices, and the energy rate’s increase or decrease.e Tanzania Some agreements narrow the scope of expert determination to finite issues without leaving room for interpretation. For instance, Tanzania’s Model PPAsf explicitly list matters that fall within the expert’s purview because of their technical nature. Disputes on inclusions, exclusions, and modifications to the draft and final operating procedures fall within the expert’s purview. Disputes concerning the accuracy of the facility’s net energy output measurementg and verification and outcomes of dependable capacity testingh should also be referred to by the parties for expert determination. Any dispute raised by either party concerning payment and billing statements should also be settled through mutual discussions and, failing this process, by the expert. Pakistan Pakistan’s Standard Energy Purchase Agreements for solar, wind and small hydro-powered generation complexes expressly mention critical issues that should be subject to expert determination, such as revisions to the facility’s draft and final operational procedures, failure of the parties to agree upon the plant’s meter readings, outcomes of the commissioning tests, disputed payments, and disagreements on the facility’s maintenance. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 49 Bangladesh Bangladesh’s 2018 PPA for waste to energy generation does not define a technical dispute but identifies the types of disagreements that the parties should refer to an expert determination. For instance, it states that any differences in the applicable bank rate, the plant’s testing and commissioning certificate, meter readings’ accuracy, and billing and invoice amounts should be referred to the expert for resolution. Jordan Jordan’s Standard PPA relating to a Photovoltaic Power Plant Facility stipulates that if the facility’s commissioning is delayed and the parties cannot agree upon an equitable adjustment to the Implementation Schedule within 30 days, they should refer the matter to an expert. Moreover, the PPA requires the parties to submit for an expert determination of any differences between them on the operating procedures and metering that cannot be resolved through mutual discussions. a. “Technical Dispute Determination Option” means the method for determining whether a dispute is a technical dispute as identified in the Key Information Table of the agreement. b. A “technical dispute” relates to a technical, engineering, operational, or accounting issue or a related matter. c. Energy that otherwise could have been generated and delivered to the Delivery Point during the Buyer Curtailment Period (period during which the Facility’s ability to generate and deliver Energy to the Delivery Point is reduced) as calculated in accordance with Schedule 4 (Determination of Payments) shall constitute“Deemed Energy” The payment made by the Buyer to the Project Company in respect of such Deemed Energy is the“Deemed Energy Payment” d. The Implementation Agreement is for the Project Company to design, engineer, develop, finance, construct, own, operate, maintain, and transfer the Facility (or, as applicable in accordance with the terms of the Put and Call Option Agreement, for the Private Shareholders to transfer their Shares) at the expiration of the Term or upon early termination of this Agreement. e. Energy rate is defined and determined in Schedule 3 of the Agreement. f. The PPAs relating to solar, wind, and geothermal power plants are for the designing, engineering, construction, insurance, commissioning (as defined in the respective PPA), operation, and maintenance of the powered electric generation facility under each PPA. The Model PPA relating to hydropower is for the sale of power from a Hydro Power Generation Plant of installed capacity more than 10 MW. g. “Net Energy Output” means net energy delivered by the Seller for sale to the Purchaser at the Point of Supply in accordance with the Purchaser’s Dispatch as measured in accordance with the agreement. h. “Dependable Capacity” means the sustained capacity in MW from the Plant as declared by the Seller in writing to the Purchaser. • Set out a mechanism to decide who will appoint decision is final and binding. The contract the expert when the parties cannot make a should also define the status of the expert’s mutually acceptable decision. Parties may determination in relation to formal arbitration already identify an appropriate appointing proceedings. authority that will select the expert in the contract. Again, the nature of the dispute can See box 4.2 for examples of contract provisions in be a factor in deciding the appointing authority. several countries. For example, an engineering body may be better suited to select an expert for technical Expert determination of disputes arising from construction-related issues since it will have force majeure political events, change of law, tax, experience in the area. and insurance • Identify the procedure or the institutional Some PPAs and implementation agreements rules that will govern the expert determination contain clauses on how the parties should resolve process. differences following force majeure political • Explicitly mention that the expert must be events and changes to laws and taxes. Some of independent and impartial. There could also be the agreements examined contain clauses in this an additional obligation to disclose any conflict respect. These contracts are for power supply and of interest. the construction of new generation facilities. Some • Specify the nature of the expert’s determination. contracts for designing, building, operating, and Parties should know whether the expert’s 50 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts maintaining renewable energy power generation of the report, it has the option to raise the matter facilities contain such clauses.77 for expert determination. However, the contract does not make such referrals mandatory. (1) Expert determination of disputes following a political force majeure event or a change in The agreement also states that the Seller should law give the government a “notice of increased costs” if its annual revenue decreases or the Georgia’s Implementation Agreement for the aggregate project costs exceed US$100,000 as Nenskra Hydroelectric Project requires that a result of (a) a change in law, (b) a political force disputes regarding revisions to the project’s majeure event, (c) a restoration,81 (4) a change timeline and costs, following specific force to the grid system, (5) the connection facilities majeure events must be settled by an expert. and/or the transmission line, or (6) a grid event.82 The Seller (in this case, the project company) Following the notice, the parties should discuss should hire an independent engineering and try to agree on the adjustments or lump sum consulting firm to prepare a restoration report if compensation that the Seller should receive. If the power generation facility needs restoration the compensation amount cannot be agreed or modifications as a result of a political force upon within 45 days of the notice, then the matter majeure event,78 a change in law,79 or a change should be resolved by the expert. in the grid system.80 The report must describe the trigger event and the damage caused, assess Pakistan’s Standard Energy Purchase Agreements whether the restoration is technically feasible, give for solar, wind, and small hydro-powered an estimate of the restoration time and cost, a generation complexes also require experts to revised cash flow forecast of the power generation resolve disputes arising from changes in laws facility, and an estimate of the recoverable and political events caused by force majeure. insurance proceeds. If a party disputes any aspect Following a Pakistan Political Force Majeure 77 For example, Georgia’s Implementation Agreement for the Nenskra Hydroelectric Project is for the Seller to design, engineer, develop, finance, construct, own, operate, maintain, and transfer the Facility; the Pakistan Standard Energy Purchase Agreement for Solar Powered Power Generation Complex is for the Seller to design, engineer, construct, insure, commission, operate, and maintain a solar-powered complex (generation capacity not specified in the model agreement) on build-own-operate basis; the Jordanian PPA between the National Electric Power Company (Buyer) and the project company (Seller) is for the development, design, financing, construction, ownership, operation, and maintenance of the power generation facility and to sell all the electricity therefrom to the buyer; the Bangladesh Implementation Agreement is for the Project Company to design, engineer, manufacture, insure, finance, acquire, construct, complete, permit, test, commission, own, and operate a Solar Power Project with a capacity of 50 MW to supply electric power to the Bangladesh Power Development Board. 78 Where the Political Force Majeure Events resulted in uninsured damage to the Facility with an aggregate estimated cost in excess of US$100,000 (or its equivalent amount in another currency) in any Annual Generation Period (including following application of the proceeds of any insurance in accordance with Clause 26.1 (Application of Proceeds of Insurance Following a Force Majeure Event). As per the Agreement, a Political Force Majeure Event means each of the following events to the extent that (other than in paragraph (g) below) such event results in an adverse Material Company Effect: (a) any act of war (whether declared or undeclared), invasion, armed conflict, or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, civil war, civil commotion, or act or campaign of terrorism or political sabotage including any politically motivated intrusion into any IT system, in each case directly affecting or occurring in Georgia or occurring as a result of an act or omission of GoG or any Public Authority; (b) any chemical contamination, radioactive contamination, or ionizing radiation in each case directly affecting or occurring in Georgia or occurring as a result of an act or omission of GoG or any Public Authority; ( c) any Lapse of Consent; (d) any strike, work-to-rule, go-slow, or analogous labour action that is politically motivated and is widespread or nationwide in Georgia; (e) any pre-existing Environmental Condition; (f) any grant of third-party rights by GoG or any Public Authority to: (i) impound, use, or divert any of the waters in the Catchment Area at a location upstream of the Facility; (ii) dam water downstream in a manner that results in the Facility being flooded ; or (iii) use water in any manner that conflicts with the water use rights of the Company and the exercise of such third-party right results in a claim being brought against the Company or a restriction on the Company’s rights; or (g) any Changes in Law or Changes in Tax that (i) make any material undertaking or obligation of the GoG, the Offtaker, or the Fund under any Project Agreement, any Finance Document, the EPC Contract or the O&M Contract unenforceable, invalid or void, (ii) render it unlawful for the Company or render the Company unable to, or materially affect its ability to, (A) repatriate dividends to any Shareholder, or to (8) pay any amount the Company is required to pay to the Finance Parties under the Finance Documents, (iii) render it unlawful for the Company or render the Company unable to, or materially affect its ability to. Receive any material payment, perform any material obligation, or enjoy or enforce any material benefit under any of the Project Agreements, the Finance Documents, the EPC Contract or the O&M Contract or (iv) prior to Actual COD, causes, or will cause, any delay to the performance of the Company’s obligations under this Agreement to the extent that such delay arises as a direct result of any extensions of time granted to the EPC Contractor in accordance with the terms of the EPC Contract. 79 Where compliance by the Company with any one or more occurrence of a Change in Law requires a modification or a capital addition to the Facility in aggregate with an estimated cost in excess of the Change in Law Threshold Amount. Per the Agreement, a Change in Law means the adoption, promulgation, bringing into effect, modification, amendment, repeal or reinterpretation of any Applicable Law, other than any Applicable Law pertaining to Taxes, including: (a) the adoption, promulgation, bringing into effect, modification, amendment, repeal or reinterpretation of the Grid Code or the Market Rules, in each case as in effect as at the Execution Date; (b) the imposition by the GoG or a Public Authority of any term or condition in connection with the issuance, renewal, extension, replacement, or modification of any Consent; or (c) the imposition by the GoG or a Public Authority of any additional Consent that in any such case: (i) establishes any requirement for the development, design, construction, financing, ownership, operation, maintenance or transfer relating to the participation by any Party, any Contractor, any Shareholder or any Finance Party in the Project that is more onerous or restrictive than the requirements: (A) in effect as at the Execution Date; (B) specified in any applications, or other documents filed in connection with such applications, for any Company Consents filed by the Company on or before Actual COD; and (C) agreed to by the Company in any of the Project Agreements; or (ii) otherwise has an adverse Material Company Effect. 80 Where any changes to the Grid System, the Connection Facilities and/or the Transmission Line that in aggregate have the effect of requiring a modification or a capital addition to the Facility with an estimated cost in excess of US$I00,000 (or its equivalent amount in another currency) in any Annual Generation Period. 81 Restoration has the meaning given to such term in Clause 26.2(a) (Preparation of Restoration Report Following a Political Force Majeure Event, Change in Law or Change in Grid System). 82 Grid Event means unavailability whether in full or in part, of the Grid System, Connection Facilities or the Transmission Line, in each case for any reason (including any Natural Force Majeure Event affecting the ability of any party constructing or operating the Transmission Line) other than as a direct result of a default by the Company or the Sponsor under this Agreement, the PPA or the Shareholders’ Agreement (as applicable). Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 51 Event (PPFME)83 or change in the law,84 the Event) is final and binding. The parties cannot Seller (project company) must prepare and give appeal against the decision unless they agree to the government a preliminary estimate of the the contrary at the time of the expert’s selection. compensation it should receive for any material It further states that the parties expressly waive, damage, modifications, or capital addition.85 The to the fullest extent permitted by law, all rights to preliminary estimate must state the projected cost contest the expert’s decision before an arbitration range of restoration (after deducting the insurance tribunal or any court or other adjudicatory or proceeds available or likely to become available administrative body. to the Seller), the threshold amount,86 a schedule of activities, and a time frame for undertaking Jordan’s Standard PPA relating to a Photovoltaic the restoration. The parties should meet within Power Plant Facility (generation capacity not 15 days of preparing the Preliminary Estimate to specified in the PPA) lists seven grounds for a conclude the discussions. If the Seller’s restoration “Government Force Majeure,”88 including a change cost estimate exceeds the threshold amount—and in the law. It states that if a force majeure event the government disagrees with the estimate— occurs before the commercial operation date, then the matter (along with any disagreement resulting in material damage to or loss of the regarding the restoration schedule) must be facility, or a delay in achieving the commercial referred to an expert within 20 days from the start operation date, the parties shall consult with of the disagreement. each other as soon as practicable concerning the effect of the event on the implementation Expert determination in Pakistan’s Standard schedule. If the parties cannot agree on an Energy Purchase Agreements for solar, wind, and adjusted implementation schedule within 30 days, small hydro-powered generation complexes is the matter should be referred to the expert for more definitive than in Georgia’s Implementation determining the commercial operation date, the Agreement, which allows the parties to refer any Long Stop Date,89 and any payments due because expert determination to arbitration.87 The Pakistani of the delayed commissioning. Moreover, if a force PPAs clearly state that an expert’s decision on any majeure event (including a Government Force disputes concerning compensation following a Majeure event) causes an Event of Loss,90 in that PPFME or a CLFME (Change in Law Force Majeure case, the project company (Seller) must rebuild, 83 The following political events that occur inside or directly involve Pakistan (each a “Pakistan Political Event,” and to the extent also a Force Majeure Event, a “Pakistan Political Force Majeure Event”): (i) any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, civil commotion, or act or campaign of terrorism or political sabotage; or (ii) any Lapse of Consent that shall have existed for thirty (30) consecutive Days or more; or (iii) any strike, work-to-rule, go-slow, or analogous labor action that is politically motivated and is widespread or nationwide. 84 Per the Agreements, change in law means (a) the adoption, promulgation, repeal, modification or re-interpretation after the date of this Agreement by any Public Sector Entity of any Law of Pakistan (including a final, binding and non-appealable decision of any Public Sector Entity); (b) the imposition by a Relevant Authority of any material term or condition in connection with the issuance, renewal, extension, replacement or modification of any Seller Consent after the date of this Agreement; or (c) the imposition by a Relevant Authority of any additional Seller Consent, that in the case of each of clause (a), (b), or (c) hereinabove establishes either a material change in cost or in revenue, or any requirement for the design, construction, operation, maintenance or financing of the Complex that is more restrictive than the most restrictive requirements (i) in effect as of the date of this Agreement, (ii) specified in any applications, or other documents filed in connection with such applications, for any Seller Consents filed by the Seller on or before the Commercial Operations Date, and (iii) agreed to by the Seller in any of the Project Agreements. 85 The PPAs relating to solar and small hydro-powered generation complexes define “Material damage” or a “material modification” or “material capital addition” as out-of-pocket expenditures on such damage, modifications or capital additions as are, or are reasonably expected to be, in excess of the equivalent of (i) the higher of the product of US$5,000 and Contract Capacity or US$100,000 in respect of any single event resulting in damage or requiring a modification or addition; or (ii) the higher of the product of US$20,000 and Contract Capacity or US$250,000in the aggregate in any Year (in each case adjusted annually from the Commercial Operations Date for changes in the United States consumer price index from the value existing on the date hereof). The PPA relating to wind powered generation complex defines “material damage” or a “material modification” or “material capital addition” as out-of-pocket expenditures on such damage, modification or modifications or capital addition or additions are or are reasonably expected to be in excess of the equivalent of (i) US$250,000 in respect of any single event resulting in damage or requiring a modification or addition; or (ii) US$1,000,000 in the aggregate in any Year (in each case adjusted annually from the Commercial Operations Date for changes in the United States consumer price index from the value existing on the date hereof). 86 “Threshold Amount” shall mean, for any event, the EPC Cost multiplied by a percentage equal to twenty-five percent (25%) at any time prior to or on the Commercial Operations Date and such percentage decreasing annually as a straight-line basis to five percent (5%) at one year prior to the end of the Term, and remaining at five percent (5%) thereafter until the end of the Term. 87 This item is only the case for disputes concerning compensation following a PPFME or a Change in Law Force Majeure Event (CLFME). 88 “Government Force Majeure” means Force Majeure which consists of any or any number of the following events: (i) acts of war (whether declared or not), invasion, armed conflict, act of foreign enemy or blockade in each case involving, occurring within Jordan; (ii) acts of rebellion, riot, civil commotion, nationwide strikes of a political nature, act or campaign of terrorism, or sabotage of a political nature, or industrial disturbances, lock outs, or any prolonged civil action that blocks access to Government of Jordan or Government Authority; (iii) any boycott, sanction, embargo penalty or other restriction imposed directly on Jordan by the government of during the period up to and including the Commercial Operation Date; (iv) any action or failure to act by a Government Authority that results in any Government Authorization: (a) ceasing to remain in full force and effect; or (b) not being issued or renewed in a timely manner upon due application having been made, provided that the reasonable exercise of any rights of a Government Authority pursuant to any Government Authorization shall not constitute Government Force Majeure; (v) National Electric Power Company Grid Failure to the extent such failure is caused as a result of Government Force Majeure; (vi) nationalization, expropriation initiated or pursued directly by the Government of Jordan of the PV Facility; and (vii) a Change in Law that prevents the Project Company from building or operating the PV Facility or which otherwise cannot be cured under Article 13.11. 89 “Longstop Date” means the date falling three (3) months after the Required Commercial Operation Date as identified as such in the Implementation Schedule as adjusted from time to time in accordance with this Agreement. 90 “Event of Loss” means an event that causes all or a portion of the PV Facility to be damaged, destroyed, or rendered unfit for normal operation. 52 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts repair, and restore the facility once the event (2) Expert determination of disputes following a ceases. For this purpose, it should use all insurance change in taxation proceeds and other amounts received on account of the Event of Loss (together called the “Casualty Georgia’s Implementation Agreement for the Proceeds”). Before the Seller receives the Casualty Nenskra Hydroelectric Project states that the Proceeds, it must provide the government Seller (project company) should give the Buyer (Buyer) with a report on whether the restoration (government) a notice of increased cost if it is commercially feasible and whether the Casualty experiences a decrease in revenue or an increase Proceeds are sufficient for this purpose. If the in costs of US$100,000 (aggregate) or more in any Buyer disputes the Seller’s determination, it may annual generation period because of a change in submit the matter to the expert. taxes.91 Following the notice, the parties should discuss and try to agree on the adjustments or Moreover, the PPA gives the Buyer the right to lump sum compensation to which the Company is refer a dispute to the expert if it believes that entitled. In the event the parties have not agreed the Seller is not pursuing any restoration aspect to an amount within 45 days of the Increased “diligently.” In such a situation, the expert’s Costs Notice, then the dispute shall be resolved determination is limited to creating a reasonable through an expert determination. restoration timetable, and the Seller must adhere to this timetable. The PPA also states that if a Pakistan’s Standard Energy Purchase Agreements party wishes to raise any other dispute regarding for solar, wind, and small hydro-powered the other party’s compliance with its restoration generation complexes follow a similar approach to obligations, it should refer this dispute to the the Georgian agreement but only to a degree. The expert for resolution. Standard Energy Purchase Agreements state that if an actual or anticipated change in tax92 causes Pakistan’s Standard Energy Purchase Agreement the Seller to incur any tax costs,93 realize its tax and Bangladesh’s Sample Implementation savings,94 or lead to a variation in the withholding Agreement differ regarding the weight attached tax rate, then either party may give notice of these to the expert’s determination. Contrary to the changes to the other. This notice should be done approach taken in the former, Bangladesh’s within 30 days of becoming aware that the change Implementation Agreement states that an in taxation will alter the Seller’s tax costs or tax expert’s decision is not final and binding unless savings. Within 45 days of the change in tax notice, agreed otherwise between the parties. Moreover, the Seller must give the Buyer a detailed written parties to Bangladesh’s sample Implementation calculation of the affected tax costs, tax savings, Agreement can contest the expert’s decision or withholding taxes. The calculations should be before an arbitration tribunal—an avenue not open accompanied by a statement from an international to parties under Pakistan’s PPA. Therefore, the accounting firm or other reputable and qualified Bangladesh Sample Implementation Agreement professional consultant certifying that the Seller treats the expert as an additional avenue for will incur, realize, or become subject to additional de-escalating disputes, whereas Pakistan’s PPA tax variations. makes it an alternative to arbitration. It should be noted that neither agreement allows the parties to The agreements state that the parties must challenge the expert’s determination before courts resolve any dispute on the amount of the tax or administrative bodies. costs or tax savings resulting from a tax change, the adjustment to the energy price, or set-off 91 Change in Tax means: (a) any substantive deviation between the Tax Implications and the Tax Ruling (substantive, for the purpose of this definition, meaning a deviation that causes a financial impact to the Company of equal to or greater than the Change in Tax Threshold Amount) or, after the Execution Date, the adoption, promulgation, bringing into effect, modification, amendment, increase, repeal, interpretation, reinterpretation or application of any Applicable Law relating to any Tax including any application of any Tax, which is imposed on the Company or any Private Shareholder (including any withholding Taxes on distributions to Shareholders or the payment of amounts due and payable to the Finance Parties) ; and (b) until the Final Debt Maturity Date, for invoices paid in any Annual Generation Period, any event where the aggregate GEL amount paid to the Company pursuant to Clause 8.2(b) (Payment) of the PPA in that Annual Generation Period is lower than the aggregate GEL amount that would have been paid to the Company in respect of those invoices if, for each such invoice, the GEL amount had been calculated by reference to the official exchange rate posted by the National Bank of Georgia on the date of payment of that invoice and not by reference to the official exchange rate posted by the National Bank of Georgia on the last day of the TOP Period that that invoice applies to (and, for avoidance of doubt, the amount of such deficit shall be deemed to be a decrease in revenue). 92 After the date of the agreement, the adoption, enactment, promulgation, coming into effect, repeal, amendment, re-interpretation, change in application, change in interpretation or modification by any Public Sector Entity of any Law of Pakistan relating to any Tax or Taxes. 93 An amount equal to the amount of any new or additional Tax or an increase in an existing Tax payable by the Seller in relation to the Project as a result of a Change in Tax, but excluding any withholding Tax on dividends. 94 An amount equal to the amount of any decrease or reduction in or elimination of a Tax, other than withholding Tax on dividends, payable by the Seller in relation to the Project as a result of a Change in Tax. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 53 against the energy payment, according to the new Indian Model PPA for the Implementation dispute resolution clause. It does not explicitly of Off-Grid Solar Power Plants in the Renewable require expert determination, unlike the Georgian Energy Service Company (RESCO) model Implementation Agreement for the Nenskra makes it mandatory for the parties to undertake Hydroelectric Project. Therefore, the parties may conciliation. The agreement requires that if the avail the option of an expert determination, but purchaser and the power producer cannot settle that step is not mandatory, and they may decide differences or disputes by mutual consent, they to bypass the step and directly take recourse to must resort to conciliation before recourse to arbitration. arbitration.96 Jordan’s Standard PPA relating to a Photovoltaic Power Plant Facility requires that any Option 5: Mediation dispute or difference, except those of a technical Contractual dispute de-escalation processes may nature, be settled amicably by the parties within include recourse to mediation95 or conciliation two months. If this is not possible, they should in some instances. For example, the Open Solar refer it to senior executives of the parties for PPA and Implementation Agreement give parties mediation. The PPA does not give guidance on this option. The use of mediation under these whether the mediation should be formal under agreements is not compulsory. Parties may, at institutional rules or a simple, informal negotiation Box 4.3 Industry perspective—Use of mediation No respondents to the IAP Survey appear to have used mediation or conciliation to solve their differences with the host country before the commencement of arbitration or litigation. However, one respondent was able to settle a conflict through mediation after the commencement of an arbitration. Two other respondents conducted a formal analysis of the suitability of mediation or conciliation for settling a dispute. Respondents indicated the following problems as preventing disputes from being considered for mediation or conciliation: • Lack of familiarity with mediation or conciliation or the process • Absence of the legislative framework for mediation or conciliation of disputes involving the government • Concerns regarding the enforceability of mediated settlements • Concerns regarding the political and legal consequences of a settlement Source: IAP Survey. any time and without prejudice to any other between the parties. For IAP Survey results, see proceedings, seek to settle a dispute following box 4.3. agreed mediation rules. On the other hand, the 95 The United Nations Convention on International Settlement Agreements resulting from Mediation (Singapore Convention on Mediation) has improved the international framework on mediation, by establishing a harmonized legal framework enforcement of settlement agreements resulting from mediation. 96 Reference to conciliation is not included in the 2016 Indian Model EPC Agreement for Grid Connected and Off-grid Roof-Top Solar Power Plants in CAPEX model. 54 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Chapter 5: Mechanisms to Reduce Regulatory Risks, Prevent Conflicts and Disputes in the Renewable Energy Sector Chapter 4 mapped out measures, following regulatory reform. In 2017, the Energy Charter different approaches that countries have put Conference98, recalling the G20 Guiding Principles in place to prevent disputes and investor-State for Global Investment Policymaking (2016)99 and conflicts. Apart from the contractual mechanisms the joint African, Caribbean, and Pacific Group discussed in the final section of Chapter 4, most of States (ACP)—UNCTAD Guiding Principles for measures mapped were sector neutral and ACP Countries’ Investment Policymaking (2017),100 available at the economywide level. No concrete endorsed some of the best practices in regulatory initiatives have been taken to specifically deal with reform to minimize potential conflicts with the reduction of regulatory risks and the prevention foreign investors.101 The best practices include the of disputes in the renewable energy sector. following: • Identify clearly and unambiguously a single lead This chapter discusses options, based on the agency in charge of the regulatory reform at experience of the Energy Charter Secretariat hand. and the World Bank Group, that countries can explore to reduce regulatory risks, prevent and • Develop a consolidated program document, manage investor-state conflicts in the renewable implementation roadmap, and decision-making energy sector. The options can be classified into schedule, with public meetings to report (1) systemic measures to improve regulatory progress. frameworks or (2) institutional measures to handle • Provide explanatory/background materials and investor grievances.97 timely information on the proposed regulatory reform to help the involved parties understand (1) Systemic measures to improve regulatory better its purpose and applicability. frameworks • Ensure that the consultation is timely and Chapters 2 and 3 highlighted the prevalence of transparent and provides stakeholders with regulatory risks and disputes in renewable power sufficient time to submit their position. The generation, arising from adverse regulatory stakeholders should clearly understand the changes and the unpredictability thereof. consultation’s scope. It is beneficial to report Therefore, at a systemic level, one of the main back on the result of such consultation, tools to reduce regulatory risks and prevent explaining how the stakeholder input has been conflicts with foreign investors in renewable assessed and considered. energy is introducing transparency and industry • Survey early in the process all existing consultations in undertaking nondiscriminatory international obligations of the state and map 97 These initiatives can be complemented with other solutions. For example, risks and grievances are often generated from badly negotiated contracts. In this regard, improving capacity of state agencies to negotiate contracts, fully understanding the implications of various terms and events can further help prevent conflicts. Limited support in this area is provided to states through initiatives such as the Connex Support Unit, African Legal Support Facility. See https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/african-legal-support-facility. See also Karl P. Sauvant, “Importance of Negotiating Good Contracts” at https://e15initiative.org/blogs/importance-negotiating-good-contracts/. 98 The Energy Charter Conference is the governing and decision-making body of the International Energy Charter, https://www.energycharter.org/ who-we-are/energy-charter-conference/. 99 See OECD, Annex III: G20 Guiding Principles for Global Investment Policymaking (2016) at https://www.oecd.org/daf/inv/investment-policy/G20-Guiding- Principles-for-Global-Investment-Policymaking.pdf. 100 See UNCTAD, Guiding Principles for ACP Countries’ Investment Policymaking, U.N. Doc. ACP/85/037/17/Rev.1. at http://www.acp.int/sites/acpsec.waw.be/ files/Guiding%20Principles%20for%20ACP%20countries.pdf. 101 Energy Charter Conference Decision (CCDEC2017 4) of October 11, 2017, Best Practices in Regulatory Reform: Minimising Potential Conflicts with Foreign Investors at https://www.energycharter.org/fileadmin/DocumentsMedia/CCDECS/2017/CCDEC201704.pdf. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 55 the categories of foreign investors currently goals, ensuring transparency in decision-making, present in the territory of the host country, granting equal treatment to foreign and domestic analyzing the potential impact and risks investors, and effectively managing disputes with stemming from the envisaged regulatory reform. foreign investors.103 • Conduct a comprehensive study into problems, (2) Institutional measures to handle investor conflicts, and disputes the host country issues before their escalation to legal experienced in the past in that particular sector, disputes as well as a comparative analysis of problems faced by other states that had introduced similar Measures to improve the process of reforms. This study should be part of the impact regulatory reform previously discussed can assessment of the proposed regulatory reform. be complemented with specific measures to address investors’ issues when they arise, before The Energy Investment Risk Assessment (EIRA)102 they escalate into full-fledged legal disputes. report assesses legal and regulatory risks to In this regard, countries may consider setting energy investment that can be mitigated through up grievance mechanisms (also referred to as government action. It aims to identify policy gaps, investment retention or dispute prevention provide learning opportunities, and stimulate mechanisms) specifically for renewable energy reforms that make countries’ investment climate projects. The World Bank’s experience of more robust and reduce the risk of conflicts with implementing such measures—in particular, foreign investors. EIRA guides governments in investor grievance mechanisms or targeted making their legal and regulatory frameworks aftercare programs—shows that, indeed, such resilient and increase their preparedness for the mechanisms can be further refined to cater energy transition. At the same time, it offers the specifically to the renewable energy sector. investor community information on the latest These mechanisms address both political risks developments in the energy sector of countries, and operational risks, which may lead to the including their policy targets, revisions to legal withdrawal, closing, or cancellation of investment and regulatory frameworks, and incentives (including preapproved expansion plans) along offered to facilitate investments in clean energy with legal disputes (World Bank 2019; Kher, technologies. Obadia, and Chun 2021). While investor grievance mechanisms are more focused on political risks Currently, EIRA evaluates three risk areas: (a) that can cause legal disputes, targeted aftercare unpredictable policy or regulatory change, (b) programs are focused on a broader set of discrimination between domestic and foreign operational risks.104 investors, and (c) breach of state obligations. In 2022, after three years of intensive discussions, Investor grievance mechanisms collect data and EIRA’s scope was updated to construct five identify patterns in the host country on political indicators to measure these risks: (a) framework and operational risks under the control of the for a sustainable energy system, (b) the foresight government. Creating the mechanism entails of policy and regulatory change, (c) management empowering a reform-oriented government of decision-making processes, (d) the regulatory agency (that is, a lead agency) and establishing an environment and investment conditions, and intra-governmental mechanism to systematically (e) the rule of law (compliance with national and address issues arising from government conduct international obligations). The indicators reward or under government control, thereby reducing countries for (a) taking concrete measures to risks at their source. The lead government manage and limit arbitrary or discriminatory agency brings to the attention of high levels of policy changes and (b) reducing the possibility government problems affecting investments, of breaching state obligations. Such measures helping to address them before they escalate include setting long-term policy objectives and further. 102 See https://eira.energycharter.org/. 103 The updated scope of EIRA aims to reflect the pledges and commitments made by countries under the Paris Agreement and the global efforts to combat climate change. In addition to its original scope, EIRA now evaluates legal and regulatory risks to achieving the clean energy transition, corruption risks, and competition in the electricity markets. It gives recommendations on long-term policy planning for clean energy transition, implementing enabling measures in this respect, and addressing cross-cutting issues of gender mainstreaming in energy and climate change, human rights, and environmental protection. It also examines whether countries are setting well-defined action plans, policy targets, and market-based incentives—in consultation with energy investors and other stakeholders—to mitigate the risk of unpredictable policy or regulatory changes at a later stage. 104 See World Bank, Divestment Drivers and FDI Retention (forthcoming). 56 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Implementation of grievance mechanisms entails 2. Determining a systematic approach and three broad steps, as shown in figure 5.1: operating procedures: Clear operating procedures should be stipulated that outline 1. Establishing an appropriate institutional setup: the strategy and process of outreach to This step includes establishing a lead agency investors, recording investor issues; analyzing that identifies, tracks and manages projects investor issues; collecting the requisite data on at risk and investor issues. The lead agency investment projects and issues; engaging in should have a strong mandate to perform problem-solving, escalation, or advocacy; and problem-solving functions effectively based on following up for implementation of solutions. a proper legal foundation. Table 5.2 provides options for establishing a lead agency. A key 3. Monitoring and evaluation: Clear performance feature of the institutional setup is having an indicators to measure the success of the escalation mechanism, where investor issues mechanism should be set up. These indicators that cannot be resolved at the technical level include the amount of investment retained by can be escalated for political decision-making. effective handling of investor issues and the This escalation mechanism is usually an inter- number of investor issues resolved. A tracking ministerial body with representatives from all tool should be implemented by the lead agency key ministries. to collect data and monitor the performance of the mechanism regularly. Table 5.1. Essential features of grievance mechanisms Institutional setup Operating procedures Monitoring & evaluation Lead Agency or IPA Steps to define Standard Operating Impact Indicator • Identifies, tracks, manages projects at Procedures 1. Investment retained risk and investor grievances 1. Defining and executing outreach plans (having a strategy) Main Outcomes Legal Instrument, Clear Mandate 1. Number of projects retained 2. Recording issues / filtering by risk • Clarifies role of lead agency 3. Assessing impacts (legal and economic) 2. Number of issues / grievances solved • Ensures coordination 4. Problem-solving Tracking Tool Escalation Mechanism / Advocacy • For the Lead Agency to easily calculate 5. Escalating and Advocacy (if needed) • Addresses highly political grievances and those indicators it is important to have enforces implementation 6. Following up a tracking tool to capture the necessary data • Addresses systemic issues – push for reforms Source: World Bank Group. Note: IPA = Investment Promotion Agency. Table 5.2 Options for establishing a lead agency New agency Within an investment promotion agency Type Independent Lead agency within IPA (for example, a grievance management unit) New lead agency (for example, a business ombudsperson) Escalation Independent platform Discussion in IPA units Mechanism → Prime ministerial or inter-ministerial meeting → High-level management of the IPA → Prime ministerial or inter-ministerial meeting Pros • Strong authority (including on issues outside the scope • Easy access to investors of the IPA) • Easy issue collection process • Focus on high-risk cases Cons • New institution with new resources • Mandate can be limited • Slow progress • Confusion between the grievance management and broader aftercare • Low capacity • Difficulties in focusing on high-risk cases Conditions • No IPA or a weak IPA • Strong empowerment of the IPA for coordination for success • Strong political support from the top to create a new • Need for an efficient filtering and escalation mechanism agency Source: World Bank Group. Note: IPA = Investment Promotion Agency. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 57 The process of resolving investor grievances • One important option for the lead agency in typically involves six steps: charge of the implementation of a grievance mechanism can be the main agency responsible 1. Determining the overall implementation for the administration of renewable energy strategy, including which types of issues and projects. Given the very specialized nature of investors (sector, volume, home country) need renewable energy projects, having an agency to be prioritized for retaining investments and that understands the operational details is preventing investor-state disputes. critical. Investment promotion agencies and 2. Recording of the issue in the lead agency’s other investment-related agencies that are tracking tool. The information recorded should often lead agencies may not have the requisite include: technical competence to coordinate and - Investment details, such as location, amount, analyze renewable energy-related investor nationality concerns. Another option that can be explored is to continue having the main investment Description of the investor issue—agencies - agency as the lead agency but also include a involved, nature of the issue, the impact of the representative of the renewable energy agency issue on the investment operations and plans as a lead agency member. In determining the - Previous actions taken and outcomes of those lead agency, the government should be sure actions to consider the issues of conflict of interest, particularly for agencies that are also energy The tracking tool is critical to the performance purchasers and regulators themselves. of the lead agency. The task of recording the issue also entails filtering issues to ensure • This report has shown that a large part of that only issues between investors and public investment disputes in the renewable power entities that affect retention of investment or generation are caused by adverse regulatory could escalate into legal disputes are registered changes, such a change in FIT or others. with the grievance mechanism. Therefore, the institutional setup for any mechanism should ensure the participation of 3. Assessing the legal and economic aspects of relevant bodies in charge of making legislative or the issue. This assessment will help determine regulatory changes in the sector. the impact of the issue on investor operations— in particular, the ability of an investor to • There should be a more emphatic focus on continue its operations—and whether the issue addressing systemic issues in the renewable could lead to liability for the state. energy sector in a way that more widely facilitates reform of the investment climate— 4. Engaging in effective problem-solving. The lead apart from the regular handling of investor- agency engages with its peer agencies that specific issues. caused the investor issue, with the result being a resolution. In its engagement, the lead agency • Relatedly, given the importance of contracts in leverages the data recorded on the investor the renewable energy sector, any mechanism for issue and its impact on operations to persuade the sector should clarify and address the aspect the other agencies to reach a solution. of contract re-negotiations - reflecting good practices around transparency, predictability and 5. Escalating for political decision-making when a fairness for both investors and States. solution to the issue has not been reached at a technical level. • As discussed in Chapter 4, renewable energy contracts extensively use sectoral technical 6. Communicating and following up. Once the experts such as engineers or other technicians issue is resolved, it is important to follow up in addressing differences between contracting with the involved agencies to ensure that parties. Because the nature of investor issues the solution is properly implemented. All in the renewable energy sector can be very through the process, the lead agency should technical, it is important to ensure that the lead communicate clearly with the investor. agency has access to a pool of sectoral experts for an external advisory opinion as needed. This Grievance mechanisms that cater specifically to external opinion would likely be needed when the renewable energy sector must consider some the lead agency is preparing the economic key differentiating features: and legal assessment of the investor issue and engaging in problem-solving with the involved 58 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts agency. The external advisory opinion will help lead agency—will further enhance accountability the lead agency assess the issue from both an at all levels. economic and legal perspective keeping in view the technical and operational complexities of See box 5.1 for one country’s experience with project implementation. first steps toward creating an investor grievance management mechanism.105 • Where there already exists a horizontal, sector- neutral grievance mechanism, clarity should In 2018, the Energy Charter Secretariat developed be ensured, in particular on coordination and the Model Instrument for Management of information sharing between that and the Investment Disputes.106 Although primarily mechanism specific to the renewable energy focused on the effective management of sector. investment disputes, the Model Instrument also • Another aspect to consider is the possibility contains several tools that can be useful for conflict of including a reference to any retention or prevention, such as centralization of information, grievance management mechanism within information sharing, coordination, and an early- the standard contract entered into between warning mechanism. The Model Instrument investors and public agencies. As discussed also emphasizes the importance and usefulness in the earlier sections, there is significant of negotiations and mediation or conciliation, use of contractual arrangements at various providing a clear and express legal basis for their stages of operations. Reference to a grievance application as well as the authority to settle. One management mechanism as an option for of the main features of the Model Instrument is preventing disputes and early resolution of the establishment of a lead agency. Governments investor issues can be included in the contract may voluntarily use the Model Instrument as a itself. This type of mechanism will help with reference or guide to develop or update their ensuring sustainability and effective usage of internal legal framework for managing investment the tool. Inclusion of specifics regarding the disputes, while considering their specific mechanism—such as the name of the lead administrative needs as well as cultural and legal agency, the process, the role of investors and the particularities. 105 For more country case studies see World Bank. 2019. Retention and Expansion of Foreign Direct Investment: Political Risk and Policy Responses. Washington, DC: World Bank; Kher, Priyanka, Eloise Obadia, and Dongwook Chun. 2021. “Managing Investor Issues through Retention Mechanisms.” EFI Note, Washington, DC: World Bank Group Group. 106 See International Energy Charter, Model Instrument for Management of Investment Disputes in English, French, Russian and Chinese at https://www. energychartertreaty.org/model-instrument/. See also Leyda (2019). Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 59 Box 5.1 Vietnam’s experience Vietnam has successfully attracted FDI as an important source of economic growth for more than 30 years. However, administrative procedures, changes in laws and policies, nonadherence to the Investment Registration Certificates and investor-state contracts, discriminatory treatment, lack of transparency in policy, difficulties in information access, and enforcement of foreign arbitration awards are commonly reported investor concerns. In 2018, Vietnam decided to move to a next-generation FDI strategy in the context of implementing the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) and the EU—Vietnam FTA. To better implement these agreements, the government of Vietnam established a pilot task force team led by the director general of the Foreign Investment Agency (FIA) to pilot an investor grievance management mechanism to draw lessons before formally setting up the mechanism. The task force was focused on political risks and comprised eight members from the FIA, Ministry of Planning and Investment, Ministry of Justice, and Prime Minister’s Office. Resolution 50 of the Politburo of the Communist Party adopted in August 2019 provided the overall direction for establishment of an investor grievance management mechanism. In June 2020, Vietnam passed its new Investment Law, which also included a reference to the mechanism. At the time of writing, the government was still working on an implementing decree for the law, which would provide more details on the functioning of the mechanism. The operating procedures followed by the task force include data collection assessment from a legal and economic perspective and preparation of a recommendation. If the grievance is not resolved at the technical level through a discussion between the task force team and relevant agencies, then the task force team drafts a consolidated report on the cases (including a legal and economic assessment, task force team recommendations, and the position of the relevant ministry), and reaches out to the Prime Minister’s Office for a political decision. All activities of the task force are recorded in a log sheet, allowing for easy follow-up and preventing duplication of activities. Between December 2018 and May 2020, 41 grievances have been recorded in the tracking tool of which 16 were cases that could have escalated to investor-state disputes but were detected in time for early resolution. Source: Foreign Investment Agency, Vietnam. 60 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Appendixes Appendix A: Additional figures, Chapter 1 Figure A.1 Demand estimates for 2030, 2040, and 2050 50,000 40,000 Electricity consumption (TwH) 30,000 20,000 10,000 0 2020 2021 2022 2030 2040 2050 Year Source: IEA, Net Zero by 2050. Note: TWh = terawatt-hours. Figure A.2 Electricity demand and production of renewables: Selected countries Canada 600 Total electricity demand and supply of renewables TWh Electricity demand 500 400 Supply of renewables 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 61 600 Germany Total electricity demand and supply of renewables TWh Electricity demand 500 400 300 200 100 Supply of renewables 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year 7000 China Total electricity demand and supply of renewables TWh 6000 Electricity demand 5000 4000 3000 2000 1000 Supply of renewables 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year 300 Mexico Total electricity demand and supply of renewables TWh Electricity demand 250 200 150 100 50 Supply of renewables 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year Source: World Bank–Energy Charter Secretariat calculations using consumption data from the IEA and production of energy from the International Renewable Energy Agency (IRENA). Renewables include onshore and offshore wind, renewable hydropower, solar PV, solar thermal energy, and other renewables. Note: TWh = terawatt-hours. 62 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Figure A.3 Electricity generation by group of countries 30000 Developed countries 25000 20000 Developing countries Electricity generation (TWh) 15000 Developed countries 10000 Developing countries 5000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e Year Non renewable Renewable Source: World Bank–Energy Charter Secretariat calculations using energy generation data from IRENA. Note: TWh = terawatt-hours. Figure A.4 Annual direct carbon dioxide emissions avoided per 1 GW of installed capacity by renewable technology and displaced fuel 4.0 3.5 Annual direct MtCO avoided per GW 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Hydro Wind offshore Wind onshore Solar PV Coal displaced Natural gas displaced Source: World Bank– Energy Charter Secretariat calculations using consumption data from the IEA. Note: MtCO2= metric tons of carbon dioxide; GW = gigawatt; PV = photovoltaic. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 63 Appendix B: Foreign direct investment in renewable energy Table B.1 Source regions for FDI in renewables (2003-21) Region Number of projects Europe and Central Asia 3,751 East Asia and Pacific 815 North America 773 Middle East and North Africa 173 Latin America and the Caribbean 52 South Asia 43 Sub-Saharan Africa 27 Sources: fDi Markets, a Financial Times data set (https://www.fdimarkets.com/); World Bank–Energy Charter Secretariat analyses. Table B.2 Top 10 source countries for FDI in renewables (2003-21) Country Number of projects Germany 690 Spain 596 United States 516 France 496 Italy 419 United Kingdom 301 Canada 253 China 239 Japan 158 Norway 146 Sources: fDi Markets, a Financial Times data set (https://www.fdimarkets.com/); World Bank–Energy Charter Secretariat analyses. Table B.3 Destination regions for FDI in renewables (2003-21) Region Number of projects Europe and Central Asia 2,473 East Asia and Pacific 889 Latin America and Caribbean 847 North America 669 Sub-Saharan Africa 316 Middle East and North Africa 243 South Asia 197 Sources: fDi Markets, a Financial Times data set (https://www.fdimarkets.com/); World Bank–Energy Charter Secretariat analyses. Table B.4: Top 10 destination countries for FDI in renewables (2003-21) Country Number of projects United States 577 United Kingdom 415 Spain 292 Brazil 218 Chile 217 France 192 Australia 180 Mexico 163 India 159 Germany 152 Sources: fDi Markets, a Financial Times data set (https://www.fdimarkets.com/); World Bank–Energy Charter Secretariat analyses. 64 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Appendix C: Damages claimed and damages awarded Table C.1 Damages claimed vs. damages awarded This table covers only the subset of cases on which information on damages claimed and awarded was publicly known as of 1 February 2022. Name of Case Damages claimed Damages awarded Ratio Windstream Energy LLC v. Canada, PCA Case No. 2013-22 (final award Can$568.5 million Can$25.2 million 4.4% dated September 27, 2016) Novenergia II – Energy & Environment (SCA) SICAR v. Spain, SCC Case No. €61.3 million €53.3 million 86.9% 2015/063 (final award dated February 15, 2018) Masdar Solar & Wind Cooperatief U.A. v. Spain, ICSID Case No. ARB/14/ €260 million €64.5 million* 24.8% (final award dated May 16, 2018) Antin Infrastructure Services Luxembourg S.à r.l. and Antin Energia €238 million €101 million 42.4% Termosolar B.V. v. Spain, ICSID Case No. ARB/13/31 (final award dated June 15, 2018) Foresight Luxembourg Solar 1 S.à.r.l. and others v. Spain, SCC Case No. €50 million €39 million 78% 2015/150 (final award dated November 14, 2018) Greentech Energy Systems A/S, NovEnergia II Energy & Environment €25.06 million €11.9 million 47.5% (SCA) SICAR, and NovEnergia II Italian Portfolio SA v. Italy, SCC Case No. V 2015/095 (final award dated December 23, 2018) CEF Energia B.V. v. Italy, SCC Case No. 158/2015 (final award dated January €10.3 million €9.6 million 93.2% 16, 2019) Hydro S.r.l. and others v. Albania, ICSID Case No. ARB/15/28 (final award €650 million €110 million 16.9% dated April 24, 2019) 9REN Holding S.à r.l. v. Spain, ICSID Case No. ARB/15/15 (final award dated €52.2 million €41.76 million 80% May 31, 2019) NextEra Energy Global Holdings B.V., NextEra Energy Spain Holdings B.V. v. €521.4 million €290.6 million 55.7% Spain, ICSID Case No. ARB/14/11 (final award dated May 31, 2019) Cube Infrastructure Fund SICAV and others v. Spain, ICSID Case No. €74.1 million €33.7 million 45.5% ARB/15/20 (final award dated July 15, 2019) SolEs Badajoz GmbH v. Spain, ICSID Case No. ARB/15/38 (final award dated €82 million €40.5 million 49.4% July 31, 2019) InfraRed Environmental Infrastructure GP Limited and others v. Spain, €75.7 million €28.2 million 37.5% ICSID Case No. ARB/14/12 (final award dated August 2, 2019) OperaFund Eco-Invest SICAV PLC and Schwab Holding v. Spain, ICSID €42 million €29.3 million 69.8% Case No. ARB/15/36 (final award dated September 6, 2019) RREEF Infrastructure (GP) Limited and RREEF Pan-European €441 million €59.6 million* 13.5% Infrastructure Two Lux S.à r.l. v. Spain, ICSID Case No. ARB/13/30 (final award dated December 11, 2019) Watkins Holdings S.à r.l. and others v. Spain, ICSID Case No. ARB/15/44 €123.9 million €77 million 62.1% (final award dated January 21, 2020) The PV Investors v. Spain, PCA Case No. 2012-14 (final award February 28, €1.16 billion €91.1 million* 12.7% 2020) Hydro Energy 1 S.à r.l. and Hydroxana Sweden AB v. Spain, ICSID Case No. €132.1 million €30.9 million 23.4% ARB/15/42 (final award dated August 5, 2020) ESPF Beteiligungs GmbH, ESPF Nr. 2 Austria Beteiligungs GmbH and €28.6 million €16 million 56% InfraClass Energie 5 GmbH & Co. KG v. Italy, ICSID Case No. ARB/16/5 (final award dated September 14, 2020) RWE Innogy GmbH and RWE Innogy Aersa S.A.U. v. Spain, ICSID Case No. €267.7 million €28 million 10.5% ARB/14/34 (final award dated December 18, 2020) BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH €61.9 million €22 million 35.5% v. Spain, ICSID Case No. ARB/15/16 (final award dated January 25, 2021) Sun-Flower Olmeda GmbH & Co KG and others v. Spain, ICSID Case No. €69 million €47.3 million 68.5% ARB/16/17 (final award dated June 22, 2021) STEAG GmbH v. Spain, ICSID Case No. ARB/15/4 (final award dated August €79 million €27.7 million 35% 17, 2021) JGC Holdings Corporation v. Spain, ICSID Case No. ARB/15/27 (final award €161 million €23.5 million 14.6% dated November 9, 2021) Source: World Bank–Energy Charter Secretariat analysis, 2022. Note: The amounts indicated exclude tax gross-up and interest. * According to the Ministry for Ecological Transition and Demographic Challenge of Spain, the investors have submitted a waiver under Royal Decree-Law 17/2019, renouncing their right to collect damages in exchange for a new incentive scheme. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 65 Appendix D: Additional examples of contractual arrangements to resolve investor grievances Option 1: Ongoing monitoring and evaluation for the engineer in this respect. It requires the of the project’s performance parties to jointly review the progress made toward meeting the facility’s commercial operation Pakistan date every month. The parties should promptly Pakistan’s Standard Energy Purchase notify each other of any anticipated delays in Agreements for solar, wind, and small hydro- reaching the facility’s mutually agreed commercial powered generation complexes107 envisage operation date or other relevant milestones under the engineer’s role in identifying and settling the agreement’s implementation schedule. In compliance-related issues early on. The PPAs addition, it requires the seller to submit monthly state that if the actual annual energy108 falls performance reports covering various technical below 90 percent of the agreed threshold,109 the metrics. purchaser (a government authority) may appoint an engineering consulting firm to assess if the Bangladesh seller maintains the complex as agreed in the Bangladesh’s 2018 PPA relating to a 5 MW (net) contract. The seller bears the cost of hiring this Waste to Power Generation Facility and the 2019 inspection engineer—selected by both the parties PPA relating to the 50–60 MW (AC) Grid Tied Solar from a panel of three firms. If the inspection Power Project require the parties to appoint an engineer finds that the seller is noncompliant, engineer that will monitor the construction and they should certify the list of corrective actions commissioning of the power plants under the and measures to the purchaser (and send a copy respective agreement. Under these PPAs, the to the seller). The inspection engineer must also engineer is also a member of the Testing and provide the seller and the buyer a reasonable Commissioning Committee. estimate of the time required to implement and complete the corrective measures. The seller Moreover, Bangladesh’s 2018 PPA creates a Joint must undertake the necessary work at its own Coordinating Committee (JIC) comprising six cost within the time specified in the inspection members. The JIC acts as a point of coordination engineer’s certificate. Pakistan’s Energy Purchase and negotiation for the parties. It establishes Agreements also contain measures to resolve procedures on the interaction of the power disagreements between the parties and the generation facility (including the metering inspection engineer. If the seller disagrees with the system), the interconnection and transmission actions and corrective measures identified by the facilities, the electrical interconnection facility, inspection engineer or the time indicated for their and the remainder of the grid system. The duties completion, the parties and the inspection firm and authority of the JIC include coordination should meet and attempt in good faith to agree of programs for construction, testing, on the remedial actions and the time for their commissioning, deciding steps to be taken upon completion. occurrence of a force majeure event or political event or the shutdown or reduction in the capacity Jordan of the facility due to force majeure events or Jordan’s Standard PPA relating to a Photovoltaic political events or for any other reason. Each party Power Plant Facility110 sets out a progress must appoint three members of the JIC and two evaluation mechanism and envisages a role substitutes for each member. The JIC should meet 107 The Standard Energy Purchase Agreement for Solar Powered Power Generation Complex is for the Seller to design, engineer, construct, insure, commission, operate, and maintain a solar-powered complex (generation capacity not specified in the model agreement) on build, own, and operate basis. See https://www.aedb.org/component/judownload/19-solar-standard-docs/33-energy-purchase-agreement?Itemid=101. Standard Energy Purchase Agreement for a Wind Powered Power Generation Complex–Cost Plus is for the Seller to design, engineer, construct, insure, commission, operate, and maintain a wind-powered complex generation capacity not specified in the model agreement. See https://www.aedb.org/component/judownload/22- wind-standard-docs/10-standard-wind-energy-purchase-agreement-cost-plus?Itemid=101. Standard Energy Purchase Agreement for a Hydro-Electric Power Generation Complex is for the Seller to design, engineer, construct, insure, commission, operate, maintain, and transfer a hydro-electric generation facility (generation capacity not specified in the model agreement) on build-own-operate-transfer (BOOT) basis. See https://www.aedb.org/component/ judownload/28-epa-ia-documents/77-energy-purchase-agreement-epa?Itemid=101. 108 The sum of Net Delivered Energy and Non-Project Missed Volume in a given Agreement Year. 109 For a given Agreement Year, the net electrical output in kWh of the Complex for the purposes of this Agreement is assumed capable of delivery at the Interconnection Point, as tabulated in the respective PPAs. 110 The PPA is between the National Electric Power Company (Buyer) and the project company (Seller) for the development, design, financing, construction, ownership, operation, and maintenance of the power generation facility and to sell all the electricity therefrom to the buyer. 66 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts at least once a month, and its chairmanship must to develop and coordinate the power plant’s rotate each year between the parties. operating procedures. The functions of the Coordinating Committee include: The 2019 PPA of Bangladesh also refers to a JIC more concisely. The membership of this • Development and coordination of the operating JIC is limited to four members, and there is no procedures on day-to-day operations, including requirement to appoint substitutes. There is the methods of communication, metering, no clause regarding procedural matters or on telecommunications, scheduling, maintenance, the chairmanship. The JIC serves as a point of data acquisition, and dispatch procedures coordination and negotiation between the parties (the Bangladesh Power Development Board • Development of the procedures for holding (BPDB) as a buyer and the project company as a meetings, keeping minutes of the meetings, and seller) and between the parties and the Power Grid appointing subcommittees Company of Bangladesh (PGCB). It is responsible for establishing procedures on the facility’s • Coordination of outages, whether such outages interaction (including the metering system), the shall be planned or unplanned electrical interconnection facility, commissioning procedures, scheduling, and acceptance of • Development, review, and revision of the safety performance tests and other mutually agreed codes on the Generation Facility and the Uganda matters affecting the operations or maintenance Electricity Transmission Company Limited of the facility and its interconnection with the grid System system. Option 2: Mutual consultations Both PPAs of Bangladesh also establish a “Testing and Commissioning Committee.” The Argentina engineer’s role in issuing the testing certificate The Draft Renewable PPA included in Argentina’s is given to this Committee under the PPAs. Request for Proposal under the RenovAr Program However, pending the Committee’s formation, the Round 1 of 2016111 requires that the parties agree to engineer acts as the sole member of the Testing solve any dispute in a bona fide way and through and Commissioning Committee and issues the negotiations. If they fail to agree within 15 days, the necessary certifications. The composition of the parties may resort to arbitration. Testing and Commissioning Committee under the PPAs differs slightly. The 2018 PPA mandates that PwC Australia the Committee should comprise three members PwC Australia’s 2017 Model PPA112 states that nominated by the BPBD, three members by before initiating legal proceedings, the parties the seller and one member by the engineer. should make best efforts to reach a reasonable On the other hand, the 2019 PPA reduces the and equitable resolution of the dispute.113 The PPA representation of the BPDB and the seller to two adds a step to this process requiring each party’s members each. It also requires the appointment representatives, as designated in the agreement, of one member by the PGCB and one member by to resolve the matter. The dispute must be referred the engineer. to the representatives through written notice and resolved within 10 days of its receipt. Uganda The Uganda Standardized PPA for the Global India Energy Transfer Feed-in Tariff Program requires The 2016 Indian Model EPC Agreement for Grid the parties to set up a Coordinating Committee Connected and Off-grid Roof-Top Solar Power 111 This draft Renewable PPA between Compañía Administradora del Mercado Mayorista Eléctrico and Seller is part of the Open Call for Tenders to purchase electric power derived from generation renewable sources in the RenovAr Program (Round 1) of 2016. Apart from the sale of power, the draft PPA also requires the Seller to build, operate, and maintain the renewable energy–powered generation plant and any other assets related to it, including the transmission line required to interconnect the power place with the delivery point. See https://ppp.worldbank.org/publicprivatepartnership/sites/ppp. worldbank.org/files/documents/RenovAr%20Round%201%20%20Request%20for%20Proposals%20with%20Annexes%20%28fv%2007252016%29%20 %28English%20Version%29.pdf. 112 Suite of precedent project documents developed by PwC Australia in 2017. See https://www.pwc.com.au/legal/assets/solar/power-purchase-agreement- mar16.pdf. 113 The Model PPA defines a dispute as any part of the subject matter of any dispute between the Parties in relation to the obligations, rights, or performance of those Parties under the Agreement. Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 67 Plants in capital expenditure (CAPEX) model114 Bangladesh states that the parties should resolve any dispute The Bangladesh Sample Implementation or difference by mutual consent within 45 days. A Agreement, the 2018 PPA on waste-to-energy similar approach is taken by the Indian Model PPA generation and the 2019 PPA for the 50–60 MW Implementation of Off-Grid Solar Power Plants solar power plant take an approach similar to that in renewable energy service company (RESCO) of the Tanzanian PPAs. These agreements state model released on May 18, 2020.115 The Model PPA that if the parties cannot resolve a dispute through requires the Purchaser and Power Producer to mutual discussions, they should refer it to the CEO settle any differences or disputes arising from the or Chief Operating Officer of the project company contract by mutual consent. (seller) and the designated representative for the BPDB’s system operations. Tanzania Tanzania’s Model PPAs require that the parties Jordan should attempt in good faith to settle any dispute Jordan’s Standard PPA relating to a PV Power under the agreement through mutual discussions, Plant Facility requires that, except for a technical in the first instance, within 30 days of the dispute’s dispute or difference, all matters should be settled precipitation. amicably by the parties within two months. Failing this, the parties may refer the problem to senior Pakistan executives of the parties for mediation. The PPA Pakistan’s Standard Energy Purchase Agreements does not give more guidance on the mediation for solar, wind, and small hydro-powered process to be followed, such as whether it should generation complexes use the same language, be through institutional rules or a simple, informal modalities, and time frames as the Tanzanian negotiation between the parties. PPAs. The agreements state that in case of a dispute, the parties should attempt in good India faith to settle it by mutual discussions within 30 The Indian Model PPA for Implementation of days from the date the disputing party delivers a Off-Grid Solar Power Plants in the RESCO model written notice to the other party. The purchaser requires a committee’s involvement only when and seller representatives must meet in Lahore the dispute concerns invoices. The agreement to make a good faith attempt at resolving the states that if the parties cannot resolve a disputed dispute. The meeting between representatives is payment by the next invoice date, it should be a mandatory requirement that must be fulfilled referred to a committee comprising one member during the 30 days, unlike in the Tanzanian PPAs, from each party. If the matter remains unresolved, where representatives’ involvement comes after the parties may refer it to arbitration as per the the 30 days “mutual discussion” period and is not agreement’s provisions. The Model PPA does not compulsory. state the modalities, time frame, and procedures that this committee should adopt. Also, it is Option 3: Raise the problem/disagreement with unclear whether the committee’s members the senior management of each party should be technical experts or senior-level management who can negotiate their party’s Tanzania respective positions. Payment disputes are usually Tanzania’s PPAs provide for an internal grievance considered technical disputes subject to expert escalation mechanism. If the parties cannot determination. However, from the text of this resolve a dispute through mutual discussions, they Model PPA, it is difficult to conclude whether the may refer it to the Chief Executive Officer (CEO) drafters wished to make this committee along the or another designated representative of the seller lines of an “internal referral to senior management” and to the CEO of the purchaser. The authorized or “expert determination.” representatives may then consider the matter and attempt to resolve it within 30 days of the referral (or an extended period as the parties agree). 114 Model EPC Agreement between Contractor and Government Organization, Public Sector Undertakings and Government Offices for Design, Manufacture, Supply, Erection, Testing and Commissioning including Warranty, Operation and Maintenance of Grid Connected and Off-grid Roof-Top Solar PV and Small Solar Power Plants in CAPEX model. See http://ipgcl-ppcl.gov.in/documents/renewable/2017_01_04_Model-MoU-PPA-and-CAPEX-Agreement- document.pdf. 115 Model PPA between Contractor and Public Institution for Design, Manufacture, Supply, Erection, Testing and Commissioning Including Warranty, Operation and Maintenance of Off-grid Solar PV Power Plants in RESCO Model. See https://mnre.gov.in/img/documents/uploads/file_f-1589864991781.pdf. 68 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts Option 4: Expert determination sets a 30-day deadline for the expert to decide the matter. It also clarifies that the expert is not an Tanzania arbitrator, and its decision is final and binding on The Tanzanian Model PPAs require that the the parties. However, if a party wishes to challenge parties submit any dispute they cannot resolve the expert’s decision, it may initiate arbitration through mutual discussions to an expert. The proceedings on the limited grounds of fraud or disputing party must provide the other party manifest error. notice about its intention to raise the matter for expert determination. The notice must contain a Pakistan description of the dispute, the expert’s proposed Pakistan’s Standard Energy Purchase Agreements terms of reference, grounds for the relief sought for solar, wind, and small hydro-powered through the determination, and any other relevant generation complexes allow the parties to written material that the party will submit to the refer disputes on specific issues for expert expert. The other party must respond within 15 determination but do not make it a condition days with a counter-notice and all the relevant precedent to arbitration. Under each PPA, either documents, including the expert’s proposed terms party can notify the other party of its intention of reference. If the parties cannot agree upon who to raise a matter for expert determination. The will be the expert, the Model PPAs allow them to notice must specify who will act as an expert in designate a third party that can decide on their the dispute. Although the agreements do not use behalf. The parties may appoint a the term “independent expert,” they state that different third party depending upon the nature of the person appointed as the expert should not the dispute. Unlike other agreements, the Model have any conflicts of interest in the matter. They PPAs set out the procedure for conducting expert also mention that the expert may be an individual, determination hearings. The parties should be partnership, association, or corporate body and allowed to appear before the expert and present should have recognized expertise relevant to their case. the dispute at hand. If the parties cannot agree upon the expert, despite good faith discussions, Uganda they may request either (1) the President of the The Uganda Implementation Agreement provides Pakistan Institute of Chartered Accountants for the appointment of an expert and lays down (for financial and billing matters) or (2) the Vice- the requirements for this purpose. It states that Chancellor of the University of Engineering and the expert should have demonstrated expertise Technology of Lahore or (3) the Vice-Chancellor in matters of a similar nature and should not be of the Lahore University of Management Sciences an agent, employee, or contractor of either party. or (4) the Vice-Chancellor of the Ghulam Ishaq If the parties cannot agree upon the expert’s Khan Institute (for technical matters) to select identity within 15 days from the initiation of a the expert. The selection is binding upon the technical dispute, the International Centre of parties. If the parties cannot accept the expert’s Expertise should make the appointment in line determination or if the matter is not decided with the Rules for Expertise of the International within the agreed time frame, either of them may Chamber of Commerce. The implementation initiate arbitration proceedings. agreement describes the procedure for the expert determination and the parties’ role and rights and Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts 69 Appendix E: Analysis of the probability of having disputes in renewables sector according to country-level characteristics To analyze whether having disputes is correlated international practices and the type of with some country-level characteristics of connection allocation policy. regulation as well as some other regulatory 6. Counterparty risk: Includes subindices analyzing aspects directly related to sustainable energy, we creditworthiness, payment risk mitigation used country-level data from different World Bank (including government guarantees), and projects. First, we used data about regulatory transparency in terms of publicly available risks from the 2019/2020 Global Investment information and auditing. Competitiveness Report (World Bank 2020b). 7. Carbon pricing and monitoring: Whether there This report includes a set of composite measures is monitoring in terms of greenhouse gas that summarize different dimensions of each emissions or carbon pricing mechanisms in type of risk.116 These indicators measure the place. level of regulatory risk in a country, along three dimensions: Finally, we analyzed WGI for each available country: 1. Transparency in the process and regulation that 1. Rule of Law: Confidence in terms of contract applies to investors enforcement, property rights, police, courts, and 2. Legal protection for investors against arbitrary likelihood of crime and violence. government interference 2. Regulatory quality: Perceptions about the ability 3. Investors’ access to effective mechanisms of of the government to formulate and implement recourse sound policies and regulations that permit and promote private sector development. A second data set that we used for this country- 3. Control of corruption: Whether public power is level analysis is RISE: exercised for private gain or if there is “capture” 1. Legal framework: Scores countries according by elites and private interests. to whether the legal framework allows private 4. Government effectiveness: Perceptions about sector ownership in energy generation, whether the quality of public services and the quality of official renewable targets exist and, if they exist policy formulation and implementation, as well if they are legally binding; if the targets are as about the government’s credibility in terms of linked to international commitments; and if the commitment to these policies. there are strategies to attain the targets. 5. Political stability: Perceptions about political 2. Planning for renewables: If there is an stability and the probability of politically assessment of the role of renewables in energy motivated violence, including terrorism. supply and if there is a target for renewables in electricity. 6. Voice and accountability: Perceptions about participation, freedom of association, freedom 3. Incentives and regulatory support: If a country of expression, and free media. offers long-term PPAs for renewable electricity for large-scale or small-scale producers and Using these data sets, we estimate a model whether it offers clear guidance on permissions including all the available countries according as well as fiscal incentives to develop renewable to each data set (with and without disputes), electricity projects. and define the dependent variable as a variable 4. Attributes of financial regulatory incentives: indicator that takes a value of one if the country Whether competition is used to ensure the has been a respondent for a dispute and a value of cost-competitiveness of projects; if there is zero if it has not. The analysis uses the probability a schedule for bids or auctions and a pre- of having disputes instead of the total number of qualification of bidders; and whether there are disputes because, other than in some countries clear timelines for project completion. with a large number of disputes, there is not a 5. Network connection and use: Whether the lot of variation in that outcome variable. Then we country has a grid code specifying connection estimate a model that calculates the probability procedures and if these procedures meet of having disputes according to these regulatory 116 The dimensionality is reduced to these summary indexes through either a Principal-Component Analysis, which means that each factor obtains a different weight (first three lines of table E.1), or an unweighted index that gives each aspect the same weight (second three lines of table E.1). 70 Enabling Foreign Direct Investment in the Renewable Energy Sector:  Reducing Regulatory Risks and Preventing Investor-State Conflicts characteristics and controlling for variables such The results presented in table E.1 are marginal as the GDP per capita of the countries and initial effects and can be interpreted as the change in electricity capacity. It is also important to note probability associated with an increase of one in that this analysis only provides some insight each of the indices presented. The interpretation into the country-level characteristics that varies according to the scale of each index. could be correlated with the probability of having disputes and does not have a causal interpretation. Table E.1: Probability of a country having disputes on renewables (Probit model) Probability of having disputes on (1) (2) (3) (4) (5) (6) (7) (8) renewables Regulatory risks Risk-transparency –0.000145 0.00135 (0.00253) (0.00201) Risk-protection –0.00127 –0.00107 (0.00194) (0.00138) Risk-Recourse –0.00545* –0.00447* (0.00324) (0.00232) Risk-transparency unweighted –0.00106 (0.00303) Risk-protection unweighted –0.00274 (0.00238) Risk-Recourse unweighted –0.00675* (0.00401) Regulatory Indicators for Sustainable Energy (RISE) Legal framework 0.000336 0.00125 0.00121 (0.00217) (0.00200) (0.00159) Planning for renewable –0.00246 –0.00299 –0.00185 (0.00235) (0.00225) (0.00159) Incentives and regulatory support 0.00134 0.000712 0.000244 (0.00215) (0.00228) (0.00145) Attributes of financial regulatory –0.00189 –0.00169 –0.000656 incentives (0.00157) (0.00155) (0.00114) Network connection and use 0.00233 0.000559 –0.00111 (0.00187) (0.00190) (0.00132) Counterparty risk 0.00169 0.00125 –0.00000965 (0.00209) (0.00192) (0.00139) Carbon pricing and monitoring 0.000365 0.000338 0.0000477 (0.00106) (0.00102) (0.000804) Worldwide Governance Indicators (WGI) Rule of law –0.265* –0.278** –0.198 (0.144) (0.136) (0.135) Regulatory quality 0.322** 0.316*** 0.193* (0.129) (0.120) (0.111) Control of corruption –0.258** –0.207* –0.216* (0.118) (0.114) (0.113) Government effectiveness 0.125 0.0818 0.102 (0.148) (0.151) (0.137) Political stability –0.0396 0.00575 –0.0212 (0.0563) (0.0553) (–0.41) Voice and accountability 0.194*** 0.173*** 0.205*** (0.0563) (0.0553) (3.32) ln (GDP per capita-) constant prices –0.0154 –0.0480 –0.0276 0.0254 0.0115 0.0297 –0.0132 0.0201 (0.0398) (0.0363) (0.0358) (0.0324) (0.0343) (0.0510) (0.0544) (0.0547) ln (electricity capacity 2000) 0.0515** 0.0577*** 0.0552*** 0.0469*** 0.0466*** (0.0201) (0.0191) (0.0183) (0.0158) (0.0144) Observations 72 68 117 129 117 131 119 117 Sources: World Bank–Energy Charter Secretariat calculations using data from the following: (1) The information about disputes was obtained from the Energy Charter Secretariat, 2022. (2) Regulatory risks: Regulatory risks are calculated using the Principal-Component Analysis (weighted) of different indicators for each type of regulatory risk; unweighted measures are also tested. These measures were obtained from the 2019/2020 Global Investment Competitiveness Report (World Bank 2020b). Data was retrieved from: https://openknowledge.worldbank.org/bitstream/handle/10986/33808/9781464815362.pdf?sequ. (3) RISE were obtained from the World Bank RISE data set: https://rise.esmap.org/analytics. (4) World Bank Worldwide Governance Indicators 2021 were obtained from https://info.worldbank.org/governance/wgi/. Note: * Significant at 10%; ** 5%; *** 1%. 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