David Turner¹

On 3 December 2024, the Energy Charter Conference approved the most significant reforms ever made to the Energy Charter Treaty (the “ECT”) during its 35th Meeting in Brussels.² The updated ECT will phase out the protection of fossil fuel investments in the EU, the UK and Switzerland, and also expressly bars investor-state claims between EU investors and EU Member States (meaning such claims will no longer be able to be brought even if seated in non-EU countries such as the UK or Switzerland). 

The agreed ECT amendments represent the culmination of more than six years and 15 rounds of negotiations to modernise the text of the treaty since the Energy Charter Conference first launched discussions in November 2017.³ During that arduous process, ten of the Contracting State Parties, as well as the European Union, announced that they were giving up on the ECT entirely, primarily on the basis of the treaty’s alleged incompatibility with their climate change goals (even though the majority of investor-state claims brought under the treaty have in fact concerned renewable energy investments). 

Ironically, it is the withdrawal of these parties (particularly the European Union, which found itself unable to adopt a common position on behalf of its Member States) that may have finally paved the way for the remaining Contracting Parties to do what the withdrawing parties had despaired of: reform the ECT and strike a new balance between investment protection and sustainable development. With these significant substantive and procedural changes (most of them heavily favouring the interests of the State Parties) due to come into provisional effect in September 2025, any investors with existing potential claims under the ECT would be well advised to consider initiating proceedings promptly.

A Rocky Path to Reform 

The ECT was conceived in 1994, following the collapse of the Soviet Union, as a multilateral agreement to establish a legal framework for cross-border cooperation in the energy sector. While the ECT is often thought of as a European treaty, it also includes some 25 State Parties from outside the EU, including Ukraine, Türkiye, Armenia, Azerbaijan and Kazakhstan and Japan. Investment protection has always been at the agreement’s core. The ECT’s investment protections have not only served to protect fossil fuel investors: Spain and Italy, for example, have been the subject of a deluge of claims from investors in solar power industry over the last decade, while another of the most prominent cases of recent years, the Vattenfall case, concerned the German government’s decision to phase out nuclear power generation in the aftermath of the Fukushima Daiichi disaster in Japan. In total, 162 investor-state disputes have been brought under the ECT, spanning the full spectrum of the energy sector (including oil & gas, coal, wind, solar, hydroelectric and nuclear energy investments).⁴

Nevertheless, the high number of disputes arising under the ECT has created tensions among the State parties, as have concerns that the protection of fossil-fuel investments under the ECT might present challenges to States’ efforts to meet their climate change commitments under the Paris Agreement, with the ECT having been described as “the most dangerous investment treaty to the energy transition”.⁵ Since 2022, 10 State parties have announced their intention to withdraw from the ECT – the UK, France, Germany, Spain, Italy, Poland, Portugal, the Netherlands, Denmark, Slovenia and Luxembourg – as well as the European Union itself.⁶ The withdrawal of European Union from the ECT was driven by division amongst the EU Member States over attempts to modernise the treaty (making a common EU position elusive), as well as opposition within the European Commission to investor-state arbitration between EU investors and Member States (on the basis that such proceedings are incompatible with EU law).⁷ Despite this recent exodus from the ECT, 37 States remain parties to the treaty, including 12 EU Member States and 25 States outside the EU.

The New Regulations in the ECT

In the face of these significant ups and downs, the amendments to the ECT were finally agreed on 3 December 2024. They include numerous important changes for investor-state disputes under the ECT, both substantive and procedural, the majority of which appear to favour (perhaps unsurprisingly) the interests of the Contracting State Parties as respondents.⁸ The most significant changes are to phase out the coverage of fossil fuels from the ECT’s investment protections (at least in the EU, the UK and Switzerland) and to expressly prohibit any EU investor from bringing a claim against an EU Member State. A summary of the key changes is as follows:

(i) Substantive Amendments

1. Exclusion of Fossil Fuels. The exclusion of fossil fuels from the ECT’s protections by certain Contracting Parties is recognised as an “exceptional measure” and will be phased in gradually. Investments made before 3 September 2025 in the EU involving coal, oil, petroleum gases, high-carbon hydrogen, high-carbon synthetic fuels and other similar materials will be excluded from investment protection 10 years after the amendments come into force, and in any event no later than 31 December 2040. Investments made on or after 3 September 2025 in the EU will be excluded from the date the amendments enter into force. Separate rules apply to fossil-fuel investments made in the UK and in Switzerland. 

While the other Contracting Parties have not (yet) elected to exclude the protection of fossil fuels in the same manner, certain fuels are to be excluded in relation to all Contracting Parties, including oils and other products produced from high-temperature coal tar, fuel wood and wood charcoal. On the other hand, carbon capture, utilisation and storage (“CCUS”) investments are now expressly included within the scope of the treaty’s protections for the first time.

2. Express carve-out for intra-EU disputes. New Article 24(3) provides that the treaty’s investor-state dispute settlement (“ISDS”) mechanism shall not apply between Contracting Parties that are members of the same Regional Economic Integration Organisation (“REIO”), such as the European Union. This provision gives effect to the 2021 ruling of the Court of Justice of the European Union (the “CJEU”) in Moldova v. Komstroy, which held that the ECT’s ISDS mechanism is inapplicable to intra-EU disputes. In effect, new Article 24(3) will bar any EU investor from bringing a claim under the ECT against any EU Member State, even if the arbitration is seated outside the EU (e.g., in the UK or Switzerland), where EU law does not apply.

3. Fair and Equitable Treatment (“FET”). New Article 10(2) specifies for the first time the types of State measures or conduct that will constitute a breach of FET, namely arbitrariness, targeted discrimination, fundamental breach of due process, denial of justice, abusive treatment and frustration of legitimate expectations (based on clear and specific representations or commitments). The amendment further clarifies that a breach of another provision of the ECT, or of any other international agreement, does not per se establish a breach of FET. 

4. Expropriation. New Articles 13(2) and (3) define for the first time the standard for direct and indirect expropriation under the treaty. Most significantly, Article 13(3) sets out criteria for determining whether a measure or series of measures constitutes an indirect expropriation, such as the economic impact and character of a measure, including its objective and context. The amendment further specifies that non-discriminatory measures adopted by a contracting party that are designed and applied to protect legitimate policy objectives (including with respect to climate change mitigation and adaptation) do not constitute an indirect expropriation, except in rare circumstances where the impact of the measure is so severe in light of its purpose that it is “manifestly excessive”. 

5. Full Protection and Security (“FPS”). New Article 10(3) clarifies that the full protection and security standard refers only to the physical security of investors and their investments (and not, for example, legal security).  

6. Most Favoured Nation (“MFN”). New Article 10(8) expressly excludes dispute settlement procedures provided for in other international agreements from the scope of MFN (meaning that investors will henceforth be unable to “borrow” more favourable dispute resolution procedures from other treaties). Article 10(8) further specifies that more favourable substantive investment provisions in other international agreements concluded by a contracting party with a non-contracting party do not in themselves constitute “treatment” under the MFN standard. 

7. Right to Regulate. New Article 16 reaffirms the right of the Contracting Parties to regulate within their territory to achieve legitimate policy objectives, such as the protection of the environment (including climate change mitigation and adaptation), public health, safety and public morals, while new Article 19(2) reaffirms the right of the Contracting Parties to adopt or modify their relevant laws and regulations consistently with their commitments to the internationally recognised agreements to which they are a party, including the United Nations Framework Convention on Climate Change (the “UNFCCC”) and the Paris Agreement.

(ii) Procedural Amendments

1. Narrowed Definitions of “Investor” and “Investment”. Amended Article 1(7) now excludes from the definition of protected investors any natural persons with the nationality of, or who are permanent residents of, the host State at the time the investment was made or acquired. The provision also establishes a requirement for companies to have “substantial business activities” in the country in which they are constituted in order to fall within the definition of a protected investor, which may include a physical presence, employment of staff, generation of turnover and payment of taxes. The definition of protected investments now expressly requires that (i) the investment must have been “made or acquired in accordance with the applicable laws” of the host state, and (ii) fulfils certain characteristics (modelled on the Salini criteria), including capital commitment, the expectation of a gain or profit and the assumption of risk.

2. Express Prohibition on “Treaty Shopping”. New Article 27(4) provides that tribunals must decline jurisdiction if they determine that an investor has acquired ownership or control of the relevant investment after the dispute arose (or where the dispute was “foreseeable on the basis of a high degree of probability”) with the main purpose of submitting an investor-state claim. The provision is aimed at preventing abuse of process through “treaty shopping” (i.e., where claimants arrange a nationality of convenience solely to benefit from an investment treaty’s protections).

3. Frivolous Claims. New Article 27 provide two mechanisms for respondent States to deal with frivolous or unfounded claims. First, a State party may file an objection within 45 days of the constitution of the tribunal (or within 30 days of becoming aware of the facts on which the objection is based) that a claim or any part thereof is manifestly without legal merit. This procedure mirrors the summary dismissal procedure under Article 41 of the ICSID Arbitration Rules. Second, a State party may file an objection (again within strict time limits) that, as a matter of law, the claim or any part thereof is not one in respect of which an award in favour of the investor can be made, even if the facts alleged by the investor are assumed to be true. 

4. Security for Costs. New Article 28 introduces a new rule allowing respondent States to ask the tribunal to order the investor to post security for all or part of the costs of the proceedings, taking into account all relevant circumstances, including the risk of non-payment, the effect on the investor’s ability to pursue its claim and the conduct of the parties. If the security for costs is not posted within the time limit set by the tribunal, the tribunal may suspend or terminate the proceedings. 

5. Third-Party Funding. New Article 29 requires that each party must disclose (and keep updated) the name, address, ultimate beneficial owner and corporate structure of any natural or legal person providing third-party funding for the pursuit or defence of the claim. Disclosure must be made at the time of the submission of the dispute or as soon as the funding agreement is concluded. The information disclosed may be also considered in assessing the arbitrators’ impartiality and independence. 

6. Transparency. Amended Article 26(6) provides for the application of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration to all disputes submitted under the ECT. These rules provide for the publication of procedural documents and information, the participation of third parties and non-disputing Contracting Parties, and the openness of hearings (subject to the protection of restricted information and essential security interests). Both investors and states should be conscious of the greater public scrutiny of claims that this is likely to bring.

7. Delimitation on Claimable Damages. New Article 26(10) provides that any monetary damages awarded to an investor may not be greater than the loss suffered, as reduced by any prior damages or compensation already provided by the respondent State. The provision also expressly prohibits tribunals from awarding punitive damages. 

8. Costs of the Proceeding. New Article 26(11) applies for the first time an express presumption that “costs follow the event”. Tribunals must order the costs of the proceedings and other reasonable costs to be borne by the unsuccessful party, unless it determines that such apportionment is unreasonable in the circumstances of the case. 

Key Takeaways

The amendments to the ECT represent a significant overhaul of the treaty, reflecting the evolving landscape of the energy sector and the global challenges of climate change and sustainable development. As detailed above, the amendments introduce significant new provisions, as well as revising and clarifying existing ones, with the aim of addressing many of the criticisms that have been raised in relation to the ECT over the last decade (including, somewhat ironically, by those who have now resolved to withdraw from the treaty entirely). 

It is critical for investors and State parties alike to consider the implications of these amendments for current and future investments in the energy sector. The amendments will provisionally take effect on 3 September 2025 (although Contracting Parties may choose to opt out of the amendments’ provisional application no later than 3 March 2025),⁹ with full entry into force subject to ratification by at least three-quarters of the Contracting Parties (even then this will apply only to those Contracting Parties that have ratified or otherwise approved the amendments). Further complicating matters, those Contracting Parties who have withdrawn from the ECT (or who intend to withdraw) will still remain bound by the (unamended) treaty for a further 20 years after their withdrawal with respect to investments made prior to that time, as a result of the treaty’s sunset clause.

Thus, while the agreement on ECT reform marks a major evolution of the treaty, significant uncertainty remains. We will continue monitoring the legal status of these amendments and would be pleased to speak with you further about their potential significance for your current and future investments in the energy sector. 

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