Czech proposed solar subsidy cuts

Why should I read this?

Investors in Czech solar power plants risk losing the benefit of the subsidies they have enjoyed, following the announcement of a new bill, known as Lex OZE III, which aims to reduce the State subsidy pot currently made available to the renewables sector. Facing a potential reduction in their rate of return, foreign investors in Czech solar projects are considering commencing claims against the country for alleged violation of protections promised to investors in the Czech Republic’s international investment treaties.

What are the proposed subsidies reforms?

Established in 2005, the Czech Republic’s subsidies program provides government support for the development and operation of photovoltaic power plants, attracting both foreign and domestic investment that kickstarted the Czech Republic’s solar sector.

New government plans seek to revolutionize the existing regime, such that those investors that have benefited from the subsidies could lose out. The proposed reforms include:

• reduction of the internal rate of return (“IRR”) threshold. Whereas currently, projects with an IRR of 8.4% or less can benefit from government support, it is proposed that the threshold be reduced such that some existing projects will no longer qualify. IRRs would also be calculated taking into account revenues over the lifetime of a project, rather than the period of support (currently 20 years)
• changes to the procedure for checks on the IRR for certain projects. Under new plans, photovoltaic projects put into operation between 2009-2010 and have a capacity of 30kW or more would be required to assess and report on their IRR, and would be subject to random inspections for compliance
• withdrawal of the entitlement to receive government support during periods of negative energy prices

How have foreign investors reacted?

Introduced as a cost-saving measure for the Czech Government, the plans to reform the subsidies regime has caused upset amongst foreign investors in the renewables space. At least three energy companies have threatened claims against the Czech Government under international investment treaties so far.

The Czech Republic is not the first country to face pushback from foreign investors for reducing subsidies available in the renewable energy sector. Since the early 2010s, Spain has faced over 50 claims from foreign investors brought under international investment treaties for cutting its financial support for solar and wind projects. A number of claims are still pending, however the majority that have already been determined have favored the foreign investor, with the tribunals directing Spain to pay the investors hundreds of millions of euros in compensation.

Foreign investors may argue that the changes to the Czech subsidies regime amount to a violation by the Czech Republic of the protections afforded to foreign investors. Such protections can include, amongst others, a promise that the foreign investor will be treated fairly and equitably. In certain circumstances, this can go so far as requiring the host State to respect a foreign investor’s legitimate expectation that certain laws or regulations would not be altered for the lifetime of their investment.

As a country with around 60 Bilateral Investment Treaties that are currently in force, along with Multilateral Investment Treaties with investment provisions (notably including the Energy Charter Treaty), more foreign investors may follow suit and threaten claims against the Czech Republic in relation to the reforms.

For more information

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