With the world changing its stance from non-renewable energy to renewable energy in its efforts to counter climate change, it has become imperative for nations to experiment with the legal regimes that are in place, specifically those developing nations that seek foreign investment. Consequently, investment arbitration has entered the picture. Investment arbitration as a mechanism for addressing disputes in the energy sector is an ever-growing trend. Since the setting up of the International Centre for Settlement of Investment Disputes (ICSID) Convention in 1966, foreign investors have been dragging states to this arbitration institution in order to seek appropriate arbitral awards. However, India\u2019s position, notwithstanding its promises of clean energy and energy transition, remains interesting.<\/span><\/p>\n Through this blog post, the authors analyse the concept of investment arbitration in India\u2019s energy sector. They begin by discussing arbitration and the energy sector, before delving into the concept of investment arbitration in India, its past as well as present, while laying particular emphasis on the Indian Budget for the F.Y. 2022-23. Towards the end, the authors explore the future possibilities of investment arbitration while providing their concluding remarks.<\/span><\/p>\n Article<\/strong><\/span><\/p>\n \u201cWe need to diversify our economy, and the energy industry would be a great place to begin that diversification<\/em>\u201d<\/span><\/p>\n -Sharron Angle<\/span><\/p>\n As the world changes, so do the needs of humankind. Since time immemorial, these needs have been driven by the decisions of people in power. Even in contemporary times, we must look towards the policies and legislations made by high-level authorities; policies and legislations that are implemented for the betterment of citizens residing in their respective territories. <\/span> At the domestic level, India established its very own Ministry of New and Renewable Energy (MNRE) to reduce the country\u2019s reliance on fossil fuel-based consumption, that is, non-renewable energy, and shift to the renewable energy sector. Subsequently, it established the Solar Energy Corporation of India (SECI) and the Indian Renewable Energy Development Agency (IREDA). Furthermore, India\u2019s budget for the F.Y. 2021-22 and F.Y. 2022-23 aimed at keeping India\u2019s promise to achieve a target of 227 GW by the end of 2022, and 450 GW by 2030. This move led to the development of the Production-Linked Incentive (PLI) scheme, along with the provision of subsidies, interest-free loans, and additional capital infusion, all contributing to the betterment of the sector. The PM Gati Shakti Plan was another significant initiative introduced by the Indian Government. In addition, the budget for the F.Y. 2022-23 brought about a rise in the capital expenditure by 35.4% (amounting to INR 7.50 crore) to induce more private party investment, due to its vehementemphasis on energy transition and clean energy mission<\/a>.<\/span><\/p>\n At the international level as well, India has taken steps showing its willingness to switch to the renewable energy sector. In 2015, it launched theInternational Solar Alliance (ISA)<\/a> with France at the 21st Conference of Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC). Further, at COP 26, held in Glasgow from 31st October to 13th November 2021, India put forth ambitious targets for countering climate change. It further made mammoth claims about its energy transition mechanisms, andpolicies<\/a> to facilitate the same. As already mentioned, India had set a target of achieving 450 GW of renewable energy production by 2030. Ambitious as it sounds, it must not be forgotten that India is the only country to fulfil its Nationally Determined Contributions (NDCs) with respect to climate change, and it has also shown its full support to the Paris Climate Agreement. The actions mentioned above are not random shots in the air. Rather, they are initiatives that showcase the way India\u2019s energy sector, along with its allied sectors, is on the rise.<\/span><\/p>\n Before coming to the aspect of investment arbitration in India, let us first understand the need for arbitration in its energy sector.<\/span><\/p>\n When bringing about the LPG (Liberalization, Privatization, and Globalization) reforms in 1991, the Government of India noticed that the State Electricity Boards (SEBs) were slowly becoming inefficient and generating huge losses. Treated as mere political instruments for those in power, they were failing to fulfil their primary function \u2013 being generation, transmission, and distribution entities. Consequently, the Government remoulded the SEBs to the modern-day Distribution Companies (DISCOMs). The Government was rather optimistic about the formation of DISCOMs, being of the view that, in the wake of this remoulding process, these entities would emerge successful after years of losses. It was expected that this would turn the tide of inefficiency, and help thembecome financially stable profitable entities<\/a>, since then private players were allowed to play ball in the energy sector too, vide the Electricity Act of 2003.<\/span><\/p>\n However, the tide did not turn as expected, and DISCOMs continued to suffer losses instead of turning into profitable entities. According to a report by the Power Finance Corporation, the aggregate loss of DISCOMs was approximately INR 900 billion. It was even claimed that these DISCOMs had accumulated dues amounting to INR 87,000 crores by March 2020, making it abundantly clear that they would be unable to repay the electricity generation companies. This opened the gates to an array of legal complications, right from the project commissioning differences, to delays in payments, bankruptcies, etc.<\/span><\/p>\n Usually, when such disputes arrive, the Central Electricity Regulatory Commission (CERC) takes it upon itself to them. However, since the option to appeal is readily available to the party against whom the judgment is passed, these judgments are often challenged in Appellate Tribunals, and ultimately, before the Hon\u2019ble Supreme Court of India. This has burdened the alreadyoverburdened judiciary with cases related to energy sector disputes<\/a> and as a result, the prolonged court battles have continued, leading to the bleeding of investors\u2019 time and money.<\/span><\/p>\n Faced with this issue, private investors started exploring alternative options to seek justice, and hereby, the mechanism of institutional arbitration came into the picture. This mechanism has since been proactively utilised by the energy sector. The major benefit of institutional arbitration is the proficiency of the individuals who deliver the arbitral awards in a case, i.e., experts in the sector who are appointed to resolve the disputes. Not only does this serve to establish trust in the minds of investors, developers, and institutions about the comprehension of the nuances and intricacies of the case, but it also paves the way for a speedy resolution of disputes. Vide the 2019 Amendment to the Arbitration and Conciliation Act, \u201cfast track procedures\u201d for international commercial arbitration have been given great importance under Section 29B, which proves to be a lucrative option for international investors. The Amendment also takes care of domestic commercial arbitration mechanisms under Section 29A, which imposes a time limit for the Arbitral Tribunal to give its final award.<\/span><\/p>\n To ensure that the final arbitral award is the best possible version of itself, there exists a process of \u201cscrutiny of the award\u201d which takes place before the final order is passed. This scrutiny is done by the subject experts who oversee the arbitral proceedings between the parties in conflict. Furthermore, Section 34 of the said Act provides for scope of challenging the arbitral award, if certain conditions are met. In addition, the Indian Government, to give a boost to institutional arbitration and Power Purchase Agreements (PPAs), has enabled the energy sector to incorporate \u201can institutional arbitration clause\u201d with atimeline nearing up to three months<\/a>. All the aforesaid factors have encouraged investors, developers, and even large corporations in the energy sector to opt for arbitration as a dispute resolution mechanism instead of lining up in courts.<\/span><\/p>\n Now, it is pertinent to ascertain, or rather, question as to why such measures are being taken by the Indian government, as well as to why the arbitration sector is witnessing a spike in India, specifically in the energy sector.<\/span><\/p>\n The energy sector is one of the sectors in India which allows for 100% Foreign Direct Investment (FDI). In addition, the mammoth pledge made by India in COP 26 circumnavigated around energy transition and clean energy. The target of achieving 450 GW of renewable energy capacity would not be possible if private entities were prevented from entering the playing field. In fact, their entry becomes pivotal because the achievement of the humungous target of 450 GW renewable energy seems to require roughly $533 billion. It must be noted that the aforesaid figure is just for the renewable energy sector; the total investment required for the energy sector as a whole, is around$1 trillion<\/a>. These investments would consecutively facilitate the creation of sustainable and suitable infrastructure, thereby boosting the businesses involved in the energy sector. At the same time, it would also utilise and develop human resources in the respective areas.<\/span><\/p>\n When such huge investments would flow in on both, the domestic as well as international fronts, disputes would arise as well. Investors, rather than going for the conventional mode of seeking justice in courts, would prefer to opt for the modern-day \u201coutside of court settlements\u201d, i.e., arbitration, which is known asInvestment arbitration<\/a>. It refers to the procedure established to resolve dispute(s) between foreign investors and the host countries in which they have invested. Also called Investor-State Dispute Settlement (ISDS), these investment arbitration proceedings are usually consented to by the host states in International Investment Agreements (IIAs), Bilateral Investment Treaties (BITs), Free Trade Agreements (FTAs), or at multilateral levels by being a party to The Energy Charter Treaty (ECT).<\/span><\/p>\n Source: International Arbitration Information by Aceris Law LLC<\/span><\/em><\/span><\/p>\n As we can see from the above chart, the time period from 1972 to 1996 witnessed a fairly low registration of cases with respect to investment arbitration. However, moving towards the end of the 20th century, i.e., 1997 onwards, we see a spike in cases of investment arbitration. This could be due to the opening up of various economies of the world, as well the IIAs, BITs, FTAs, and ECT showing the world the benefits of arbitration. At the onset of the 21st century, i.e., the period from 2000 to 2020, we see a boom in the number of cases with respect to investment arbitration. Now, the above-mentioned data speaks only of cases at the international level. The picture in India is completely different.<\/span><\/p>\n It won\u2019t be out of place to mention that investment arbitration in India has evolved with time. The 5 stages of investment arbitration, in order, are \u2013 scepticism, openness, increased participation, protectionism, and lastly, a state-centric approach towards BITs. After the LPG policy of 1991, India became an excellent destination for investment by foreign investors. Although the stance of the government fluctuated from time to time, the investments poured in. And along with the investments came disputes related to investment arbitration. As per thedata available in Investment Policy Hub, UNCTAD<\/a>, there were twenty-six cases wherein India has appeared as a Respondent State, and nine wherein it appeared as the Home State of the Claimant. Even though all cases have their own standing, the two prominent ones include Vodafone v. India<\/em> and Cairn v. India<\/em>, both of which were filed following the announcement of a retrospective taxation system for corporate entities.<\/span><\/p>\n Looking at the history of investment arbitration in India, we are presented with a rather rough picture. India\u2019s relationship with BITs started when it signed its first-ever BIT with the United Kingdom in 1994. Despite the fact that the culture of BITs has started in India, the nation is not a party to the ICSID Convention till date. During this time, the world witnessed the openness shown by the Indian Government towards the concept of investment arbitration. However, this openness soon turned into something diametrically opposite when the Dabhol Power Plant project dispute arose. In addition to raising questions about the efficiency of the Indian Judiciary, this dispute forced India to switch to a \u2018protectionist\u2019 approach. One thing led to another, and the Indian government began cancelling telecom licenses, which gave birth to a new set of issues.<\/span><\/p>\n However, the government changed in 2014, and the new government\u2019s approach towards the arbitrational regime caught the international community\u2019s attention. The NDA-led government took two major steps in this regard, the first one being the establishment of a model BIT structure, and the second one being the abolishment of the FDI approval process. The power was delegated to the ministries for their own FDI requirements as they deemed fit.<\/span><\/p>\n
In recent years, the world has had to strive hard to fight one of the biggest global threats we\u2019re facing \u2013 the phenomenon of climate change. Governments at both, the national and international levels, have formulated a broad array of measures as well as conventions in efforts to counter it. This growing menace has brought the world to its knees and made it essential to adopt sustainable measures to protect the environment. Not only has India followed the lead, but it has also emerged as one of the pioneers in this struggle against climate change. In order to do so, it took heed of the aforementioned quote by Ms. Sharron Angle and started its experimentations in the energy sector.<\/span><\/p>\n![\"\"](\"https:\/\/ijpiel.com\/wp-content\/uploads\/2022\/04\/Number-of-ICSID-Cases-Registered-to-Date-2022-300x133.jpg\")
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