Challenging the Re-Regulation of Liberalized Electricity Prices Under Investment Arbitration
43 Pages Posted: 8 Dec 2011
Date Written: December 7, 2011
According to the liberalized electricity markets paradigm, free market prices are expected to stimulate sufficient investment in production capacity to meet future electricity demand. This implies that electricity producers must be able to recover their operating and investment costs whilst achieving a reasonable return on their investment. They must be allowed to pass increases in the price of primary energy sources on to the consumer. Moreover, to send the right investment signals, shortage of production capacity must be reflected in higher prices. However, such price increases can be opposed to short-term social, economic, and political interests. A perception amongst investors that public authorities are likely to cede to public pressure and interfere in price formation has a negative impact on the inflow of capital to the sector. Energy companies will be reluctant to invest if they perceive a risk that governments might re-regulate electricity prices and so prevent them from recovering their costs and earning a reasonable rate of return. On the contrary, a guarantee that free market prices will be respected is likely to facilitate investments. This contribution argues that international investment law could provide this guarantee of protection. International investment standards, in particular the fair and equitable treatment standard, could shield foreign investors in electricity production from the introduction of price caps or the re-regulation of liberalized electricity prices. Investment arbitration could therefore contribute to the regulatory stability and predictability needed in liberalized markets to attract sufficient investments in the expansion and modernization of electricity production.
Keywords: Liberalization of electricity markets, international investment law, government interference with prices
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