May 8, 2021

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Hong Kong energy fund sues Japan in groundbreaking case

3 min read


The Japanese government was pushed into “crisis mode” after a Hong Kong-based renewable energy fund broke a long-standing taboo and became the first to file an arbitration claim against the state under ‘a 24-year-old investment treaty.

The dispute centers on whether Japan’s sharp pullback on a renewable energy subsidy program has exposed investors to unreasonable risk and an operating environment that, according to figures from the Teikoku Databank, has forced more than 250 solar companies bankrupt since 2018.

The groundbreaking case, which litigation lawyers in Tokyo said risked a series of similar complaints against the Japanese government, is being conducted under a veil of secrecy and injunctions that prevent both the plaintiff and the Japanese government to discuss the matter in public.

However, two people familiar with the situation told the Financial Times that the company making the claim was Shift Energy, an investor with offices in Hong Kong, Tokyo and three other Japanese cities. Shift declined to comment.

As well as being the first complaint filed under any of Japan’s 29 bilateral investment treaties, the case is unique, lawyers familiar with its details said, as the plaintiff has withstood considerable government efforts. Japanese to settle the case without formal arbitration.

Upon receipt of the claim, the Japanese government assembled an elite group of lawyers from the country’s top firms and legal experts from top universities to help, but was unable to persuade the claimant against arbitration.

The fact that this claim was made under the Japan-Hong Kong bilateral investment treaty, said an attorney experienced in international arbitration, was significant because many investors in the Japanese renewable energy market are based on the Chinese territory.

On the domestic policy front, the lawyer added, Japan will strive to show that the many investment treaties it has signed in recent years do not expose it to more such claims.

“This negotiation failure, and how much is now at stake in terms of reputation, has put many Japanese bureaucrats in crisis mode. They really didn’t want it to go to arbitration, ”said a person close to the Japanese Foreign Ministry. Mofa declined to comment on the matter.

According to people familiar with the dispute, which will be arbitrated under the rules of the United Nations Commission on International Trade Law, the case centers on a subsidy program introduced by Japan in the aftermath of the earthquake and the Tohoku tsunami in 2011, which prompted the shutdown of the country’s nuclear generation capacity.

The program, which began in 2012, was designed to encourage foreign investment in solar and other renewable energy projects by offering generous feed-in tariffs – agreed prices at which electricity will be purchased to reduce investment risk.

The system was introduced at a time when the costs of solar equipment were rapidly decreasing, creating a powerful incentive that successfully brought large numbers of investors to Japan looking for land to build solar farms.

But after barely a year or so, the government began steadily reducing feed-in tariff rates, and then introducing retroactive deadlines for licensed factories before those constraints existed to start operating. Regulatory uncertainty and lower-than-expected tariffs have contributed to a recent surge in bankruptcies, said a person directly involved in the industry.

Legal experts said one of the models for investors filing complaints against governments is Spain, which has also significantly reduced subsidies for renewable energy and is facing a series of complaints contributed by four Japanese companies.



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