ICSID tribunal concludes Bulgaria breached the ECT through frustration of legitimate expectations and awards damages. Will this award push Bulgaria toward withdrawing from the ECT?

ACF Renewable Energy Limited v. Republic of Bulgaria (ICSID Case No. ARB/18/1)

The investors

ACF, a company incorporated under Maltese law, was founded shortly before acquiring an investment in Bulgaria. Its main beneficial shareholder is ACWA Power International, a Saudi electricity company. In June 2012, ACF acquired the Bulgarian photovoltaic (PV) plant Karad Plant by purchasing a local company. ACF invested in Bulgaria under the premise that the Karad Plant would benefit for 20 years from the new investment regime established by Bulgaria’s Energy from Renewable Sources Act (ERSA).

Energy reforms and the quest for renewable investments

Due to the high costs of producing photovoltaic energy before the mid-2010s, Bulgaria introduced a new incentive scheme in May 2011 to attract foreign investors into the photovoltaic sector. ERSA introduced an ex-ante regime with three key components: (i) guaranteed purchase by Bulgaria (full offtake), (ii) payment of a preferential feed-in tariff (FiT), and (iii) 20-year power purchasing agreements (PPAs).

Although renewable energy schemes were not uncommon in the EU, Bulgaria’s ERSA regime was more protective, significantly shielding investors from market risks. ACF described the regime as “rock solid” and capable of removing “nearly any material degree of doubt about what Bulgaria could and could not do to alter the economics of PV investments once they had been made.”

To secure reasonable returns and align with EU legislation, Bulgaria began adjusting the ERSA regime as early as September 2012. It introduced a temporary grid access fee, affecting the claimant’s plant. This first modification was invalidated by Bulgaria’s Supreme Administrative Court on March 25, 2013, and the parties settled the dispute over the fees in December 2015.

One year after invalidating the temporary grid access fee, Bulgaria introduced a permanent grid access fee to correct system imbalances from increased energy production and reduce consumer costs. In 2014, Bulgaria made more changes to the ERSA regime: it abolished the full offtake feature, capped the electricity purchased from producers benefiting from feed-in tariffs, introduced “balancing costs” to compensate for intermittent production imbalances, and reduced the FiT by 20% through a levy, later declared unconstitutional.

Further modifications in 2015 included a mandatory 5% revenue contribution to the Security of Electrical Power System Fund to compensate state electricity provider costs. In 2018, Bulgaria replaced the FiT system with a feed-in premium (FiP) model, requiring PV producers to sell energy to the wholesale market without full purchase guarantees in exchange for a premium based on early wholesale prices.

The tribunal dismisses Bulgaria’s objections to its jurisdiction

Bulgaria raised three objections to the tribunal’s jurisdiction: (i) denial of benefits (Article 17(1) ECT), (ii) tax carve-out (Article 21 ECT), and (iii) the exclusive competence of the CJEU to interpret EU law.

Article 17(1) ECT enables treaty parties to deny investment protections to legal entities owned by nationals of third states if the entity lacks substantial business activities in the territory of the treaty party in which it is incorporated. Bulgaria claimed ACF lacked substantial business activities in Malta. The tribunal rejected this objection, noting Bulgaria was aware of ACF’s corporate structure from the start and should have raised this issue at the beginning of the arbitral proceedings.

Bulgaria argued that the 20% levy and the 5% contribution were tax-related measures and thus outside the tribunal’s jurisdiction under Article 21 ECT. The tribunal used a “know-it-when-you-see-it” test, concluding the 20% levy was not a tax—Bulgaria’s internal organs had not treated it as such—but that the 5% contribution was, and thus exempt under Article 21 of the ECT. Despite some bad faith elements in the 5% contribution—it disproportionately affected producers benefiting from FiT, effectively serving to reduce their subsidies—it was not central to the contribution, and no proof existed that Bulgaria designed it to circumvent the ECT.

Finally, the tribunal dismissed Bulgaria’s intra-EU objection, stating that Bulgaria’s reference to Komstroy did not change its unpublished 2019 interim decision based on the Achmea judgment by the CJEU.

Bulgaria violated claimant’s legitimate expectations

The tribunal evaluated whether Bulgaria created legitimate expectations that the three key ERSA regime pillars would remain unchanged throughout the PPA. According to the tribunal, an expectation could only be legitimate under Article 10(1) if it were objective, reasonable, and capable of being induced in any other normal investors under the same circumstances.

The tribunal found investors had legitimate expectations that Bulgaria would not substantially alter the ERSA regime’s three pillars. Bulgaria’s promotion of these features through policy papers, specific legislation, and discussions with claimant representatives before investment induced legitimate expectations of regulatory stability. Three measures violated these expectations: (i) the 20% levy on the FiT, (ii) the production cap, and (iii) the forced adoption of FiP tariffs.

The 20% levy, although later declared unconstitutional, temporarily reduced the FiT value, impacting the claimant’s investment. The production cap contradicted the full offtake character of the ERSA scheme. Although Bulgaria claimed the cap was necessary to offset unlicensed overproduction, the respondent failed to prove said unlawfulness. Consequently, the tribunal considered that the cap was meant to deliberately reduce the returns of PV. Finally, the forced conversion from FiT to FiP tariffs, ending the PPA before the 20-year expiry, nullified the ERSA regime’s fixed price and duration features.

The tribunal did not find violations in the temporary grid access fee and balancing costs. The first claim was settled between the parties in 2015, and the second did not substantially alter the ERSA regime’s fundamental pillars.

Bulgaria breached Article 10(1) of the ECT by introducing a permanent grid access fee

The tribunal decided to address this contention separately. It did not consider that the permanent grid access fee was capable of substantially altering any of the pillars of the ERSA regime on its own. Moreover, the tribunal concluded that claimants were not entitled to expect Bulgaria would never introduce an access fee.

Instead, the breach of Article 10(1) arose from a conjunction of factors. First, the introduction of the access fees eliminated guaranteed discharges, altering the character of the ERSA regime. Second, the access fee made the regime less attractive. Third, the access fee targeted PV power plants. Fourth, the access fee was not transparent since the rates set for the years 2015, 2016, and 2017 aimed at recouping costs incurred in previous years despite the “forward” nature of the fee. Fifthly, it constituted a double imposition on the claimant’s investment.

Damages and costs

The tribunal rejected Bulgaria’s argument for damages based on a reasonable rate of return, adopting the claimant’s proposal instead. Compensation was calculated as the difference between the investment’s sale price to a third party and its projected value had Bulgaria not breached the ECT. The tribunal awarded the claimant EUR 61.04 million in damages, with a EURIBOR rate plus 2% compounded annually. Additionally, Bulgaria was ordered to bear its legal costs and 80% of the claimant’s legal costs.

Conclusion

The ACF v. Bulgaria arbitration aligns with many other ECT arbitrations concerning changes to renewable energy schemes. It highlights the criticism that the ECT restricts states’ ability to fine-tune complex regulations and maintains the established practice regarding the development of the FET standard. Notably, it does not clarify the ongoing debate about whether—and under what circumstances—the general regulatory framework can create legitimate expectations.

Therefore, the significance of the ACF v. Bulgaria arbitration lies not in its content but in its timing. The tribunal issued the award in January 2024, just as the debate over withdrawing from the ECT is gaining momentum. Given that Bulgaria has not yet clearly stated its position on withdrawing from the ECT, this arbitration could potentially ignite this debate within the country.

Note

The tribunal consisted of Oscar M. Garibaldi (appointed by the claimant), Professor Pierre Mayer (appointed by the respondent), and Judge Bruno Simma (president of the tribunal).

Author

Leonardo Flach Aurvalle, is an associate at Knijnik Advocacia (BR) S/S. He holds a master’s degree in international law from the Geneva Graduate Institute and is a former fellow at IISD’s Sustainable Investment program.

The statements in this article are those of the author and do not necessarily reflect the views or positions of any entities he represents.