The European Commission Proposes to Exit from Energy Charter Treaty as Modernisation Proves Politically Impossible
On 7 July, the European Commission issued a statement proposing that the EU, its Member States, and the European Atomic Energy Community (“Euratom”) withdraw from the Energy Charter Treaty (“ECT” or the “Treaty”). Due to opposition to the proposed modernisation of the ECT, the Commission determined that “there is no legal and/or institutional avenue for the modernisation of the ECT to be adopted and produce its effects” and that without modernisation, the EU (and its Member States and Euratom) cannot remain a party to the Treaty. The Commission also proposed that all EU Member States enter into a side agreement stating that the ECT’s Sunset Clause will not apply to intra-EU investments. If these proposals are accepted by the Council and implemented by Member States, existing investors in the European Energy Sector will need to restructure their investments to maintain investment treaty protection.
The ECT is a multilateral investment treaty with over 50 signatories, including the European Union and Euratom. The ECT was created to stimulate cross-border investment in energy, diversify energy supplies, and liberalise energy markets by protecting energy investments from expropriation, and by requiring host States to afford such investments certain protections including fair and equitable treatment. For several years, the ECT operated with relatively little controversy and with only a handful of cases filed each year. However, starting in 2012 several EU Member States (particularly Spain and Italy) were hit by a wave of claims, often by investors from other EU Member States, related to changes made to solar energy subsidies and regulations.
The Commission believes that the ECT as written is no longer in line with the EU’s investment policy and climate goals and that intra-EU investor-State dispute resolution is incompatible with EU law. Hence, the European Commission, among other stakeholders, has for many years advocated for ECT modernisation on two key points: (1) phasing out protections for fossil fuel investments; and (2) removing intra-EU investor-State dispute resolution from the ECT.
The modernisation proposal gained enough traction that it was set for a European Council vote in November 2022. But in the lead up to the vote, several EU Member States expressed preferences for withdrawing from the ECT rather than modernisation. Ultimately, four States (France, Germany, Spain, and the Netherlands), blocked the Council vote. Without Council authorisation either way, the EU and Euratom could not vote on the modernisation proposal. Further, the European Parliament, whose assent is also necessary for any modernisation to enter into force, does not support ECT reform.
Given that ECT modernisation has become politically impossible, the Commission proposed ECT withdrawal as “the only available solution” offering a new Council resolution to that effect. This new resolution will require a qualified majority, meaning 55% of EU Member States representing at least 65% of the EU population.
In an attempt to counter the implications of the ECT’s sunset clause, which affords existing investments continued protection for 20 years post termination, the Commission has also proposed a new intra-EU Agreement wherein Member States would agree that the ECT’s sunset clause is inapplicable to intra-EU disputes.
In short, investors in the EU energy sector must take action to protect themselves and their investments, as ECT protections will not apply to new investments, and existing European investors may not be able to claim ECT protection for intra-EU investments. All EU energy investors should obtain advice about how to structure (or re-structure) their investments to gain protection from other bilateral or multilateral investment treaties, taking into account any relevant tax and corporate governance concerns.
