Hong Kong energy fund sues Japan in groundbreaking case

The Japanese government has been thrust into “crisis mode” after a Hong Kong-based renewable energy fund broke a longstanding taboo and became the first to lodge an arbitration claim against the state under a 24-year-old investment treaty.

The dispute centres on whether Japan’s sharp pullback on a renewable energy subsidy scheme exposed investors to unreasonable risks and to an operating environment that has, according to Teikoku Databank figures, forced more than 250 solar companies into bankruptcy since 2018.

The groundbreaking case, which dispute lawyers in Tokyo said risked drawing out a slew of similar claims against the Japanese government, is being conducted under a shroud of secrecy and injunctions that prevent both the claimant and the Japanese government discussing the matter in public.

However, two people with knowledge of the situation told the Financial Times 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 claim brought under one of Japan’s 29 bilateral investment treaties, the case is unique, said lawyers familiar with its details, because the claimant has resisted extensive efforts by the Japanese government to settle the matter without formal arbitration.

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

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

In domestic political terms, the lawyer added, Japan will be at pains to show that the many investment treaties it has signed in recent years do not lay it open to more such claims.

“That failure of negotiation, and how much is now at stake in reputational terms, has put a lot of Japanese bureaucrats into crisis mode. They really desperately didn’t want this to go to arbitration,” said one person close to Japan’s ministry of foreign affairs. Mofa declined to comment on the case.

According to people with knowledge of the dispute, which will be arbitrated under the UN Commission on International Trade Law rules, the case centres on a subsidy programme introduced by Japan in the wake of the 2011 Tohoku earthquake and tsunami, which prompted the long-term closure of the country’s nuclear generation capacity. 

The programme, 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 bought to reduce the investment risk.

The scheme was introduced at a time when solar equipment costs were falling rapidly, creating a powerful incentive that successfully brought large numbers of investors to Japan in search of land to build solar farms. 

But after just a year or so, the government began steadily cutting the feed-in tariff rates, as well as then introducing retroactive deadlines for plants licensed before those constraints existed to start operating. The regulatory uncertainty and lower than expected tariffs have contributed to a recent surge in bankruptcies, said one person directly involved in the industry.

Legal experts said one of the templates for investors bringing claims against governments was Spain, which also made deep cuts to renewable energy subsidies and is facing a series of claims brought by four Japanese companies.

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