Emma Johnson, Partner at law firm Ashurst, explains the implications of European states’ planned withdrawal for energy investors.
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 suit. In this article we consider the background to this trend, as well as the implications for investors.
Background to the withdrawals
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 Union were also cited by states announcing their intention to withdraw from the ECT now. 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.
Implications for investors
As a result of these developments, energy sector investors in Europe (and investors from withdrawing states investing elsewhere) should consider the following:
Those looking at making new energy sector investments in withdrawing states as well as investors from withdrawing states looking to invest in other ECT signatory states should not delay making their investments. Withdrawal from the ECT takes effect one year after notification. From then, new energy investments (both in, and by investors from withdrawing states) will not be protected by the ECT. However, investments already made at this point in time will continue to enjoy protection for a period of 20-years under the so-called ‘sunset provision’ of the ECT.
As there is a risk that withdrawing parties also agree to abandon the sunset provision, investors should take steps to maximise the protection of their investments through different mechanisms. Most importantly, it would be prudent for investors from withdrawing states to seek to negotiate appropriate investment protections with the host-state and to write those protections directly into their investment contract. For example, so-called ‘freezing’ or ‘stabilisation’ clauses can be used. These clauses specify key regulatory parameters for the foreign operations that would otherwise be subject to changes of the domestic regulatory framework, or taxation, and guarantee them for the life of the investment. Having robust contractual protections will become more important in the absence of ECT protection. However, such contractual protections are generally less effective and harder to enforce than ECT investment protections (which permit international arbitration by investors directly against sovereign states, enforceable on an almost global basis).
It will also be crucial for investors in or from withdrawing states to consider whether they can benefit from investor protections contained in bilateral investment treaties (BITs), as an alternative to reliance on the ECT (the investment protection chapter of which operates as a multi-lateral investment treaty). Many states maintain a broad network of BITs which typically include similar protections to those contained in the ECT, including an obligation to accord fair and equitable treatment to foreign investors, and not to expropriate their investments without effective compensation. For example, Spain is a party to more than 80 bilateral investment treaties and France is a party to more than 100. Ideally, investors would look to rely on BITs entered into between the relevant withdrawing state and a non-EU Member state. Where BITs are not available under the current corporate structure of the investment, investors should consider restructuring. If such restructuring is done before a specific dispute arises, it is typically considered permissible and helps attract the highest protection possible.
Investors with existing disputes should accept the host states’ offer to arbitrate that is included in the ECT as quickly as possible. This will help ensure that a neutral dispute resolution forum remains available, even in cases of withdrawal and termination of the sunset provision. Although there will no doubt be an increase in claims against the withdrawing states as investors seek to preserve existing rights to claim, it is – as a first step – not necessary to initiate a full arbitration to preserve the corresponding rights.
Notably, the EU has not itself withdrawn from the ECT and remains a signatory in its own right. It might be that investors will seek to bring claims against the EU rather than withdrawing EU member states. Indeed, the EU’s recent attempts to impose caps on low carbon energy pricing and windfall taxes on fossil fuel producers are likely to prompt claims from affected investors (for more on this, see our briefing note here). The degree to which actions by member states could generate claims against the EU is unclear and currently the focus of much analysis by international law scholars.
The ECT covers much more than protection of foreign investments: its stated purpose is to provide a legal framework to promote long-term cooperation in the energy sector. As matters stand, there is no multi-lateral instrument that replaces the ECT’s legal framework, and so the withdrawal of a number of EU member states is likely to have a significant impact on international cooperation in the energy sector more generally. Critics have noted this would be at just the time cooperation in the sector was most needed in the light of Russia’s weaponization of gas supplies to Europe following its invasion of Ukraine.
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 undoubtedly the case that many businesses are already focussed on a planned transition away from fossil fuels. Those companies that do not yet have clear transition plans in place may find themselves under increased pressure from their stakeholders to take action. Those companies may perceive withdrawals from the ECT as of limited relevance, particularly against a backdrop of criticisms of the ECT as a treaty that inhibits regulatory change that is adverse to the interests of investors in fossil fuels. Such an approach would, however, overlook the fact that the ECT’s provisions apply equally to renewables investments and that this area has produced a particularly large number of cases against EU states where they have reduced the subsidies that attracted renewables investment in the first place.
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.
This article was co-authored by Matthew Saunders, Partner, Global Head of International Arbitration, and Lucy McKenzie, Senior Associate, Dispute Resolution, at Ashurst.
 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.
 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.
 Kluwer Arbitration Blog, ‘Poland to Withdraw from the ECT: Who does it Benefit?’, dated 27 September 2022.
 Energy Charter Treaty, Article 2.