REUTERS | Regis Duvignau

The Energy Charter Treaty: new energy, new era

The Energy Charter Treaty (ECT) is entering a new era. That is, who is being sued and what types of energy sources those claims relate to, has evolved from what was originally contemplated by its drafters in the early 1990s. That trajectory is set to continue as the significant amount of renewable ECT claims registered over recent years against EU member states are heard by arbitral tribunals and their awards are issued.

The overall background of the ECT was an endeavour to provide an international legal framework for energy co-operation across Europe and beyond. At the forefront of that effort was assisting the transition of former Soviet Union economies by liberalising investment conditions, and integrating their energy sectors into the European market.

At the same time, the ECT sought to assist in the establishment of the rule of law by safeguarding property rights and prohibiting discrimination. In terms of energy sources, the ECT’s primary point was to protect investments in conventional energy types (especially oil and gas) that were in abundance in Eastern European countries, and in which Western European countries wanted to invest.

But if one were to take a snapshot of ECT claims over the past few years, we see a treaty that has been used for energy investments that were not necessarily at the forefront of drafters’ minds. More often than not, ECT provisions are invoked against Western European countries by Western European investors (and therefore are largely “intra-EU” in nature). The claims pertain to renewable energy sources, namely solar and wind investments and, more recently, hydro-electric power installations.

So why is this? In short, the changing face (or new era) of the ECT came as a result of claims against EU member states resulting from retroactive changes to renewable energy regulatory regimes. Such regimes were introduced to induce renewable investment pursuant to European Community objectives (Directives 2001/77/EC and 2009/28/EC); in particular, the target for EU member states to derive 20% of its energy needs from renewable sources by 2020. Many EU member states implemented “feed-in-tariff” schemes or other support mechanisms designed to induce investment in renewable projects. This typically requires significant upfront expense. However, following significant investment in the renewables sector, many member states began scaling back those investment incentives.

As a result, there has been a striking increase in ECT claims by renewable investors against Western European states. They sought to grow renewables and capitalise on technological advancements which allow for renewable production on an industrial scale. As of early 2011, only one ECT claim had been filed against a Western European state (Germany) compared to 21 cases having been filed against Eastern European states. However, from early 2011 to date, 39 claims have been filed against Western European states compared with 23 Eastern European claims. Principally, these claims are for breach of the fair and equitable treatment standard and for conduct amounting to expropriation. These are amongst the many broad protections provided to foreign investors in the energy sector under the ECT.

Comparing the conventional versus renewable energy cases, 48 out of a total of 99 ECT claims registered to date now relate to renewable energy sector investments (26 out of 33 in 2015-2016). This is a noteworthy juxtaposition against the ECT’s drafting history. The discussion of renewables between the drafters was not in any way significant (although this is not surprising given that renewable technology was very much in its infancy).

In terms of country dissection, and as has widely been reported, the overwhelming majority of these renewable cases have been brought against Spain (33 ECT claims registered to date). Additionally, six claims have been registered against Italy, seven against the Czech Republic and two against Bulgaria. The disputes against Spain, the Czech Republic and Italy relate predominantly to changes in tariffs applicable to solar power generation, as well as the erosion of other investment incentives. These include:

  • Limiting the hours solar installations can benefit from tariffs (Spain).
  • Implementing a retrospective “solar tax” on revenue (Czech Republic).
  • A moratorium on grid connection (Bulgaria).

Of all these renewable claims, only one award on the merits has been made public. In Charanne v Spain, Spain prevailed. However, that may not necessarily be a sign of things to come, as the award related to a confined set of measures (a set narrower and less drastic compared with later measures upon which the majority of the Spanish claims are based). The tribunal deliberately left it open for other ECT tribunals to reach their own conclusions based on the facts before them. Additionally, there is no precedent preventing other tribunals from reaching different conclusions regarding violations of the ECT (indeed, a dissenting opinion was issued in Charanne).

It remains to be seen how other pending ECT renewable claims will unfold, but what is clear is that the outcomes of these cases will no doubt alter the ECT’s jurisprudential landscape. Moreover, recent developments demonstrate that the ECT is dynamic, capable of evolving over time to keep pace with shifting investment and international trends. Properly utilised, the ECT can continue to facilitate development and advance international energy co-operation in this new (renewable) energy era.

Allen & Overy Stephanie Grace Hawes

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: