As governments tighten their belts in the face of a protracted financial crisis, a number have rolled back generous incentive schemes designed to attract investments in green energy.

While the phasing out of subsidies or the trimming down of preferential tariffs has been duly noted in the financial press, the investor response has received less attention. In a growing number of instances, foreign investors are filing international arbitration claims – seeking to hold governments liable for projected losses arising out of these policy reversals.

The most prominent of these arbitrations has been brought against Spain by a consortium of investors in the country’s solar generation sector. The consortium takes issue with legislation that slapped caps on solar energy production, and reduced the window during which a subsidy is available.

The investors say that they were induced to make huge investments in Spain’s solar industry, and that the government then changed the rules once the investments were made. Many legal observers are watching the case closely, as the stakes are high – upwards of €4bn – and the outcome could dictate whether other green energy investors can hope to recoup losses occasioned by policy reversals.

Indeed, a second claim against Spain could materialise if that country’s legislature proceeds with plans to claw back incentives for so-called solar-thermal energy. (In contrast, to conventional solar power, solar-thermal generation uses sunlight to heat water in order to power steam turbines.)

Spain is far from the only country facing crossborder lawsuits from disgruntled green energy investors. A group of investors in the Czech Republic are threatening to bring their own multi-billion dollar arbitration claim in response to a 2010 levy slapped on solar power producers in the country. A similar claim has been threatened against Italy, and other copycat cases could arise in other jurisdictions where governments have reined in once-generous green energy incentives.

At the core of all of these cases is a hotly debated legal question: do treaties designed to protect foreign investments from expropriation, discrimination and unfair treatment go so far as to shield foreign investors from the types of policy reversals that are proliferating in the green energy field?

There is a broad – but not universal – legal consensus that investors may be able to recover losses in cases where the governments made specific and binding promises, and then failed to live up to those pledges.

If investors have promises of subsidies and preferential tariffs in writing – for instance, in a contract or other legal agreement – then this could go a long way towards bolstering their damages claims. But, if investors merely piled into a market when the policy portents looked good, they may have less protection from subsequent changes in that policy framework.

Precisely because international investment treaties do not provide ironclad protection against changes in energy policy, some political risk insurers such as the Multilateral Investment Guarantee Agency are developing specialised policies that could insulate investors against withdrawal of subsidies or other incentives needed to foster long-term green energy investment.