Energy & Infrastructure
Germany to leave Energy Charter Treaty
On 11 November 2022, MPs from Germany’s ruling coalition had announced that Germany would be leaving the Energy Charter Treaty as soon as possible. This was then followed on 30 November 2022 by the Federal Government’s official decision, making it possible for Germany to withdraw from the Treaty before the end of the year. Germany is following the example of a number of EU Member States that recently also announced their intention to withdraw from the Energy Charter Treaty, including Spain, the Netherlands, France and Poland. Italy already pulled out of the Energy Charter Treaty in 2016.
The Energy Charter Treaty came into force in 1998 and has more than 50 signatories, including the EU. It protects investments related to economic activities in the energy sector in other contracting states or the EU and allows investors to request international arbitration and claim damages if their rights under the Treaty are violated.
The Energy Charter Treaty has increasingly come under fire in recent years for allowing companies to sue a host state for damages over changes in the law or administrative decisions, especially in connection with the energy transition. The fear is that companies with investments in conventional power generation will file requests for arbitration before international arbitral tribunals that could potentially result in host states having to pay damages running into the billions. Critics therefore argue that the Treaty is incompatible with effective climate protection.
Reform of the Energy Charter Treaty
This criticism also led to negotiations to modernise the Energy Charter Treaty being launched in November 2017. These came to an end on 24 June 2022, when the contracting states reached an agreement in principle, and the Energy Charter Conference was to vote on the proposal on 22 November 2022. But after various EU Member States announced their withdrawal, the EU called off a vote scheduled for 16 November 2022 in the Permanent Representatives Committee – the risk of a blocking minority was apparently too high. And it was indeed impossible to achieve the necessary qualified majority at the follow-up meeting of the EU ambassadors of the Member States scheduled for last Friday: Germany, France, Spain and the Netherlands abstained, which is counted as a rejection. The EU Commission then asked for the vote on the modernisation proposal to be removed from the agenda of yesterday’s meeting of the Energy Charter Conference – and its request was granted.
The modernisation proposal includes a “flexibility mechanism” that would allow contracting states to exclude protection for fossil fuel investments in their territory. The EU and the United Kingdom had already indicated in the past that they may make use of this mechanism. Other contracting states – now also including Germany – seem to no longer want to be part of the reform process and instead plan to withdraw from the Treaty. It remains to be seen whether the reform process will be completed at a later point in time, but this seems doubtful.
Consequences of Germany’s withdrawal from the Treaty
Politically speaking, the announcement by the governing parties in Germany that the country intends to withdraw from the Treaty is being justified as a necessary step towards climate protection and chalked up as a success, as it has been in France, for example. But this assessment often fails to take account of the fact that there are of course a (growing) number of arbitration cases under the Energy Charter Treaty concerning investments in renewable energies, in addition to damages actions relating to conventional power production. The “solar claims” against Spain are good examples of this. The statistics on requests for arbitration under the Energy Charter Treaty show that these are by no means isolated cases and that at least the majority of arbitration proceedings under the Treaty concern investments in renewable energies. In the long term, the withdrawal from the Energy Charter Treaty will deprive not only investments in conventional energies but also those in renewable energies of the protection under international law afforded by the Treaty. A unilateral withdrawal by Germany could therefore have a negative impact on the investment climate for renewable energies in the future.
Protection for existing investments remains intact
Withdrawal from the Energy Charter Treaty is unlikely to have an immediate impact on existing investments. In order to withdraw from the Treaty, the contracting state in question must give written notification to the depositary (Article 47(1) Energy Charter Treaty). The withdrawal will generally take effect one year after receipt of the notification by the depositary (Article 47(1), (2) Energy Charter Treaty). Of particular importance in this context is the so-called “sunset clause”, according to which the provisions of the Energy Charter Treaty will continue to apply to existing investments for a period of 20 years as from the date on which the contracting party’s withdrawal from the Treaty becomes effective. In other words, investments that were protected under the Treaty when the withdrawal became effective will remain so for another 20 years. This means that the unilateral withdrawal by Germany or other contracting states from the Treaty is only likely to have a direct impact on investments made after the date on which the withdrawal took effect. Protection for such investments can only be sought before the courts of the host state and in accordance with the respective applicable national laws.
Even if the planned exit from the Energy Charter Treaty is seen as a success for effective climate protection, this ostensible success will, according to the current state of affairs, not be fully realised until the end of 2043 at the earliest. Until then, investments in conventional energies made before Germany’s withdrawal will also remain protected. Germany can therefore expect claims for damages under the Energy Charter Treaty to be asserted against it in arbitration proceedings for many years to come. At the same time it will miss the opportunity to play a decisive role in the reform process already initiated under the Treaty, and to further develop investment protection under international law in the form of a sustainable energy policy.
What is also overlooked in the discussions about possible unilateral withdrawals by European Member States is that the Energy Charter Treaty was concluded in the 1990s precisely against the background of Europe’s growing energy needs and the resources available in the post-Soviet countries. The goal pursued at that time, i.e. securing supply, is more relevant today than ever. The Energy Charter Treaty could – after the end of the war in Ukraine and if economic relations are resumed with Russia – be an important instrument for protecting German and European investments in Eastern Europe and Russia and contribute to restoring security of supply.