Spain’s Infamous “Sun Tax” – Would it stand the Test of Legality ?

Spain has imposed a support levy on the producers of solar energy in order to deflate the looming deficit in the energy sector of the country. The tax is supposed to help the government in cashing upon the growing demand for solar energy in order to run the government operated grid.

Spain’s energy sector has hit by two pronged attack

  1. The decline in the investments in renewable energy sector
  2. The rising rate of import of energy

In 2014, the government of Spain had withdrawn the subsidies from the renewable energy sector, a move which was a shift from the “Feed-In Scheme” followed by most of the European countries. Under this scheme, the producers of renewable energy are given subsidies in the form of technology cost cuts and minimum support revenue. The withdrawal was later backed by the Supreme Court which upheld the constitutionality of the same and left the renewable energy producers knocking the doors of EU and other arbitrations.

The second problem arose for the fact that Spain imports 80% of its energy supply, expending 40.5 billion Euros annually which is 4.5% of its GDP. This trend became even more unfortunate by the growing rate of renewable energy consumption in the country. People who installed solar panels not only consumed energy by themselves but also saw it as a commercial opportunity to sell the surplus electricity produced from such panels. This further concentrated the fiscal burden on the government and the tariff deficit soared to 34 billion Euros; even when 95% people still receive electricity at Tariff of Last Resort (TLR) rate which is governed by the government.

It is in this backdrop, that the Spanish government came up with a tax on Photovoltaic System (PV) owners. The key features of this policy are:

  1. PV systems up to 100 kW are prohibited from selling electricity. Instead, their owners are required to donate the extra electricity to the grid for free
  2. For PV systems up to 100 kW, the owner of the installation must be the owner of the contract with the electricity company. Moreover, before installation, permission must be sought from the electricity supplier and the Spanish government
  3. Community ownership is prohibited altogether for all sizes of self-consumption systems

 

After establishing the law, what comes next is the test of legality where the piece of legislation is made to stand the principles of rule of law, non-arbitrariness and fairness. Likewise, the sun tax needs to pass the legality test vis-à-vis Spanish Constitution and EU Directive on Renewable Energy.

The constitutionality test of sun tax attracts two provisions of the Spanish Constitution – Article 9.3 that establishes principle of legal certainty and non retroactivity of punitive provisions and Article 106.2 that puts an obligation on government to compensate individuals for losses suffered by them due to administrative action. Even though the retroactive application of PV Systems tax does violate Article 9.3 by setting a punitive provision even for those persons who had already established the PV systems, the Supreme Court’s multiple rulings denying the unconstitutionality of cut in feed-in tariff (subsidy to renewable energy sector) makes it near impossible for the Constitutional Court to have a different interpretation of Article 9.3 vis-à-vis retroactive taxation. Moreover, proving legal uncertainty in this matter would be difficult as the Electricity Sector Law 54/1997 authorizes the government to modify its energy policies as long as the modifications are objective and non-discriminatory. So the only way to move ahead with Article 9.3 is to show how the aforementioned tax does not pass the test of objectivity and non-discrimination as laid down in the Electricity Sector Law for it does not give any reasonable explanation for differentiating between the class of PV Systems Operators and other electricity suppliers.

The major bottleneck in moving Constitutional Court to strike down PV Systems tax as unconstitutional is Article 162 of the Constitution. Since the sun tax is a Royal Decree-Law (as it was ratified by the Parliament), as per Article 162, the appeal for unconstitutionality of such law can only be moved by the Prime Minister, President, Ombudsman, 50 members of Parliament or 50 members of senate. It disenfranchises the Union of PV Systems owners, people who are most severely hit by this law, to move the Constitutional court for the ultimate remedy. The only way through which they can approach the court is when the actual application of the law, for instance deciding the rate of tariff, causes some discrimination for which an appeal can be filed only to an ordinary court asking it move an appeal of unconstitutionality in the Constitutionality. This indirect procedure is highly uncertain and depends on the mercy of the ordinary court to endorse an appeal to the Constitutional court.

Since it is very difficult to strike down the PV Systems tax as unconstitutional, an effective remedy can be to approach court under a liability suit asking for compensation for the loss caused by an administrative function. However, even in that case the loss has to be real, concrete and of economic value.

Other legality test for the policy is the one posed by EU Directive 2009/28/EC. Clause 8 envisages a mandatory target of 20% contribution from renewable energy in the total energy production by member states by the year 2020. In addition to this, Clause 19 asks the member states to constantly evaluate energy policies and ensure that they are aligned to meet the aforementioned target. The sun tax policy is anything but the compliance of both of these clauses. Therefore, as of present, there are 6 petitions pending in the EU court challenging the cut in feed-in tariff and 9 petitions challenging the sun tax.

Another challenge under International Law comes from the Energy Charter Treaty to which both Spain and the EU are signatories. Article 10 of the Treaty obliges the signatories to provide fair and equitable treatment to the investors of the other contracting states, to respect the obligations entered into vis-à-vis contractors, and not have a differential treatment between foreign and domestic investors. Moreover, International Arbitration Tribunals have upheld the protection of legitimate expectation of investors to have a stable and predictable legal and administrative framework. This Article is largely in line with general protection guaranteed under Article 9.3 of Spanish Constitution. Since, this policy is already shown to be violative of Article 9.3 of Constitution; it would be safe to call it violative of Article 10 of the Treaty also. Now that the discrimination has been established, the investors can move either domestic courts or international arbitrations to challenge the discriminatory policy under Article 26 of the Treaty. Pending arbitrations such as EDF v Hungary and Vattenfall AB, and Vattenfall Europe Generation AG & Co KG v Germany, show that Article 26 can be applied in EU member states also.

 

It is quite obvious that the tax on PV Systems will have an adverse effect on the cause of environment protection. At the post COP 21 era, where commitments have been made to move towards greener and alternative sources of energy, this move comes across as a move backwards.

Instead of taxing renewable energy to support conventional energy market, the government of Spain should have accepted the voluntary or obligatory quota scheme as followed in Sweden. Under this system, producers of renewable energy are given certificates for every unit of electricity they produce. Moreover, in some areas the electricity supply chains are obligated to take a quota of electricity from renewable energy producers. Therefore, the producers of solar energy are able to sell electricity in energy market at equal price and have full access to the demand. This system ensures balancing of electricity consumption and production on the basis of market forces of demand and supply and either way the energy sector market is benefitted with revenue. This scheme will also reduce tariff deficit for the system ensures reduction of support cost as it is operated through competition.

Since there is abundance of sunlight in Spain and people are also choosing renewable sources of energy, the abovementioned scheme is a much better choice than the sun tax for the former will encourage growing foreign as well as domestic investments in the energy sector, hence reducing the deficit. On the contrary, the sun tax will repel the investors; increase the burden on government to provide support cost for conventional grid energy.

With abovementioned arguments in context, the people of Spain shouldn’t be charged for sunlight, a public resource so central to their cultural and folk practices. I hope the sun would set on the tax and the jubilation would again sing – Sale el sol.

 

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