The European Union
(EU) changed its state aid rules to increasingly support renewable energy
projects through subsidy mechanisms such as Contracts for Difference (CfDs).
These developments attract foreign investors but also expose tensions between
International Investment Law (IIL) and EU state aid law, particularly when
subsidies are revoked due to non-compliance with EU law. This scenario raises
the question of whether legitimate expectations under the Fair and Equitable
Treatment (FET) standard can be grounded in commitments that were unlawful ab
initio, such as a Member State’s promise of unlawful state aid. This article
proposes a framework for tribunals to resolve this normative conflict by
distinguishing the source of the state’s commitment: subsidies granted through
general regulation versus contractual instruments. This article argues for a
proportionality-based approach where commitments stem from regulation,
following the International Court of Justice’s (ICJ’s) test in Certain Iranian
Assets, and for strict liability where subsidies are contractually guaranteed.
Further, this article applies this framework to conventional and novel methods
to allocate RE subsidies, namely Feed-in Tariffs (FiTs) and CfDs and
demonstrates its practical significance by positing that CfDs provide stronger
protection for investors than FiTs.