Modernized Energy Charter Treaty: Key Challenges and Opportunities for Energy Investors

As a follow-up to my previous post on the coordinated European withdrawal from the Energy Charter Treaty (“ECT” of “Treaty”), I am writing to provide an important update on the recent developments concerning the ECT modernization. On 3 December 2024, the Energy Charter Conference made a landmark decision to adopt the modernized version of the ECT, marking the conclusion of over a six year-long reform process that has been the subject of intense debate and scrutiny.

The Modernization Decision

The Energy Charter Conference, at its 35th meeting, issued the following decisions that officially adopted the modernized version of the ECT:

• A Decision on Amendments to the ECT
• A Decision on Modifications and Changes to Annexes to the ECT
• A Decision on Changes to Understandings, Declarations and Decisions
• A Decision on Entry into Force and Provisional Application

The Conference also adopted a Decision on the Designation of the Energy Charter Secretariat as a Depositary of the ECT.

These decisions reflect the content of an earlier agreement in principle reached in June 2022, which proposed significant changes to the ECT.

Key Changes in the Modernized ECT

The modernized ECT introduces several important modifications aimed at addressing criticisms and aligning the treaty with current global priorities, particularly in relation to climate change and sustainable development. Some of the key changes include:

• Right to Regulate and Climate Change: New article and additional wording in the preamble and throughout the ECT emphasize each state’s right to regulate in the interest of legitimate public policy objectives. Such objectives may include the protection of the environment, including climate change mitigation and adaptation, protection of public health, safety or public morals. New exceptions from the ECT are introduced to complement the existing general exceptions to clarify the possibility of taking measures for the maintenance of international peace and security.
• Fossil Fuel Carve-out Option: A new Annex provides an option for contracting parties to carve out fossil fuel investments from the ECT protection (“flexibility mechanism”). The carve-outs will not affect investment protection in the territory of other contracting parties, unless they opt to apply them reciprocally.
• Intra-EU Claims: A new provision specifies that the investor-state dispute settlement system in Article 26 of the ECT does not apply in relations between member states of a Regional Economic Integration Organization (REIO), effectively excluding intra-EU investor-state claims.
• Refined Definitions: The terms “investor” and “investment” have been given more limited definitions. Definition of “Economic Activity in the Energy Sector” covers the capture, utilization and storage of carbon dioxide (CCUS) in order to decarbonize the energy systems. Some Energy Materials and Products are introduced and covered by the investment protection provisions, such as: hydrogen; anhydrous ammonia; biomass; biogas; and synthetic fuels. Additional Energy-Related Equipment is introduced and covered by the trade provisions, such as wool, rock-wool and similar mineral wools; and multiple walled insulating units of glass.
• Modified Protection Standards: The standards of protection have been made more restrictive.
• Denial of Benefits and MFN Clause: New wording suggests that the denial of benefits (DOB) clause can be invoked after an arbitration has already started, while the treaty’s most-favoured-nation (MFN) clause does not apply to dispute settlement or substantive standards of protection.
• Enhanced Transparency: An agreement provides for the application of the UNCITRAL Rules on transparency, as well as enhanced transparency for state-to-state disputes.
• Procedural Changes: New provisions address expedited review mechanisms, including review of frivolous claims, treaty shopping, third-party funding, and security for costs.
• Damages and Costs: The modernized ECT excludes the possibility of granting punitive damages and introduces a costs-follow-the-event presumption.

Entry into Force and Provisional Application

According to the decision on entry into force and provisional application of the modernized ECT:

• The amendments to the ECT and Section C of Annex NI will enter into force 90 days after at least three-fourths of the contracting parties have deposited their instruments of ratification, acceptance, or approval to the depositary.
• The parties have agreed to a provisional application of the amendments from 3 September 2025, onwards, unless a party opts out of the provisional application before 3 March 2025.
• Other modified annexes will enter into force on 3 September 2025, but they will not apply to ongoing disputes.

Implications for Energy Investors

The adoption of the modernized ECT marks a significant shift in the landscape of international energy investment protection. For energy investors, this development brings both opportunities and challenges that warrant careful consideration:

1. Enhanced Climate Change Considerations

The explicit recognition of climate change concerns and the right to regulate in the modernized ECT aligns with the global trend towards sustainable energy policies. Energy investors involved in renewable energy projects may find increased support and protection under the new framework. However, those with investments in traditional fossil fuel sectors should be aware of the potential for reduced protection, depending on the host state’s approach to the fossil fuel carve-out option.

2. Intra-EU Investment Protection

The exclusion of intra-EU investor-state claims is a significant change that reflects ongoing debates about the compatibility of investment arbitration with EU law. EU-based clients with investments in other EU member states should reassess their investment protection strategies and consider alternative dispute resolution mechanisms.

3. Refined Investment Definitions

The more limited definitions of “investor” and “investment” may affect the scope of protection available under the ECT. Energy investors should review their investment structures to ensure they still qualify for protection under the new definitions.

4. Procedural Changes

The introduction of expedited review mechanisms, provisions on treaty shopping, and rules on third-party funding and security for costs will impact how investment disputes are conducted under the ECT. Energy investors should be prepared for these procedural changes when considering potential disputes.

5. Transitional Period and Uncertainty

With the provisional application set for 3 September 2025, and full entry into force dependent on ratification by three-fourths of the contracting parties, there will be a period of transition and potential uncertainty. Energy investors should closely monitor the ratification process in relevant jurisdictions and be prepared for a potentially extended period where different versions of the ECT may apply to different contracting parties.

6. Continued Relevance of Withdrawals

Despite the modernization, it’s important to note that several key players, including the EU as a bloc and major European countries like Germany, France, and the UK, have already decided to withdraw from the ECT. This creates a complex landscape where the applicability of the ECT, whether in its original or modernized form, varies significantly across jurisdictions. Separately, interpretative declarations and inter se agreements that aim to neutralize the so-called sunset clause of the ECT, which grants existing investments protection for 20 years following states’ withdrawal from the ECT, should be assessed. I have discussed the sunset clause provision of the ECT here.

The Road Ahead

While the modernization of the ECT represents a significant effort to address criticisms and align the treaty with contemporary priorities, it’s clear that challenges remain. The effectiveness of these changes in balancing investment protection with climate action and state regulatory powers will only become apparent as the modernized treaty is implemented and tested in practice.

For energy investors navigating this evolving landscape, it’s crucial to:

• Conduct a thorough review of existing and planned investments in light of the modernized ECT provisions.
• Stay informed about the ratification process and the positions of relevant host states regarding the ECT.
• Consider the potential impact of the fossil fuel carve-out option on energy investments.
• Reassess dispute resolution strategies, particularly for intra-EU investments.
• Engage with legal counsel to understand the specific implications of the modernized ECT for your investments and operations.

As we move forward, it’s clear that the ECT modernization process, while concluded, has opened a new chapter in the ongoing debate about the role of investment protection in the energy sector. The coming years will be crucial in determining whether this modernized framework can effectively balance the interests of investors, states, and global climate objectives.

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