Introduction
The Czech subsidies regime for photovoltaic plants was introduced in 2005 (Act No. 180/2005 on the promotion of the use of renewable energy sources).
Under current legislation, solar projects with IRRs of 8.4% or less qualify for government support including certain ‘green’ bonus payments. The draft law proposes to reduce the maximum IRR threshold such that many projects will no longer qualify for support.. The draft law would amend the calculation period such that IRRs are calculated over the lifetime of a project rather than the period of support (previously fixed at 20 years) making it more likely that a given project will exceed the maximum IRR threshold and will no longer benefit from the available support schemes.
The amendments would also cancel renewables subsidies that currently apply during periods of negative electricity prices. Due to the fluctuating nature of renewable energy production, which is heavily influenced by weather conditions, the supply of electricity from renewables can exceed demand for certain periods requiring producers to pay to offload the excess electricity. The amendment seeks to abolish previously available government support for such periods.
Wider context
The reforms have been described by the Czech Ministry of Finance as “a concrete solution to the problem of overcompensation of the owners of some solar power sources, which has been operating here for many years”, with the Ministry of Finance predicting savings “in the order of billions to lower tens of billions of crowns”.
However, several solar energy investors have already threatened claims against the Czech Republic under the ECT should the draft law enter into force. Another investor is relying on the Swiss-Czech 1990 BIT. The investors assert that the proposed amendments to the subsidies regime violate their legitimate expectations of a stable and fair investment environment.
The Czech Republic is no stranger to investment treaty claims over changes to its solar power legislation. The last of seven investment arbitrations initiated over changes to the same legislation in 2013 concluded in January 2024 with an adverse award against the state of approximately US$15 million.
Cuts to support schemes for renewables projects in other EU member states have similarly given rise to a deluge of claims over the last decade. Since 2011, Spain has faced over 50 claims relating to changes to feed-in tariffs for renewable energy projects. Notably, Spain has been found liable in 27 of 33 decided cases with tribunals relying on the retroactive clawback of previous subsidies that were paid at higher levels than that set by the new subsidy scheme. In a number of cases, Spain was held liable for scrapping the previous tariff-based scheme and shifting to a reasonable rate of return cap, also failing to ensure a reasonable return for renewable projects under the new scheme. In this regard, some tribunals went on to explain that investors did not have a legitimate expectation that the subsidies would not change but, rather, they had a legitimate expectation that the regime as a whole would not be overhauled.
Conclusion
If the new legislation is approved, these changes are likely to take effect from early 2025 and it is expected that more claims against the Czech Republic will follow. Solar companies with investments in the Czech Republic should consider the possible impact of the amendments to their business at the earliest opportunity.
- Ministerstvo financí České republiky
- Global Arbitration Review
Client Alert 2024-233
