On June 27, 2024, the European Union announced its withdrawal from the Energy Charter Treaty (ECT). This move potentially marks the end of a long and difficult negotiation process on the reform of the treaty, which was originally intended to promote and protect investment in the energy sector. Given the undisputed need to promote investment in renewable energy and thus combat climate change, this withdrawal raises a number of questions.

The Origins of the ECT

The ECT was signed in 1994 and came into force in 1998. Originally comprising almost 50 contracting parties from Europe (including all EU member states in addition to the EU), the successor states to the Soviet Union and Asia, it aims to create a stable framework for cross-border cooperation in the energy sector. This includes protecting investments in the energy sector and settling disputes between investors and states. The original political motivation was to secure access to the oil and gas sources there after the First Gulf War and the collapse of the Soviet Union.

So far unsuccessful reform negotiations

In recent years, criticism of the ECT has grown, particularly with regard to its alleged incompatibility with the EU’s climate targets and the Paris Agreement. Critics argued that the treaty protects fossil fuels and would thus hinder the transition to renewable energies. In 2022, after five years of negotiations, an agreement in principle was reached on a modernized treaty that would have significantly restricted protection for existing and new investments. However, as not all EU member states agreed to the details, a vote was postponed until 2023. In the meantime, however, numerous contracting parties, including Germany, Denmark, France, Italy, and Spain have declared their withdrawal from the ECT. Austria has also been considering an exit from the ECT for some time, but initially has postponed its final decision in view of the modernization efforts.

In March of this year, the European Commission therefore proposed a three-stage process in which the EU first withdraws from the treaty, then the EU member states agree to no longer block the conclusion of the modernized treaty, and subsequently all other EU member states withdraw from the non-modernized ECT.

Effects of the phase-out on existing investments

A crucial point in connection with the EU’s withdrawal is the sunset clause in Article 47 of the ECT. This clause states that existing investments continue to be protected by the treaty for up to 20 years after the withdrawal of a contracting party. This applies both to foreign investors and to investors of this contracting party abroad.

However, the relevance has so far been low, as proceedings have almost always been initiated against EU member states. The withdrawal is also likely to be of little relevance for investors from the EU, as all EU member states were also parties to the ECT. Despite the withdrawal of these states, the issue will also have little relevance in the future, as the sunset clause also applies to the member states. Whether this can be abolished retrospectively is at least doubtful.

Impact on new investments and renewable energies

Probably the most serious effect of the withdrawal concerns new investments. While existing investments, whether fossil or renewable, will remain protected, no new investments, whether fossil or renewable, will be protected against EU measures.

The need for private investment in the energy transition is undisputed. According to the International Energy Agency (IEA), annual investment in clean energy must increase to around USD 4 trillion by 2030 in order to achieve the goals of the Paris Agreement.

Interestingly, the majority of arbitration proceedings under the ECT were directed against European states such as Spain, Italy and Germany and concerned the renewable energy sector. These proceedings were often initiated by investors who felt disadvantaged by changes in the support conditions for renewable energy. Spain, for example, was confronted with a large number of lawsuits after it retroactively reduced the feed-in tariffs for solar energy. This shows that renewable energies also require considerable investment protection in order to ensure confidence and stability for investors.

Conclusion: a double-edged sword

The EU’s withdrawal from the Energy Charter Treaty is a complex issue with far-reaching consequences. While existing investments continue to be protected and European companies in third countries continue to benefit from the ECT, the lack of protection for new investments, particularly in the area of renewable energies, could hamper the EU’s climate protection efforts.

It remains to be seen whether the European Commission’s strategy of overcoming resistance to the adoption of the modernized ECT will work. In the short term, however, it represents a setback for the protection of urgently needed investments in renewable energies.

Authors of the unyer Energy & Infrastructure working group

Dr Richard Happ
Manuel Tomas
Roberto Padova
Nicolas O. Zenz