Post - Blog
Uncertainty for energy investors around proposed EU withdrawal from the Energy Charter Treaty
- 1 year, 3 days ago (2023-05-04)
- Junior Isles
Leigh Crestohl , Partner, Zaiwalla & Co., and Stephanie Limaco , Solicitor, Zaiwalla & Co.
EM-Power 2024
On 24 November 2022, the European Parliament passed a Resolution, which urged the Commission to initiate the process towards a coordinated exit from the Energy Charter Treaty (ECT). [1] The Resolution was scathing towards the charter, labelling it as an “ outdated instrument, which no longer serves the interest of the European Union ”.
The Resolution, which came after some individual EU member states such as France, Germany and the Netherlands had voiced their opposition to the ECT, is echoed by an unofficial EU Commission "non-paper" that was leaked in February 2023. [2] Their call for action was the culmination of years of unsuccessful negotiations at EU level over a modernised version of the ECT, during which member states repeatedly failed to reach consensus on the proposed reforms. Shortly after this, more than 100 academics urged the UK government to consider joining EU allies in withdrawing from the ECT. [3]
The apparent demise of the ECT would bring to an end several years of cooperation between the Charter’s 53 contracting parties. Signed in 1994, following the collapse of the Soviet Union, the Charter’s original mandate was the establishment of “ a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter ”.
The ECT includes guarantees commonly found in investment protection treaties. As such, the Charter contains rules relating to fair and equitable treatment, most-favoured nation treatment, national treatment, protection from unreasonable or discriminatory measures, protection against expropriation and allowing the resolution of disputes against ECT member states for ECT violations to be subject to international arbitration. In the case of a breach, an investor may at its election submit a dispute either to a national court or to arbitration. In this respect, it is similar to many bilateral investment treaties currently in force.
However, the ECT has faced numerous criticisms in recent years, including that it gives too much protection to fossil fuel investments and that very large compensations have been granted in favour of fossil fuel firms, thus jeopardising the transition to renewable energy. Recent large arbitration claims and awards against western European states under the ECT have also fuelled signatories’ concerns about “regulatory chill”, leading one former UK minister to describe the ECT as a “relic from a bygone age” that “is being weaponised by fossil fuel companies to sue governments for introducing climate policies”.
There indeed does seem to have been a perceptible turning of the tables over the last decade. Claims are now increasingly being made by EU investors against EU member states, rather than non-EU states as was envisaged when the ECT was signed. Rockhopper's successful £210 million award last year arising from Italy’s 2015 coastal offshore oil drilling ban is a recent example of such a claim where, critics note, the damages awarded greatly exceeded the initial investment. Likewise, there are around 50 cases pending against Spain following a change to its renewable energy policy in 2013. It is said that such “intra-EU” claims represent two-thirds of ECT claims since 2014.
Should the EU, and potentially also the UK, decide to withdraw from the ECT, the rules in place would prevent an immediate impact on investments currently covered by the Charter. This is due to the Charter’s stipulation of a 20-year “sunset clause” after a country’s withdrawal, a clause which the EU is attempting to circumvent by way of separate agreements. In the case of EU disputes, an inter se agreement clarifying that the ECT and its sunset clause have never applied in an intra-EU context is being considered. In the case of non-EU contracting parties, the November Resolution called on the Commission to reach out to non-EU partner countries to propose a second agreement allowing them to neutralise the sunset clause on a reciprocal basis. This could potentially apply to the UK should it follow suit and quit the ECT.
Despite the European Parliament’s plans, the Energy Charter Secretariat has challenged on a number of grounds the validity of an inter se agreement clarifying that the sunset clause has never applied in an intra-EU context. [4] They argue that such action may not be consistent with other provisions in the ECT and would lead to uncertainty. As such, there are doubts as to whether the proposed inter se agreement would be lawful. A difficulty also arises given that Italy has already left the ECT and other EU members may have done so before an inter se treaty is concluded.
If these concerns are valid, then there is a risk that some fossil fuel investments would in fact obtain 20 years of protection, which is more advantageous than were modernisation approved and a phase-out introduced in line with the “flexibility mechanism”. Any investments from investors in non-EU member states would also obtain full benefit of the sunset clause, unless persuaded to join in a separate inter se agreement. Currently, there is no evidence that any other state might be intending to do so.
Depending on how the EU and UK decide to move forward, there is a potential for Arbitral tribunals dealing with future ECT arbitrations to question the legal effect of ECT withdrawals and of the agreements dealing with them. The risk of enforcement in non-EU jurisdictions may mean that withdrawing EU states may never fully be free until the expiry of the “sunset clause”. This has given rise to increased uncertainty for energy investors, the timing of which is particularly sensitive given the unsettled state of global energy markets.
[1] European Parliament resolution of 24 November 2022 on the outcome of the modernisation of the Energy Charter Treaty (2022/2934(RSP)), full text available at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0421_EN.html
[2] Full text available at: https://www.euractiv.com/section/energy/news/exit-from-energy-charter-treaty-unavoidable-eu-commission-says/
[3] https://warwick.ac.uk/fac/soc/law/research/centres/chrp/governance/energycharter/
[4] https://www.energycharter.org/fileadmin/DocumentsMedia/News/0047-SG-13022023-EP_President.pdf