In a much-anticipated decision of 3 December 2024, the Energy Charter Conference agreed to adopt the 2022 finalised modernised text of the 1994 Energy Charter Treaty. This marks the end of the reform process, with the Energy Charter Treaty being modernised as originally planned before Germany and other European states withdrew. The amendments largely concern the provisions on investment protection and dispute settlement, which now include mechanisms for the summary dismissal of claims without legal merit, the application of the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, and the option for states to request security for costs from investors. The remaining contracting states may also choose to exclude investment protection for fossil fuels.
Summary
- Energy Charter Conference adopts modernised text of the Energy Charter Treaty.
- Implementation of the amendments finalised in 2022.
- Provisional application from 3 September 2025.
- Investment structuring may in some cases grant German investors protection under the modernised Energy Charter Treaty or other investment treaties.
Energy Charter Conference adopts modernised text of the Energy Charter Treaty
On 3 December 2024, the Energy Charter Conference voted in favour of modernising the Energy Charter Treaty (see the decision of 3 December 2024 and the press release of 3 December 2024). This is the first time that the Treaty, established in 1994, has been modernised.
The modernisation that has now been agreed marks the end of a reform process that has lasted almost seven years, with discussions on updating the Energy Charter Treaty having begun back in 2017. It took 15 negotiation rounds before the contracting states reached an agreement in principle on the reform in June 2022 (see information from the Energy Charter Secretariat on the modernisation project). Amid increasing opposition to the Treaty, especially in some EU Member States, several European countries announced their withdrawal, believing the Treaty to be incompatible with sustainable and climate-friendly development. These included France, Germany, Poland, Luxembourg, Slovenia, Portugal, Spain and the United Kingdom (see our article of 11 July 2024, our article of 1 August 2023 (German only) and our article of 20 April 2023 (German only)).
Initially, the Energy Charter Conference was set to vote on the reforms in November 2022, but this was postponed by two years after the European Union and EU Member States were unable to reach an agreement on whether to support the reforms. It was a political compromise within the European Union that ultimately made the modernisation of the Energy Charter Treaty possible: the EU withdrew from the Treaty, while the EU Member States remaining party to the Treaty could either approve the modernisation or choose not to oppose it (see press release of the European Council of 27 June 2024).
The amendments that have now been adopted will take provisional effect on 3 September 2025, with the contracting parties having until 3 March 2025 to decide whether they want to opt out of the provisional application of the amendments. The modernised Energy Charter Treaty will enter into full force 90 days after ratification by at least three-fourths of the contracting parties. So after a modernisation process lasting seven years, the amended Treaty may now become provisionally applicable in less than a year.
Key amendments
Among the most significant changes is the “flexibility mechanism”, which allows the contracting states to exclude investment protection for fossil fuels. This change is a direct result of criticism levelled at the Energy Charter Treaty during the reform process, namely that the Treaty also – or even primarily – protects investments in fossil fuels. The possibility of excluding investments in fossil fuels from the protection offered by the Energy Charter Treaty could significantly impact (future) investments in these fuels and shows that many countries want to switch to more sustainable energy sources and renewable energies.
On the one hand, the flexibility mechanism means that the respective contracting state can restrict its offer to conduct investor-state arbitration to exclude investors with energy investments listed in Annex NI of the Energy Charter Treaty (see the new Article 26(3)(d)). To date, Switzerland and Turkey have made use of this option.
On the other hand, the flexibility mechanism allows a contracting state to make investment protection dependent on whether the investor’s home state has excluded investment protection for fossil fuels under Annex NI (see the new Article 16a). Only Japan has made use of this option so far.
There are concerns that these two exclusion options will lead to inconsistent, fragmented investment protection under the Energy Charter Treaty.
The modernised Energy Charter Treaty also changes the conditions that investors and investments must meet in order to benefit from the Treaty’s protection, now also requiring, for example, the commitment of capital. Claims by nationals of the host country are generally excluded.
It is also clarified that court decisions and arbitral awards will no longer be considered investments in future. Failure to comply with a court decision or an arbitral award in some cases could previously be regarded as a breach of investment protection; the amended Energy Charter Treaty aims to put a stop to this practice.
Changes to investment arbitration proceedings under the modernised Energy Charter Treaty
The contracting states to the Energy Charter Treaty have made key changes to investment arbitration proceedings in response to criticism from parts of the public and some EU Member States. One significant change is that intra-EU investment disputes are explicitly excluded under the new Article 24(3). This takes account of the ECJ’s heavily criticised Komstroy ruling, according to which the Energy Charter Treaty’s investor-state arbitration provisions do not apply to intra-EU disputes (see our article of 11 July 2024). It has therefore been clarified that the modernised Energy Charter Treaty does not provide for intra-EU investor-state arbitration, meaning that EU Member States have prevailed and have managed to eliminate what has thus far been an effective instrument for the legal protection of investors. In the absence of an alternative and equally effective mechanisms, there is a risk of gaps in the legal protection (see our article of 11 July 2024).
The Energy Charter Treaty now includes the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, with the aim of making such proceedings more open and transparent. There are also new mechanisms for the swift dismissal of claims that are frivolous or manifestly without legal merit. States can now request that investors post security for the costs of the proceedings, and investors must disclose any third-party funding they receive (e.g. from litigation funders).
Review of existing and planned investments
This does not necessarily mean that German and other investors who are no longer covered by the Energy Charter Treaty due to the withdrawal of their home state or for other reasons (see also our article of 20 April 2023 and our article of 11 July 2024) are left without any protection. Existing and planned investments should be reviewed to determine whether they have sufficient protection. Experience and the successful use of investment arbitration proceedings – especially in the energy sector – show that national regulations often provide a basis for reviewing the decisions made.
The first step is to examine whether investments are still protected by bilateral investment treaties after the withdrawal of Germany and other EU Member States from the Energy Charter Treaty. This protection may vary, depending on the treaty concerned.
If protection is unavailable or insufficient, the investment could be restructured via third countries whose investors are still protected.
Direct (re)structuring could, for example, be carried out via a legal entity within the investor’s corporate structure which is established in a third country and is given control of the investment. An indirect, but possibly equally effective, (re)structuring measure could be to have the investment itself managed or made by a special purpose vehicle owned by an entity established in a third country. Such (re)structuring measures would obviously need to be assessed not only in terms of the investment protection offered but also from the point of view of corporate and tax law.
This practice – sometimes called “treaty shopping” in the context of investment protection – is generally considered a legitimate approach provided that the timing and aim of the restructuring do not constitute an abuse of right (see Mobil and others v Venezuela, Decision on Jurisdiction, 10 June 2010, paragraph 204). To date, arbitral tribunals have usually denied investors protection under investment treaties in cases where restructuring efforts were aimed solely at gaining access to international investment protection without a legitimate economic or business purpose, or where a dispute was already “foreseeable” (see Philip Morris v Australia, Award on Jurisdiction and Admissibility, 17 December 2015, paragraph 554).
Ultimately, whether an investor can lay claim to the desired investment protection will depend on the specific case and the respective investment treaty. Previous decisions issued by arbitral tribunals, however, show that investors can proactively review whether the structure of existing and future investments provides the requisite investment protection and adjust it if necessary – at least before a dispute is “foreseeable”.
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