This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Prof. Dr. Harald Sippel, Foreign Lawyer and Head of European Desk at Skrine
Vishnu Vijandran, Associate at Skrine
In recent years, the world has witnessed a significant shift towards renewable energy sources as nations strive to combat climate change and reduce their dependence on fossil fuels. Europe has been at the forefront of this transition, with ambitious renewable energy targets and policies designed to promote both clean energy consumption and generation. One of the key aspects of renewable energy policy in Europe was the establishment of fees and tariffs to incentivise renewable energy production and ensure a fair and sustainable energy transition. Unfortunately, these have also been the source of multiple investor-State and other arbitrations in Europe.
Renewable energy is also a key concern in Malaysia, with the government aiming to install 70% renewable capacity and to phase out coal power plants completely by 2050, among other objectives, under the National Energy Transition Roadmap, published by the Malaysian Ministry of Economy in August 2023.
Malaysia too has adopted a feed-in tariff (FiT) system, among other policies to increase the proliferation of renewable energy sources and increase uptake of the same. This essay explores the intricacies of fees and tariffs for renewable energy in Europe and highlights key lessons Malaysia can take away to increase the robustness of its own system and ideally avoid disputes.
The European Model of Fees and Tariffs for Renewable Energy
Europe’s approach to fees and tariffs for renewable energy is rooted in its commitment to achieving climate goals outlined in the Paris Agreement and the European Green Deal. This has led to the development of a multifaceted system that supports the growth of renewable energy sources, such as wind energy, solar energy, and biomass energy, to name a few. The European model encompasses several key components, as follows:
Feed-In Tariffs (FITS)
Feed-in tariffs have historically been a cornerstone of European renewable energy policies. They guarantee fixed, above-market rates for the electricity produced from renewable sources, ensuring a steady income for renewable energy producers. FiTs have been instrumental in kick-starting the renewable energy sector in many European countries.
Auction Mechanisms
In recent years, many European countries have transitioned from FiTs to competitive auction mechanisms. Through these auctions, renewable energy projects compete for subsidies, with the lowest bid securing the support. Auctions are designed to reduce the cost of renewable energy generation and increase market competitiveness.
Green Certificates and Guarantees of Origin
To encourage renewable energy consumption, Europe has implemented systems of green certificates or guarantees of origin. These instruments certify the origin and environmental attributes of renewable energy, allowing consumers to make informed choices about the source of their electricity.
Net Metering and Feed-In Premiums
Some European countries have adopted net metering policies, enabling small-scale renewable energy generators to offset their consumption with excess production. Feed-in premiums provide additional incentives by offering a supplementary payment on top of market prices.
Cross-Border Electricity Trade
Europe has established interconnected electricity grids and cross-border trading mechanisms to facilitate the exchange of renewable energy across countries. This promotes renewable energy integration and supports regions with varying renewable energy potential.
Investor-State Disputes in Europe Pertaining to Renewable Energy
The achievements in Europe over the last years in the proliferation of renewable energy are remarkable. As such, Denmark made it to the news in 2017 when it managed to run the country 100% on win energy, albeit for only 24 hours.
All the while, numerous disputes arose between foreign investors and European nations. At large, this was the result of an over-incentivization of solar energy. Several countries suffered from a renewable energy boom by far exceeding anticipations and thus costs for governments.
Spain clearly stands out, with the incentives offered for the solar industry leading to such proliferation that it became unsustainable for the Spanish government to continue with its FiT. Spain then pulled the plug in 2012 when it retrospectively curtailed the FiT advantages provided to inves- tors. Since then, many investors have initiated investor-state arbitrations against Spain and other countries, with the investors often prevailing with (at least a portion of) their claims.
Lessons from Europe’s FiT Experience for Malaysia
As Malaysia further develops its integration of a FiT system for renewable energy, there are several critical lessons that can be drawn from Europe’s extensive experience in the field of renewable energy:
Stable, Predictable and Robust Policies
Europe’s success with FiTs is underpinned by the stability and predictability of its policies. Malaysia should aim to establish a long-term policy framework that provides certainty to investors and developers, fostering a conducive environment for renewable energy growth. Indeed, a current issue with the Malaysian renewable energy landscape is the lack of robust policies, leaving key industry players with a lack of understanding of their rights and obligations.
Technology-Specific Rates
Tailoring FiT rates to specific renewable energy technologies based on their characteristics and costs can promote the balanced development of various technologies, optimizing the energy mix and leading to greater diversification of renewable energy technologies.4 Indeed, differentiating FiTs for specific technologies also a greater adaption of support to the costs of varied technologies; this in turn reduces the costs of support and the likelihood that “…the cheapest technologies will receive windfall profits”.
Regular Tariff Adjustments
Regularly reviewing and adjusting FiT rates to reflect technological advancements and cost reductions is vital to ensure that tariffs remain equitable and fair over time. The Malaysian Government ought to ensure that the rates for any implemented tariffs are reviewed at regular periods (e.g., annually or semi-annually) so that Malaysia does not run into the same problems that several European nations were facing when they needed to cut back on attractive tariffs.
Grid Integration Planning & Monitoring and Transparency
Adequate grid planning and investment are essential to accommodate increasing renewable energy capacity, minimize curtailment, and ensure grid stability. With the increase in renewable energy uptake that has no doubt accompanied the feed-in tariff system in Malaysia (which shall no doubt be enhanced under the Malaysian Renewable Energy Roadmap), Malaysia must ensure that it designs and implements a robust and comprehensive grid integration strategy. Such a plan ought to include sub-strategies for forecasting, balancing area coordination and expansion and increasing flexibility, among others.
Furthermore, Malaysia must implement a transparent and robust monitoring and evaluation system to help track the effectiveness of the FiT scheme and make data-driven adjustments to the policy as needed. Also, clear monitoring and transparency would also provide clear information to investors, which would provide a lead-in for the market to aid in and support this transition into renewable energy, as it did in Europe.
Avoiding Disputes with Investors
One key aspect in driving Malaysia’s energy transition will be managing investors’ expectations. The experience in Europe should both serve as encouragement – attractive investment opportunities will proliferate the shift to renewable energy – and a warning sign: unexpected changes in policy will lead to investor-State disputes.
Malaysia is far from being a shining example for providing clear, stable, and transparent regulations. The country has seen five different Prime Ministers since 2018, with each of them seemingly driving his own “agenda.” If there were plenty of attractive opportunities for foreign investors in the field of renewable energy, frequent policy changes would be a potential powder keg for Malaysia.
Conclusion
The transition to renewable energy is a global imperative, driven by the need to address climate change and ensure a sustainable energy future. Europe has been a pioneer in developing and implementing policies related to fees and tariffs for renewable energy, offering valuable lessons and insights for countries like Malaysia.
As Malaysia takes steps towards a greener energy landscape, it has the opportunity to not only reduce its environmental footprint but also stimulate economic growth, create jobs, and enhance energy security. By learning from the experiences of Europe – including how to not end up in numerous legal disputes – and leveraging its own unique strengths and resources, Malaysia can make significant progress in the global transition to renewable energy. It is hoped that this progress will be conflict-free.
ABOUT THE AUTHORS
Prof. Dr. Harald Sippel is a Foreign Lawyer at Skrine, where he acts as counsel and arbitrator (chair, sole, wing) in international arbitration proceedings. Harald has acted in over 85 matters under the rules of all major arbitral institutions. Previously, he led the Asian International Arbitration Centre’s case management team with over a dozen case counsel and supervised the administration.
Vishnu Vijandran is an Associate at Skrine, based in Kuala Lumpur, with experience working with clients through his year in the Exeter Law Clinic and throughout his career. He has recently been granted an LLM (Distinction), for a thesis on retention of title clauses and digital sale of goods under English law. Further, he has achieved membership with the Chartered Institute of Arbitrators. Vishnu has a proven track record in his professional career educational pursuits, awards, and scholarships. These evidence his ability to apply himself effectively and efficiently. Through meeting clients and learning how best to meet their needs, he enhanced his ability to explain and understand the law and continues to hone.
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