As we move closer to 2020, it has never looked more difficult for some countries to meet their national greenhouse gas emissions reduction targets. In many jurisdictions, nuclear energy has often been considered to be the answer to carbon reduction while fulfilling ever-increasing domestic energy demand. However, 2011 saw a global shift away from the nuclear option, triggered in part by the crisis at the Fukushima nuclear plant in Japan. Subsequently, Germany announced that the entirety of the country's nuclear power plants would be phased out by 2022, Switzerland and others followed suit. This shift away from nuclear power by certain countries also had a knock on effect on those countries that still place nuclear power at the heart of their energy policy, as certain developers with nuclear expertise decided instead to focus on the development of both renewables and cheaper forms of conventional power (such as gas-fired power), particularly in jurisdictions where they may not have much experience, but where they might consider there to be an easier investment framework.

The question therefore remains, if they cannot increase the use of nuclear energy, how can countries meet their carbon reduction aims, whether or not legally binding? New technologies have very significant potential, but many of the initiatives are still either in their infancy or remain theoretical.

To equalise the costs of development and, to a certain extent, operational costs between renewable energy and conventional power, most governments around the world have adopted a three-pronged policy approach, as follows:

While the financial support mechanisms undoubtedly encourage the uptake of renewable technologies, setting the level of the support at a level which is acceptable to all stakeholders has proved to be extremely troublesome and controversial in many countries. If the level of support for renewables is set too low, there will not be the uptake of the technology that is required, but if it is too high it sparks a "gold rush", resulting in costs spiralling out of control for governments in their attempts to maintain the levels of support promised. This has been particularly problematic in the context of the global economic downturn and the resulting public sector spending cuts.

Many support schemes around the world adopt the principle of grandfathering, which guarantees a certain level of financial support for a fixed period of time. However, subject to this principle, it is widely accepted by both governments and generators alike that levels of support must be reduced over time such that projects developed in future will receive reduced tariffs to take account of, most obviously, falling development costs as technology prices, such as for solar photovoltaic (pv) panels, drop. However, falling technology costs are not the only reason that tariffs have been reduced in recent years. In Slovakia, for example, an overly-generous feed-in tariff resulted in installed solar pv capacity rising from 31MW at the start of 2010 to 492MW by November 2011, which led to instability in the electricity transmission grid.

High levels of incentives have in many cases led to significant rises in final electricity prices paid by consumers. Many governments have come under significant political pressure to reduce tariffs to lessen the effect on consumers, who may otherwise question the need for expensive "green" electricity during a global financial crisis.

In the context of the issues raised above, the speed at which incentive levels for renewables should be reduced can cause great difficulties. Governments who act too swiftly, slashing tariffs with little warning, will adversely affect "shovel ready projects" (that is, projects that are poised to begin the construction phase) in respect of which developers have invested significant time and sums of money in securing sites, obtaining the necessary consents and grid connection as well as procuring the necessary technology. Conversely, reducing incentive levels too slowly may not stop the problem of over-compensating developers quickly enough and can even result in a last-ditch flurry of projects seeking to take advantage of the original tariff levels, exacerbating the original concerns further. In addition, governments who act to adjust their renewable energy incentive regimes too frequently will adversely affect the confidence of generators, investors and their funders who seek regulatory certainty for their projects.

Tariff reductions therefore must be undertaken gradually with as much notice to industry as possible. The UK Government has recognised this and has recently published its proposals for incentives to be given to larger-scale renewable energy projects from 2013 to 2017. The consultation process, which started towards the end of 2011 enabled stakeholders to be fully involved in setting tariff levels at an early stage and allowed for long-term project planning.

Many incentive regimes, particularly feed-in tariffs, apply the concept of degression, meaning that while a development is guaranteed to receive a tariff for a set number of years, the tariff will decrease each year. For example in Germany, tariffs decrease within statutory limits each year, with the exact decrease dependent on market conditions.

Some countries have proposed stringent cuts in tariff levels, only to later reverse them and subsequently reduce the severity of the cuts. For a number of years, Poland was one of the most attractive locations in Europe for investors when it came to renewable energy. However, in December 2011, a draft bill introduced the concept of banding (that is, applying different levels of tariffs to different renewable energy technologies), which resulted in many investors becoming nervous at the long-term viability of investing there. The Polish Government has since published a re-drafted bill that aims to provide more stability and therefore certainty for investors.

While the problems highlighted above can create unacceptable levels of uncertainty for investors contemplating entering certain markets, the issues are exacerbated for those developers who have already committed to developing projects in areas when the relevant incentive regimes are subject to cuts. Solar pv developers have been most affected by this problem in recent years and there has been much discussion as to potential remedies for those who have been impacted.

In October 2011, the UK Government proposed substantial reductions to feed-in tariffs to apply to installations that had become eligible for support in December 2011, effectively applying the reductions retroactively. A judicial review challenge to the UK Government's proposals was brought by Friends of the Earth (environmental charity) and a number of solar pv developers (Secretary of State for Energy & Climate Change v Friends of the Earth & ORS [2012] EWCA Civ 28). The proceedings concerned whether it was within the UK Government's power to make modifications that had such a retroactive effect. It was also claimed that the modifications proposed would take away vested rights in those whose installations have become eligible for payment before April 2012, namely the right to a tariff fixed from the time the installation became eligible for payment throughout a 25-year period. The challenge ultimately succeeded despite being vigorously contested by the government, who sought to take the case to the Supreme Court. The case highlights the problems that governments have in balancing the need to reduce incentive levels quickly on the one hand, with implementing the reductions in a proportionate and fair way on the other. Perhaps surprisingly, it also highlights that environmental pressure groups and renewable energy investors are willing to work together, despite differing agendas, to ensure that low carbon technologies receive suitable incentives to encourage their continued deployment.

Another method that foreign investors have used in opposing tariff reductions is claiming breaches of investment treaties. In Spain, investors have claimed that cuts in feed-in tariffs breach the Energy Charter Treaty (a multi-lateral agreement providing protection to investors in the energy sector similar to a bilateral investment treaty) in respect of promises of long-term price support. In essence, developers argued that the initial levels of support were relied upon when investment decisions were being made. Similar claims are being used by foreign investors in other jurisdictions such as Italy and the Czech Republic. The basis of such claims is often a breach of the fair and equitable treatment (FET) standard. Arbitral tribunals have interpreted the FET standard as protecting an investor's legitimate expectations, although tribunals have taken different approaches to what this means. Some commentators have stated that relevant considerations may be transparency, stability, procedural propriety and whether a state has complied with its contractual obligations. However, some tribunals have found that investment frameworks need to evolve and be amended, as long as this does not run counter to a state's explicit obligations. As a result, a reduction in a previously established support mechanism could be inconsistent with a "legitimate expectation", although there is still an element of uncertainty for investors in pursuing such a claim due to the variation of interpretation by the tribunals.

What is clear, is that governments cannot take decisions to cut subsidy levels lightly, as affected investors are willing to commence proceedings to protect their interests. When setting future subsidy levels, mechanisms that governments introduce will have to be much more flexible to minimise the likelihood of these types of proceedings arising.

Tariff reductions problems seem to be unavoidable for renewable energy projects and there is little doubt that they will continue to dominate the renewable energy incentive policies of many governments for the foreseeable future. On the basis that tariff reductions will need to be implemented, the mechanisms for doing so must be carefully considered and will inevitably be built-in to the legislative regime to lessen the "surprise" factor, which many tariff reduction announcements currently appear to have.

In future, tariffs may be linked to the deployment of renewable technologies, either by lowering tariffs when target levels of deployment have been reached, or specifying a budget for a particular technology and closing the relevant incentive scheme to any plant deployed when the budget has been exceeded. The problem with this method is that while it will certainly ensure that government budgets are not stretched beyond expectations, it does not prevent technologies from being over-incentivised. Therefore, it would be unlikely to offer the level of certainty that investors need (given the long lead-in times for certain projects) and in the long-term may therefore reduce deployment levels.

Alternatively, tariffs could be reduced on a more regular basis as Germany has done, so that instead of reducing the tariff levels every 12 months, tariffs could instead be reduced every six months, for example. This would be particularly suitable for technologies that have fast-paced cost reductions such as solar pv. In addition, the concept of index-linking tariff levels could be removed, or else an alternative index adopted, and the length of time during which tariffs are paid could be reduced. In the UK, some technologies are eligible for index-linked tariffs for 25 years. While most investors would understand the benefits of regular reviews and degressions of tariff levels, as this would enable them to be kept fully informed as to the incentive levels of their schemes, removing index-linking or dramatically reducing the tariff life would be difficult to accept, causing some investment funds to ultimately move into other industries or countries.

Another alternative for governments would be to impose more stringent eligibility criteria or reduce tariffs for generators that have a portfolio of renewable schemes, which is proposed in the UK. Currently, tariffs are offered to those installations under certain output levels and this has meant that investors have often aggregated large portfolios of smaller eligible installations. Some may argue that portfolio investors such as these may not need the high levels of support currently on offer. However, there are just as many who argue that this class of investor is critical to future renewable energy deployment as they have "bought into" the asset class, understand the regulatory risks and have done so multiple times. Reducing tariff payments to these investors could again jeopardise future deployment rates.

As we have seen, support levels need to be reduced for many different reasons. However, this conflicts with the continuing need for investment in the renewables sector, particularly in light of countries' renewable energy targets, which are often binding. When considering this problem, governments should consider previous attempts to impose drastic cuts in support, as these have often been overturned by the courts. Balancing the need for investment and ensuring technology is not over-incentivised is difficult, but is crucial to ensure that future energy needs are met. How governments approach this will be one of the defining energy stories of the next five to ten years.