The protection of investments in the energy sector

In recent years, the Energy Charter Treaty (“ECT”) has been under increasing scrutiny, given concerns that the treaty is no longer fit to facilitate changes necessary to effectively combat climate change.

ECT Contracting Parties, with the European Union (“EU”) and the United Kingdom in the lead, have been pushing for a modernisation of the treaty to address these concerns. In June 2022, an agreement on the ECT’s modernisation was reached, including a “flexibility mechanism”, which would allow contracting parties to exclude investment protection for fossil fuels in their territories, affecting existing investments after ten years from the entry into force of the relevant provisions as well as new investments made after 15 August 2023.

However, as these reform efforts drew to a close in late 2022, some EU Member States expressed dissatisfaction with the agreed revisions, finding them insufficient to effectively tackle climate change. A cascade of EU Member States, starting with Poland, Spain and the Netherlands, followed by France, Belgium, Germany, Slovenia and Luxembourg announced their intention to withdraw from the ECT. Most recently, Austria also stated that it was considering withdrawal. Italy has already withdrawn from the ECT in 2016.

It was planned to confirm the final text for the modernisation of the ECT, which would have required a unanimous vote, during the Energy Charter Conference on 22 November 2022. However, the EU Commission, which had negotiated the modernised provisions on behalf of the EU and EU Member States with the objective to bring the treaty in line with the 2015 Paris Agreement and which had attempted to stop the exodus of EU members from the treaty in the days before the scheduled vote, failed to procure a mandate from EU Member States to vote in favour of the reform.

The EU Commission therefore had to propose postponing the vote shortly before the Conference. The Energy Charter Conference is now expected to meet ad hoc in April 2023 to continue discussions on adopting the proposed amendments.

On 24 November 2022, the European Parliament passed a resolution, welcoming the withdrawals by some EU Member States’ governments from the ECT and underlining “the need to act in a coordinated manner in order to be stronger in the withdrawal negotiations” and urging “the Commission to initiate immediately the process towards a coordinated exit of the EU from the ECT“. It remains to be seen if a majority of EU governments will assent to this position.

Many will regret the cascade of withdrawals from the ECT, highlighting that the ECT had proved useful in promoting long-term cooperation between states to ensure energy security and noting that a reformed treaty could have been an instrument to promote climate action. Others will welcome the more drastic step away from the treaty, now taken by some of its Contracting Parties. In any event, the exodus and the delayed reforms will fragment and complicate the landscape of protections investors can rely on when making cross-border investments in the energy sector.

There are a number of questions which investors are advised to consider in this changing environment. This Guide first addresses these key legal issues before presenting an overview of the status of the ECT and available remedies for investors investing in or coming from each of the countries that have announced their withdrawal from the ECT.