Foreign enterprises investing in wind farms in Poland can claimcompensation from the state

by Piotr Mrowiec

12 November 2016

The Polish Wind Energy Investments Act of 20 May 2016 (Journal of Laws of 2016, item 961), which came into force on 16 July 2016, has thwarted both Polish and foreign investors in implementing many wind farm projects that they have been developing for years. Foreign investors can protect their investments by invoking international laws which may make Poland liable for damages.

Enterprises investing in renewable energy sources in Poland (RES) in our country must have nerves of steel: daunting prices of green certificates, the never-ending work on new regulations on green energy support scheme, the uncertainty as to the support period and the extremely difficult and time-consuming investment process. All these burden RES investments with a certain amount of risk. However, the record numbers of wind farm connections in previous years (which in 2015 was, in turn, caused by the fear of the auction system) prove this area of business to be still attractive. Foreign enterprises used to invest in wind power in Poland eagerly as our support scheme allowed a decent rate of return in comparison with the support provided in many European countries where it was very limited or even phased out.

The situation changed radically when the Wind Energy Investments Act entered into force on 16 July this year. As a result, a vast majority of open wind farm projects that did not make it to the building permit stage must now be written off because they fail to meet the strict minimum distance requirement introduced by the act. The minimum distance between a wind farm and any residential buildings must be at least 10 times the height of the entire turbine (in practice the radius of the no-go area is about 1.5–2 km). That restriction has profound consequences.

Above all, we have to remember that bringing a wind farm project to the building permit stage of the procedure is difficult, time-consuming, expensive, and requires the developer to go through a myriad of administrative and civil law proceedings.

After a preliminary selection of the wind farm location, the investor has to ensure that the intended use of the area is designated properly. The next extremely important but difficult phase to go through is obtaining a decision on environmental conditions, generally called an "environmental decision". In the above procedure the investor often has to procure a costly report on the impact his wind farm is going to have on the environment. The investor must also receive the approval for connecting his planned wind farm to the power grid, which means that right at the beginning the investor has to make an advance payment on account of the connection costs to the tune of PLN 30,000 for each megawatt of power fed into the grid. Depending on the project location, the investor must also obtain many other permits and approvals, such as: the permit for exclusion of the land from farming activities; agreements with relevant civil and military aviation authorities on the marking of every wind turbine; agreements with the relevant public road administration, or even with a heritage conservation officer. It is also hard on the investor's pocket to guarantee himself the rights to the real property on which the wind farm is to be erected.

Due to different locations and circumstances of every project, it is hard to estimate accurately the costs the investor has to face at the initial stage of a wind farm development. Yet, the most oft-heard figures hover between 70,000 and 100,000 euro for each megawatt of energy to be generated by the wind farm. If the investor is engaged in a dozen or so large-scale projects, losses may reach tens of millions of euro.

Summing up, investors who have secured funding and fulfilled all the costly and legally complex requirements to build a wind farm in Poland, except obtaining a building permit (which in such circumstances is often just a technical formality), have been deprived of the right to complete these projects and reap the rewards of their efforts.

Both Polish and a foreign investors in the situation described above, or in a similar one, can of course seek their rights under the Polish laws and try in different ways to have the minimum distance provisions declared unconstitutional (for example claiming a violation of the principle of the democratic state of law which underlies the principle of protection of acquired rights or the principle of protection of business in progress). The aim of such (usually long-lasting) actions would be to obtain a building permit and, later, an occupancy permit, or get compensation from the Polish state.

However, the most natural and convenient way for the foreign investor to go is to look for justice before a body that is independent of the Polish state. This could be an international investment tribunal established outside Poland specifically to hear a given case. Such a tribunal adjudicates on the basis of the international investment law and not the Polish laws.

In the situation described in this article, such protection is provided under bilateral investment treaties to which Poland is a party (we are a party to almost 60 such treaties, among others, with Germany, Spain, France, the Netherlands, Austria and the USA), as well as a multilateral treaty containing special provisions on protection of investment projects in the energy sector, the Energy Charter Treaty.

The basic international protection standard the violation of which may be raised in the described situation is the prohibition of unlawful expropriation. In the situation in question we can talk about expropriation because the minimum distance requirement strips the foreign investors of the right to implement their planned wind farm projects and benefit from them, without any compensation. Such investments are usually carried out through special-purpose vehicles whose activity is limited to (a) particular project(s). Therefore, alternatively, it may be claimed that expropriation takes place because the shares in the special-purpose daughter companies implementing such projects have been deprived of any value.

Other standards which are common for many investment treaties and may be breached in the analysed situation are especially: the fair and equitable treatment standard and the full protection and security standard. Violation of these standards would present an additional argument that would strengthen the investor's position in investment arbitration but would not raise the potential compensation from Poland because if the prohibition of unlawful expropriation is indeed violated, the investment tribunal would normally order the Republic of Poland to pay the full compensation amount for the expropriated property rights. Depending on the situation, such compensation could cover the expenses incurred for project implementation or – and this is the option that most investors will probably pursue – the value of the lost profit expressed, for example, as a discounted value of cash flows reasonably expected from a wind farm or a group of wind farms in a given period less the amount of other expenses necessary to make the wind farm operational.

Thus, undoubtedly, the game is worth the candle. Since every case is different, before making a decision to institute arbitration proceedings one should thoroughly review the facts in order to know the strengths and weaknesses of the particular case. Moreover, it is worth knowing the provisions of the treaties to be invoked in the potential dispute (usually it is a bilateral treaty between Poland and the investor's country of origin, and the Energy Charter Treaty), as well as requirements that have to be met before instituting arbitration proceedings – for example, most treaties require the expiry of a specific negotiation period, the so-called cooling-off period of e.g. 6 months of the date when Poland is requested in writing to resolve the dispute amicably.