On December 7, 2016, the Italian Constitutional Court (the Constitutional Court) rejected on appeal the claim that the new state incentives scheme, pursuant to the Italian Law Decree no. 91, dated June 24, 2014, (the Decree), which applies retrospectively to the renewable energy sector, was unconstitutional. (Please see recent blog for more information.)
On January 25, 2017, the full text, outlining the rationale of the judge’s decision was published. We have summarised the following key points from the decision below:
Retroactive changes in the legislation and long term contractual relationships
Concerns over the constitutional legitimacy of the Decree were predominantly based, on the retrospective effect of the feed-in tariff (FITs) cuts pursuant to the Decree.
The Constitutional Court held that reliance on legal certainty is a key element of the rule of law. In line with the principles upheld by the Constitutional Court’s and the European Court of Human Right’s case law, the protection of such legal certainty does not necessarily mean that the legislator is not allowed to enact provisions which disrupt the regulation of long term contractual relationships (for example, in the way the general FITs agreements entered into by the energy operators and the Italian Agency for Energy Services (GSE) were impacted by the Decree).
In fact, the Constitutional Court added that the test for the legislator is that a change in legislation should not undermine legal certainty by adopting irrational, arbitrary and unpredictable law provisions.
In particular, the Constitutional Court held that the Decree did not affect the general FITs agreements entered into between the energy operators and the GSE since, by enacting such provision, the Italian legislator has acted in the general public interest, balancing two opposite purposes: the state economic support to the renewable energy sector and the best sustainability of the costs through which such support is granted, borne by the electricity end-users through the electricity bill.
Certainty of the state incentives regime and changes in the long term contractual relationships
A second argument against the constitutional legitimacy of the Decree was that the FITs cuts introduced by the Decree were not consistent with other provisions of the general regulatory framework governing renewable energy sector incentives. In particular, the cuts in the FITs undermine legal provisions which prescribe that state incentives should remain in place throughout the 20 years of duration of the FITs agreements.
The Constitutional Court rejected these arguments and held that the regulatory framework does not require that such incentives must remain unchanged over the 20 years duration of the FITs agreements entered into with the GSE.
In particular, the Constitutional Court stated that such FITs agreements are not for the sole benefit of the energy operators (which, in that case, would have had the legitimate expectation to keep the initial terms and conditions unchanged for the 20 years duration of the agreement). In fact, FITs should rather be considered as general regulatory instruments, aimed at supporting the renewable energy sector and simultaneous help to minimise the costs paid by consumers. Changes are therefore inevitable and cannot be declared unconstitutional for these reasons alone.
Notwithstanding the Constitutional Court’s decision, many energy operators continue to criticize the retrospective effect of the FIT cuts. However, certain commentators have suggested that the decision should be considered as positive news for investors and new potential investors in the renewable energy sector, since: i) it confirmed the validity of the three options to be implemented in relation to FIT allowances, between which the solar plants operators had to choose by November 30, 2014, pursuant to the Decree (please see our previous blog mentioned above); and ii) it has provided much needed clarity to the sector, by closing litigation that, until now, generated uncertainty in the renewable energy regulatory framework.
This post was prepared with the assistance of Bianca De Vivo in the Milan office of Latham & Watkins.