The Energy Charter Treaty (ECT) is at a crossroads. Dramatic recent developments, such as the intention of multiple EU member states to withdraw from the ECT, mean companies in the energy sector will be wondering what the future holds for their cross-border investments.
The ECT concluded in 1994 and is a multilateral investment treaty focused on the energy sector. It has 53 signatories, predominantly (but not exclusively) European and Central Asian states. Following the collapse of the Soviet Union, the idea was to provide mutual protection between contracting states for foreign investors in the energy sector.
The ECT has been relied upon by countless investors to obtain compensation (in some cases, in the billions of euros) for measures such as unlawful expropriation, nationalisation and breach of the fair and equitable treatment standard. Of particular note have been claims by EU investors against EU member states (such as Spain and Italy) for measures taken to reduce incentives for renewable investments, the effect of which has been a backlash within the EU against the ECT and allegations that it prevents EU member states from tackling climate change.
This has led to a “modernisation” process aiming to bring the treaty in line with current priorities, both allowing for protection for fossil fuel investments to be removed and facilitating investment protection for new products, such as green hydrogen. In addition, reflecting the backlash against the ECT and despite the modernisation initiative, we have seen successive announcements of withdrawals from the ECT by EU member states and calls for others to do so, including for a coordinated withdrawal by the entire EU.