What Investors (Really) Want: Regulatory Stability in the Italian Energy Sector

Regulatory stability is the holy grail of investors in any sector. But what does it really mean? In my forthcoming paper ‘Regulatory Stability in the Energy Sector: The Italian Experience’[1] I argue that regulatory stability cannot mean a complete ban on regulatory changes and cannot be achieved (only) through national and international litigation. What is needed is a set of procedural and substantive regulatory measures allowing States to make credible long-term commitments.

My paper analyses retrospective cuts to support schemes for renewable energy in Italy. This is a textbook example of regulatory instability. Italy was not alone in trying to revise its support schemes. Many other EU and non-EU countries made adjustments to feed-in tariffs, the most widespread support scheme. Most of the time, these regulatory changes prompted national and international litigation. Investors claimed that their legitimate expectations had been breached. The protection afforded by the Energy Charter Treaty was usually invoked. So far, investors’ claims have been seldom upheld. But many cases, including those against Italy, are still pending. It cannot be excluded that in the near future some international arbitration tribunals will rule in favour of the investors. In Italy, the Constitutional Court will decide, probably in 2017, whether the legislator was entitled to reduce the subsidies granted to producers of renewable energy.

Aside from the outcome of litigation, these regulatory changes have already prompted several reactions. Italy decided to withdraw from the Energy Charter Treaty, thus signalling distrust in the only available multilateral agreement on energy investments. The European Commission accelerated its project of completely replacing investment arbitration for intra-EU disputes, and, possibly, for extra-EU disputes with the most important commercial partners. More generally, investments became more costly in the countries that adopted retrospective cuts.

What seems dangerous is that these reactions are too focused on dispute resolution procedures. However, neither the procedures currently available, nor those being proposed, will ensure regulatory stability. Investments cannot be attracted simply by providing ‘better’ options for litigation. The disputes about retrospective cuts confirm what the empirical literature on investment litigation has already pointed out: investors don’t care about rules on dispute resolution. What they care about is the credibility of the commitments made by the national authorities, as well as the overall quality of the regulatory framework. Thus, the most pressing question is: how can States increase their credibility in the energy sector?

The paper proposes a mix of procedural and substantive measures. On the procedural side, the forthcoming National Energy and Climate Plans, to be submitted in the framework of the Energy Union strategy, will need to include the process and criteria to select support schemes, the channels to finance them, and the procedures which could be used to change them. On the substantive side, the paper proposes to implement regional coordination of national plans and support schemes, to build up a regulatory framework for innovative climate finance tools, to broaden the availability of private and public insurance schemes for regulatory risks, and to transform mediation into the main dispute resolution procedure.

To sum up: the uncertain threat of litigation cannot enhance the credibility of regulatory commitments. What could enhance credibility is a set of interlocking relationships making it more costly for a State to renege on its policies. But will States be willing to tie their hands in this way? They have much to gain from a higher rate of investments. Moreover, a refusal to move in the proposed direction could have dramatic consequences. Most of the financial resources needed to achieve climate goals in the coming years will come from the private sector. Without credible commitments, those resources will not shift from the high-carbon to the low-carbon sectors.

Giuseppe Bellantuono is an Associate Professor at the University of Trento.