Energy Charter Conference: Agreement In Principle provides significant solutions to modernise Energy Charter Treaty’s dispute settlement mechanism

On 24 June 2022, at the Ad Hoc Meeting held under the Mongolian Chairmanship, the Energy Charter Conferenceconfirmed the agreement in principle on the modernisation of the Energy Charter Treaty (ECT). The result is that the negotiations for a modernised ECT are officially concluded following the Modernisation Group’s fulfilment of the negotiation mandate it received from the Conference.

While, the Energy Charter Secretariat has since made available an approved Public Communication to explain the main changes contained in the agreement in principle, the draft text will be communicated to the Contracting Parties by 22 August 2022 following an editorial and legal review.

Thereafter, a so-called silence procedure will be triggered between the Contracting Parties of the ECT. If none of the Parties raises objections, the new text could be formally adopted at the Energy Charter Conference scheduled to take place on 22 November 2022.

If ratified by three-fourths of the Contracting Parties, the modernised ECT will enter into force 90 days after the ratification.

There is no doubt that the text of the ECT needed to be modernised – especially to bring it in line with international law commitments on climate change and sustainable development and to take into account all of the developments in investment law and policy.

The modernised ECT, once approved and ratified, will make it possible to put an end to two recurrent issues that arise in the context of the application and interpretation of the current version of the Treaty, namely (1) the Contracting Parties’ right to regulate with a view to implementing environmentally sound policies; (2) the application of the ECT investment dispute settlement mechanism amongst State Members of the same REIO.

• Reaffirmation of the Contracting Parties’ right to regulate with a view to implementing environmentally sound policies

The new wording of the ECT reinforces the right of Contracting Parties to regulate investments and the activities carried out by investors so as to ensure the protection of the environment, including through climate change mitigation and adaptation measures and the safeguarding of public health, among others.

According to the Public Communication issued by the ECT Secretariat, the amendments provide for a novel “flexibility mechanism” that would allow Contracting Parties to exclude new fossil fuel related investments from investment protection and to phase out protection for the already existing investments, “considering their individual energy security and climate goals.”

As pointed out by the EU Commission in a news release dated 24 June 2022:

“This phasing out of protection for fossil fuel investments will take place within a shorter timeframe than in the case of a withdrawal from the ECT, for both existing and new investments: existing fossil fuel investments will be phased out after 10 years under modernised rules (instead of 20 years under current rules) and new investment in fossil fuels will be excluded after 9 months.”

Nevertheless, as remarked by the Energy Charter Conference in its Communication, the envisaged exclusions “will not, as a matter of principle, affect investment protection in the territory of other Contracting Parties, unless they opt to apply them vis-à-vis investors from the aforementioned Contracting Parties reciprocally.”

For the time being, the new text will make it possible to align energy policies, reflecting clean energy transition goals and contributing to the achievement of the objectives of the Paris Agreement and Goal 7 of the UN Sustainable Development Goals (SDG). The amendments acknowledge states’ right to pursue their public policy objectives and preserve their ability to develop sustainable and climate-friendly energy policies.

Furthermore, the agreement in principle prevents the Contracting Parties from promoting international trade and investment in energy by lowering their respective environmental and labour protection laws and standards.

It also recommends that Contracting Parties promote adherence to international standards and principles of responsible business conduct among investors operating in their areas. The new provisions on sustainable development and corporate social responsibility clarify and strengthen the provisions on environmental impact assessment of energy investment projects, in accordance with the respective laws and regulations of the Contracting Parties, ensuring a higher level of environmental protection and greater public participation.

Thus, this new wording will prevent foreign investors from taking advantage of the provisions of the ECT to subvert the sovereign power of states to put in place legislation to pursue environmentally sound and climate change sensitive policies, including the proposed Europe’s Green Deal, a set of environmental policies designed to achieve a priority objective for the EU Commission, that is, “[m]aking Europe the first climate neutral continent in the world.”

Under the current ECT wording, governments are not entirely free to sanction sustainable and climate-friendly energy policies without threats of investor–state disputes.

Moreover, such disputes could lead to the total distortion of the policies initially envisaged and/or result in multi-billion USD awards against states, which in turn could translate into a reversal or delay of the environmental policies that were intended to be put in place.

The Vattenfall case in Germany, the Aura Energy case in Sweden and the Uniper case in the Netherlands are some clear examples of that aforementioned problems.

Following the 2011 nuclear reactor accident in Fukushima, Japan, the German parliament expedited the phase-out of nuclear energy in the country through the 13th Act amending the Atomic Energy Act.

In so doing, the German Federal Government revoked the service operating permit extensions it had approved for 17 German nuclear power plants a few months earlier. As a result, Vattenfall AB – an energy company wholly owned by the Swedish state that, at the time, was operating two of Germany’s oldest nuclear reactors – instituted international investment arbitration proceedings against Germany before the ICSID (ICSID Case No. ARB/12/12).

As reported by iarbnews [see here], German Uniper SE and Dutch RWE AG initiated in 2021 ICSID arbitration proceedings (ICSID Case No. ARB/21/4) against the Netherlands, pursuant to the ECT, as a result of legislation introduced by the Dutch government in 2019 to phase-out coal generated electricity in order to fulfil targets under the Paris Agreement on climate change.

Also, on 8 November 2019, the Australian mining company Aura Energy gave Sweden notice of an investment dispute under the ECT. The conflict between the investor and the Swedish government was triggered by the summer 2018 decision of the Swedish Parliament to phase-out/ban uranium prospection and/or exploration in that country.

Climate ministers of Denmark and New Zealand have admitted that the threat of investor-state lawsuits has prevented their governments from being more ambitious in their climate policies.

In fact, the ECT is the treaty most frequently invoked by investors in arbitrations brought against States, including 150 known cases as of June 2022. Most of the them have been ruled in favour of investors, and around 80% have been brought in the past ten years.

In spite of the foregoing, there was some resistance to change on behalf of some of the members. For instance, Japan has stated that it “believes that it is not necessary to amend the current ECT provisions,” proposing minor adjustments and “an option to keep all ECT provisions as they are.”

• The ECT investment dispute settlement mechanism will not be applicable amongst State Members of the same REIO

The new wording will also confirm that an investor from a Contracting Party that is part of a regional economic integration organisation (REIO), like the EU, cannot bring an investor-state claim against another Contracting Party member of the same REIO. This shall finally bring an end to the intra-EU applications under the ECT that were held contrary to the EU law in recent judgments by the Court of Justice of the European Union (CJEU).

According to the European Commission “[t]he new text will also confirm that an investor from a Contracting Party that is part of a regional economic integration organisation (REIO), like the EU, cannot bring an Investor-state dispute settlement (“ISDS”) claim against another Contracting Party member of the same REIO.”

Indeed, Articles 7 (Transit), 26 (Investment dispute settlement), 27 (disputes between Contracting Parties), 29 (trade with non -WTO members) are not to be applied amongst Contracting Parties that are members of the same Regional Economic Integration Organisation in their mutual relations, with the EU being the only REIO at present.

This issue has been of particular concern and a major source of conflicts for the European Union since the CJEU’s judgments in Slovak Republic v. Achmea GV and Moldova v. Komstroy cases [see our synopses here and here] and the subsequent Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection in the European Union.

Based on these decisions, the European Commission has filed many applications for leave to file written submissions as non-disputing party, before arbitral tribunals and also before foreign courts, particularly in the context of proceedings to confirm arbitral awards involving intra-EU disputes under the ECT.

For example, the European Commission filed applications in Encavis and others v Italy (ICSID Case No. ARB/20/39); in Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v. Italian Republic (ICSID Case No. ARB/17/14); Eskosol S.P.A In Liquidazione v Italian Republic (ICSID Case No. ARB/15/50); in NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain (US District Court for the District of Columbia - Civil Action No. 1:19-cv-01618-TSC), among others.

In these cases, in line with Achmea and Komstroy Decisions, the EU Commission held that the standing offer from the EU and its Member States to arbitrate contained in Article 26 of the ECT “applies only to investors from third countries outside the EU” and “does not apply intra-EU in general, […] so that the Arbitral Tribunal lacked jurisdiction” [see our reports here and here].

Finally, it should be mentioned that despite the efforts made by the EU to introduce a Multilateral Investment Court for the resolution of investment disputes [see the EU text proposal here], this has not been reflected in the agreement in principle.

Background

The Energy Charter Treaty (ECT) is a multilateral investment agreement which protects investments in the supply of energy. The ECT was signed in December 1994 and entered into legal force in April 1998. Currently there are fifty-three Signatories and Contracting Parties to the Treaty.

The Treaty’s provisions focus on four broad areas:

• the protection of foreign investments, based on the extension of national treatment, or most-favoured nation treatment (whichever is more favourable) and protection against key non-commercial risks;
• non-discriminatory conditions for trade in energy materials, products and energy-related equipment based on WTO rules, and provisions to ensure reliable cross-border energy transit flows through pipelines, grids and other means of transportation;
• the resolution of disputes between participating states, and – in the case of investments – between investors and host states;
• the promotion of energy efficiency, and attempts to minimise the environmental impact of energy production and use.

In November 2017, the Energy Charter Conference confirmed in Ashgabat, Turkmenistan, the launching of a discussion on the potential modernisation of the ECT.

After consultations in early 2018, Contracting Parties agreed to address a specific list of topics.

On 6 November 2019, after approving some suggested policy options, the Conference established and mandated the Modernisation Group to start negotiations on the modernisation of the ECT, with a view to conclude negotiations expeditiously.

After the formal start of the negotiations in July 2020, fifteen Negotiation Rounds on the Modernisation of the Energy Charter Treaty were held, 12 via videoconference, 2 in hybrid mode and one in person due to pandemic-related travel restrictions.