The Energy Charter Treaty: What to look for from the next ad hoc Energy Charter Conference

After more than five years and fifteen rounds of negotiation, efforts to modernize the Energy Charter Treaty (ECT) appear to be moving closer to a conclusion.

The 1994 Energy Charter Treaty

The ECT, drafted in 1994 and ratified in 1998, is a multilateral investment treaty with more than 50 signatories and contracting parties, including the European Union.  The ECT created a legal framework to promote long-term investment and international cooperation in the energy sector.[1]  It requires Contracting Parties to create stable, equitable, favorable, and transparent conditions for investors from other Contracting Parties,[2] and includes a dispute resolution clause whereby each Contracting Party gives its “unconditional consent” to the submission of disputes between a Contracting Party and an investor from another Contracting Party to international arbitration.[3]  Since 1998, the ECT has given rise to at least 150 investment arbitrations.[4]

In recent years, the ECT has come under scrutiny, especially in Europe.  Critics argue that the ECT will interfere with efforts to facilitate an energy transition because any government policy changes which impact investments in fossil fuels may give rise to claims by investors.  On the other hand, efforts by the EU and various EU Member States to retroactively disclaim their agreement to arbitrate with ECT investors and contest enforcement of arbitral awards issued pursuant to the ECT have also been criticized and have given rise to a deluge of disputes in courts around the world concerning the validity and enforceability of the ECT’s dispute resolution mechanism.

Modernized Energy Charter Treaty

In the midst of this controversy, in November 2017, the Energy Charter Conference announced it would set up a working group to consider a potential “modernization” of the ECT.[5]  On June 24, 2022, the Energy Charter Conference announced that the Contracting Parties had reached an agreement in principle on the ECT’s modernized text. 

The amended text to the ECT (Modernized ECT) includes amendments to update the list of energy materials and productions (now including hydrogen, anhydrous ammonia, biomass and synthetic fuels) entitled to protection and allows for a review of protected energy materials every five years.

The vote on the Modernized ECT is expected to take place at the end of April.[6]  If the Modernized ECT is adopted, it will enter into force 90 days after its ratification by three-fourths of the ECT’s Contracting Parties. 

Here are a few other major changes to watch for. 

1.  The flexibility mechanism

The Modernized ECT introduces a “flexibility mechanism” that permits Contracting Parties to exclude protections for fossil fuels in their territories.

The flexibility mechanism will apply to:

1. existing investments (including projects in the exploration phase), after 10 years from the entry into force of the new provisions and
2. new investments made after that date.

Some Contracting Parties, including the European Union and the United Kingdom, have indicated that they intend to use the flexibility mechanism to exclude protections for fossil fuel investments.

2.  Protected “investors” and “investments”

Under the Modernized ECT, protected “investors” and “investments” will be subject to additional requirements.  Investors will now have to show they have substantial business activities in the host state, such as “physical presence, employment of staff, turnover generation or payment of taxes” in the host state, and exclude from the definition those who are nationals or “permanent residents” of the host state at the time of making an investment. 

Investments will now have to satisfy an “indicative list of characteristics” including commitment of capital, expectation of gain, duration and risk, and certain investments will specifically be excluded, such as “judicial and administrative decisions.”[7]

3.  Amendment on regional economic integration organizations

The Modernized ECT prohibits investors from Contracting Parties in a regional economic integration organization (REIO), such as the European Union, from bringing claims against another Contracting Party belonging to that same REIO.  This amendment will bring the text of the ECT in line with the European Parliament’s position that the ECT does not protect investors from one EU member state from measures taken by another EU member state.[8] 

This proposed amendment, together with those discussed above, is likely to have the overall effect of substantially shrinking the coverage of the ECT.

Contracting Parties announce withdrawal from the Energy Charter Treaty

While these modernization efforts have been ongoing, numerous Contracting Parties to the 1994 ECT – primarily EU member states and the EU itself – have announced their intent to withdraw from the ECT.

At the time of this writing, France, Germany, Luxembourg, the Netherlands, Slovenia, Spain, and Poland have all made such announcements.  Italy previously withdrew from the ECT on January 1, 2016.[9]  The European Parliament also passed a resolution on November 24, 2022 that “urges the Commission to initiate immediately the process towards a coordinated exit of the EU from the ECT and calls on the Council to support such a proposal.”[10] 

Any withdrawal will not take immediate effect.  Article 47 of the ECT contains a sunset clause providing that a Contracting Party’s withdrawal from the ECT will not take effect until one year after the formal notification of that withdrawal.  Furthermore, under Article 47 of the ECT, the ECT’s protections continue to apply to investments made in the territory of a Contracting Party prior to withdrawal for a period of 20 years after the withdrawal takes effect.

These recent withdrawal announcements create uncertainty about the future of the ECT and its modernization efforts.  The next meeting of the Energy Charter Conference is expected to take place at the end of April[11] and will be crucial for further clarifying the state of play moving forward. 

Learn more about the modernized ECT and its implications for your business by contacting any of the authors.