European states seek to exit the Energy Charter Treaty what does this mean for energy investors
11 October 2023
11 October 2023
In recent weeks a number of EU member states have indicated their intention to withdraw from the Energy Charter Treaty (ECT), a multi-lateral treaty that protects investments in the energy sector in its more than 50 signatory states. Specifically, Spain, Poland, the Netherlands and France have announced such intentions, and Belgium and Germany are reportedly considering following suit1. In this article we consider the background to this trend, as well as the implications for investors.
Several states have cited environmental concerns to justify their withdrawal, arguing that the ECT's investment protection provisions constrain states' ability to regulate for climate action (e.g. to limit fossil fuel production and energy generation) and thus inhibit the transition to Net Zero. At the core of this "concern" is the ECT's obligations on host states to treat foreign investors fairly and equitably, to observe obligations assumed vis-à-vis foreign investors and to compensate investors at fair market value for any measures with expropriatory effect (be it a formal taking of title or a de facto deprivation of the economic value of the investment). Moreover, the ECT gives foreign investors a direct avenue to pursue these rights against the host state in a neutral forum: international arbitration.
The announcements follow a long campaign by the European Commission and a number of pressure groups and NGOs to end investment arbitration in intra-EU settings. Important milestones in this campaign such as the so-called Achmea judgment of the Court of Justice of the European Union2 were also cited by states announcing their intention to withdraw from the ECT now3. Notably however, these withdrawals would have implications beyond the intra-EU setting as they would concern the ECT as a whole, including investors from non-EU Member States. There is a lively debate to be had around the extent to which the application of law by EU member state courts can provide an adequate alternative that uniformly protects investments, including those in the energy sector. Regardless of this, significant withdrawals, including by some states that took a lead in promulgating the ECT in the 1990s, look to be a near certainty.
From 2018 onwards there have been attempts at reforming the ECT but it has not proved possible to "square the circle" of reconciling the treaty's provisions and mechanisms with principles such as the autonomy of EU courts and there have remained criticisms that the ECT would continue to protect fossil fuel investments for many decades.
It has also been noted by commentators that the extent to which EU states have recently faced claims, some of which they have lost, is a motive for withdrawal.
As a result of these developments, energy sector investors in Europe (and investors from withdrawing states investing elsewhere) should consider the following:
It is unlikely that the withdrawals from the ECT will end here, not least because of the impact on other signatory states of those who originally promulgated the treaty being seen to eschew its protections and assert its inconsistency with Net Zero aims. There are few similar examples of Western democracies advocating the removal of international law protections.
It is also striking that little is said about the impact upon investors from withdrawing states whose investors will lose treaty protections. Investors should follow the developments closely and be on the lookout for further exits. It is crucial that energy sector investors remain alive to these developments and obtain early legal advice to ensure that their investments continue to attract the maximum scope of available investment protection and that any available causes of action are pursued in a timely manner.
1.Investigate Europe, 'Germany prepares withdrawal from Energy Charter Treaty', dated 20 October 2022; Climate Home News, 'European exodus from Energy Charter Treaty raises climate questions', dated 25 October 2022.
2.Slovak Republic v. Achmea B.V., Case C-284/16, Judgment of the Court, dated 6 March 2018; République de Moldavie v Komstroy LLC, Case C-741/19, Judgment of the Court, dated 2 September 2021; PL Holdings (i.e. Republic of Poland v. PL Holdings Sàrl, Case C-109/20, Judgment of the Court, dated 26 October 2021; Green Power Partners K/S and SCE Solar Don Benito APS v. The Kingdom of Spain, SCC Case No. V2016/135, Award, dated 16 June 2022.
3. Kluwer Arbitration Blog, 'Poland to Withdraw from the ECT: Who does it Benefit?', dated 27 September 2022.
4. Energy Charter Treaty, Article 2.
Authors: Matthew Saunders, Partner; Arne Fuchs, Partner; Emma Johnson, Partner; Lucy McKenzie, Senior Associate