The European Commission is seeking permission from the European Council to defend Spain from a €106 million lawsuit brought in a US court under the Energy Charter Treaty (ECT) which could put Madrid in breach of EU state aid rules, according to a document seen by Euronews.
The ECT is a post-Cold War international agreement designed to protect investments in unstable, formerly communist states. It has since become a source of controversy because it allows energy companies to sue countries for measures that could harm their expected profits.
While the legal case is binding and can generally be enforced in courts under international investment treaty rules, the European Union argues that Spain could face conflicting legal obligations – at home and abroad – if a US court orders enforcement.
After Spain rolled back the state aid scheme set up in 2007 to promote electricity generation from clean power sources, the Japanese investor Eurus Energy claimed losses under the ECT and won the right to compensation, with Spain ordered to pay €106 million plus interest in November 2022.
The legal proceedings were initiated by the International Centre for Settlement of Investment Disputes (ICSID), an arbitral tribunal linked to the World Bank, which manages legal disputes between international investors and countries worldwide.
In 2023, Spain challenged the compensation award, but ultimately failed.
Between a rock and a hard place
Eurus then assigned the case to Blasket Renewables, described in the document as a US-based “vulture fund” specialising in difficult-to-enforce arbitration compensation, effectively seeking enforcement through US courts.
"The Kingdom of Spain has informed the Commission that Blasket Renewables has filed a petition seeking recognition and enforcement of the award before the courts of the United States," reads the document.
The Commission argues that if Spain "compensates investors for losses incurred due to the repeal of the 2007 State aid scheme", it amounts to state aid, meaning financial support that a government gives to a company or investor.
But investors seeking compensation disagree, arguing that the payments are not government subsidies but compensation that Spain is legally required to pay after losing an international arbitration case.
Under EU rules, governments are not allowed to give special benefits to particular businesses if doing so would give them an unfair advantage over competitors, unless the support has been approved by the Commission.
The legal case highlights a clash between two legal systems, each asserting that its rules should prevail. International arbitration holds that Spain must pay, while the Commission says that making the payment could breach EU rules.
"Where aid is granted in violation of that provision, the beneficiary cannot have any legitimate expectations in being allowed to keep that aid, and the member state is obliged to recover it ex officio," reads the document, implying that the Spanish government would need to act accordingly.
The Commission considers that foreign courts' recognition and enforcement of such financial compensations is "incompatible with EU law" and would undermine "the primacy of EU law," which the EU executive sees as "unenforceable".
'Vulture funds' versus Spain
The Spanish Energy Ministry said that arbitral proceedings between international investors and Spain over renewables are the result of decisions made by the previous Spanish government, particularly in 2013 under former conservative Prime Minister Mariano Rajoy.
Madrid added that the majority of final arbitrations linked to renewable energy investments are in the hands of litigation funds, which have acquired the rights to the original plaintiffs, the main one being Blasket Renewable Investments.
"They are not the companies affected; they have purchased debts against Spain and try to enforce them abroad, filing the same cases in different countries," reads an Energy Ministry statement.
Paul de Clerck, economic justice coordinator at the NGO Friends of the Earth Europe, said this legal case was the "perfect illustration of the absurdity" of international state dispute settlements (ISDS).
He argued that if an investor doesn’t agree with a Spanish decision, it should go to the normal Spanish courts and not to a "business-friendly tribunal".
"Vulture funds are further misusing the system by buying up claims to make profits at the expense of tax payers," de Clerck told Euronews.
"It is high time that this comes to an end and that the EU and member states take ISDS out of all of their investment treaties."
