Solar levy in the Czech Republic – First investment protection proceedings completed

In a nutshell:

On 11. October 2017, the arbitration court in Geneva was the first arbitration court to issue an award in the lawsuits brought by foreign investors against the Czech Republic for the implementation of the solar levy.

Adopted in 2010 initially for the period until the end of 2013, the solar levy provision stipulated that operators of photovoltaic installations with an installed capacity of more than 30 kWp and commissioned in 2009 and 2010 had to pay 26% of their revenue from feed-in tariffs (FIT) or 28% of their revenue from the Green Bonus to the state budget. Since 2014, the solar levy has applied only to the revenue of photovoltaic installations commissioned in 2010. Since then, the levy has been set at 10% of the revenue from feed-in tariffs or 11% of the revenue from the Green Bonus throughout the funding period. The reason given for implementing the solar levy was the necessity to recoup the overcompensation that arose because the applicable law did not allow to reduce the feed-in tariff quickly enough to match the rate of decline in technology prices.

Already in 2012, as part of judicial review proceedings regarding the compliance of legal provisions with superior law [Normenkontrollverfahren] the Constitutional Court of the Czech Republic had ruled that the solar levy adopted in 2010 did not violate the discrimination ban or the ownership rights and had denied any retrospective-like effect of the levy – an approach we cannot really understand. Iin the opinion of the court, the changes that the legislator retrospectively introduced to the funding system in order to restore the investment-income balance were rather legitimate.

Thus, most of the claims raised by domestic investors against the Czech State were refused.

Foreign investors, in turn, had still the possibility to sue the Czech Republic based on investment treaties signed by the Czech Republic, and the Energy Charter Treaty.

In the proceedings now completed, the German claimants referred to the investment treaty concluded between the Federal Republic of Germany and the Czech Republic on 2 October 1990 and argued in particular that not only the implementation of the solar levy in 2010, but also the abolishment of corporation tax exemption and the prolongation of depreciation periods for installations constituted state interventions comparable to expropriation. According to the investment treaty, such interventions are admissible only if appropriate compensation is paid. In the proceedings concerned, a claim was raised for damages and lost profits of CZK 500 million (about EUR 19 million).

According to a press release of the Czech Ministry of Finance, the arbitration court dismissed the claim as unfounded because the recovery of the initial investment is still guaranteed after the implementation of the solar levy.

It seems that also the arbitration court in Geneva decided to approach the case from the economic rather than the legal point of view. Just like the Czech Constitutional Court, the arbitration court might have mainly invoked one of the guarantees included in Act No. 180/2005 Coll. on Support of the Production of Electricity from Renewable Energy Sources. The above guarantee stipulates the obligation of the Czech Energy Regulatory Authority to ensure the recovery of initial investment within 15 years [from commissioning] when determining the incentive amount on an annual basis. But the arbitration court seems to neglect that, apart from that, the amount of income should not be reduced over the same period, but rather adjusted in line with the development of prices of industrial products. It is particularly this guarantee that might have been violated by the implementation of the solar levy leading indirectly and retrospectively to a reduction in revenues by 26% (FIT) or 28% (Green Bonus).

But we will be able to comprehensively evaluate the arbitral award only if and when it is published.

The Czech Ministry of Finance wishes that this arbitral award were a precedent for the decisions in the six further arbitration proceedings pending. However, we point to the fact that arbitral awards do not have binding effect and not all of the arbitration proceedings have been instituted at the same arbitration court. Thus, the aforementioned arbitral award can be seen only as a partial success of the Czech Republic.

It will be interesting to see if the arbitration courts will take a similar standpoint in the remaining proceedings. Should this be the case, then, according to the opinion represented by the courts, no state intervention comparable to expropriation would exist also in situations where the legislator retrospectively intervenes in the legal positions of an investor and significantly devaluates them in order to restore the investment-income balance provided for by the legislator. In this respect, investments would always be burdened with the risk that during the investment recovery period the legislator will conduct a revaluation of the investment parameters set by itself. In this case, the legislator would act as an institution vested with the right to conduct a general evaluation of the profits which an investor “is entitled to” and, therefore, to recoup those profits of an enterprise that are excessive in the legislator’s view (whereas this view can change, of course, depending on current events, such as elections or government formation). This would give room to a state redistribution mentality, which would be hardly reconcilable with the idea of legal certainty.