The Modernised Energy Charter Treaty: Key Takeaways from the Amended Text

The Modernised Energy Charter Treaty: Key Takeaways from the Amended Text

Blog International Arbitration Legal Developments

1. On 3 December 2024, the Energy Charter Conference in Brussels adopted a long-anticipated and wide-ranging tranche of modernisation amendments (the “Amendments”) to the Energy Charter Treaty (“ECT”) (available here).

2. The ECT has provided a framework for energy investment in more than 50 States for three decades and has been the basis for the resolution of more investor-State arbitrations (162) than any other treaty.1 However, it has come under significant criticism in recent years, including for allegedly being incompatible with European Union (“EU”) law and for allegedly inhibiting States’ transition to greener forms of energy.

3. These recent Amendments – which reflect the Agreement in Principle on the modernisation of the ECT that was originally agreed in 2022 – aim to address a number of these criticisms. This blog recaps the background to the modernisation process and summarises the key changes to the ECT. It then explores some of the most potentially significant implications of the Amendments, including the restriction of intra-EU arbitration and the reduced protection for fossil fuel investments.

I. BACKGROUND

4. The ECT was executed in 1994 to provide “a legal framework in order to promote long-term cooperation in the energy field.”2 However, perceptions as to energy investment have changed significantly since the ECT was signed, particularly in light of the increased focus on climate issues and the energy transition. These changing perceptions have led to calls for the treaty to be modernised: the United Kingdom (“UK”) Government, for example, referred to the terms of the unmodernised treaty as “no longer fit for purpose.3

5. The Energy Charter Conference launched a formal discussion regarding potential modernisation of the treaty in November 2017.4 This kick-started a lengthy negotiation process involving 15 separate rounds. The Energy Charter Conference voted on 24 June 2022, to approve an Agreement in Principle on the modernisation of the ECT (the “AIP”), and a vote to finally approve the modernisation was scheduled for 22 November 2022.5

6. However, shortly after the AIP had been agreed to, Germany, France, Spain, the Netherlands, Poland, Slovenia and Luxembourg all announced their intention to withdraw from the ECT (mostly citing climate-related concerns). This led to the repeated postponement of the vote to approve the AIP. On 24 November 2022, the European Parliament passed a resolution calling for coordinated withdrawal by the EU from the ECT.6

7. Since then, 10 ECT contracting parties (including Germany, France, UK, Spain, the Netherlands, Poland, Slovenia, Luxembourg, Portugal and the EU) have formally notified their withdrawal from the ECT. Given this context, the future of the modernisation proposals – and the ECT itself – was unclear. Indeed, the ECT Secretary-General stated, “[i]f the modernisation process fails, I don’t see a future for the Treaty.7

8. However, following two years of uncertainty, the Energy Charter Conference has now approved a modernisation package, marking a major milestone for the treaty. 

II. THE MODERNISED TEXT

9. The Energy Charter Conference adopted the Amendments to the ECT on 3 December 2024 and published a 30-page document setting out the Amendments, along with a separate document setting out amendments to the annexures. The Amendments are in line with those outlined in the AIP but are now set out in full and in their final form. The most significant Amendments are summarised below (this is not exhaustive; for the full Amendments, please see the text here):

a. Fossil fuel flexibility mechanism: perhaps the most anticipated and controversial change to the ECT is the adjustment to the fossil fuel investment protections. New exclusions have been introduced for certain investments.8 The specific exclusions are tailored to individual countries and the scope of the exclusions vary – we therefore recommend that interested parties carefully review Annex NI of the amended ECT. However, in summary:9

i. Investments made before 3 September 2025, in the EU that relate to a broad range of fossil fuels, including coal, oil, petroleum gases and other similar materials, will be excluded from investment protection from 10 years after the date of entry into force of the Amendments to the ECT (but no later than 31 December 2040).10

ii. Investments made before 3 September 2025, in the UK which relate to (i) certain environmentally harmful fuels, such as coal, lignite and peat, will be excluded from investment protection from the date of entry into force of the Amendments; and (ii) other fossil fuels such as oil and petroleum gas will be excluded from investment protection from 10 years after the date of entry into force of the Amendments.11

iii. Investments made on or after 3 September 2025, in the EU and its Member States,12 or the UK, which relate to any coal, oil, petroleum gas or other similar materials, will be excluded from investment protection from the date of entry into force of the Amendments.13

iv. Investments made on or after 3 September 2025, in Switzerland relating to non-low-carbon hydrogen and synthetic fuels without significantly reduced life cycle greenhouse gas emissions will be excluded from protection from the date of entry into force of the Amendments.14

b. Sustainability commitments: in addition to the fossil fuel flexibility mechanism, new wording has been added to Article 19 to specify that States recognise the importance of environmental protection,15 and a new “right to regulate” is introduced recognising States’ rights to protect the environment.16 There is also an entirely new Article 19 BIS added, which provides a general commitment by contracting parties to “implement its commitments and obligations under the [United Nations Framework Convention on Climate Change] and the Paris Agreement.”17 The modernised ECT also provides a dispute resolution process in relation to the Article 19 commitments, which allows contracting parties to refer any Article 19 dispute to the Secretary-General, who may appoint a conciliator.18

c. Carve-out for intra-EU investment disputes: the Amendments also address the applicability of the dispute resolution provisions in Article 26 of the ECT to intra-EU disputes. Specifically, a new sub-clause has been added into Article 24 which provides that “[f]or greater certainty, Articles 7, 26 [which relates to investor-State disputes], 30, 30 bis and 32 shall not apply among Contracting Parties that are members of the same [Regional Economic Integration Organization] in their mutual relations.”19 The Amendments therefore now align the text of the ECT with the Court of Justice of the EU’s approach in Moldova v. Komstroy, which ruled that intra-EU investor-State arbitration under the ECT was incompatible with EU law.20

d. Tightened definitions of “Investment” and “Investor: the unmodernised ECT allowed any citizen or permanent resident of a contracting State to claim protection under the ECT for a qualifying Investment.21 This text has now been amended to exclude any natural person investor who is a resident of, or has the nationality of, “the host Contracting Party at the time the investment was made or acquired.” A corporate entity investor that does not conduct “substantial business” in the area of a contracting State is also now expressly excluded, and new text has been introduced setting out how the “substantial business” requirement will be assessed.22 Similarly, the amended ECT has tightened the definition of “investment” so that it only includes investments “made or acquired in accordance with the applicable laws” of the host State and that fulfil certain characteristics, including the commitment of capital, the expectation of gain or profit or the assumption of risk.23

e. Clarification of what constitutes “Fair and Equitable Treatment” and “Indirect Expropriation: Article 10(1) of the unamended ECT contained an open-ended obligation on States to afford investors fair and equitable treatment (“FET”). This text has now been amended to provide an exhaustive list of six measures that define what constitutes a violation of the FET standard.24 Similarly, the indirect expropriation standard under the unmodernised ECT has been amended by introducing a list of factors for consideration, and by effectively carving out measures that are taken for the protection of public policy objectives, such as the protection of the environment (including climate).25

f. Amendments to the dispute resolution provisions: the modernised treaty also introduces a number of significant changes to the arbitral dispute resolution process under the ECT. These changes include: (i) a requirement that arbitral tribunals constituted under the ECT “apply the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration of 1 April 2014;26 (ii) the introduction of a new Article 27, which provides that a tribunal may summarily dismiss claims which are “manifestly without legal merit;27 (iii) the provision of an explicit power to the tribunal to require a claimant to “post security for all or part of the costs of the proceedings;28 and (iv) a requirement that the parties disclose the “name and address, the ultimate beneficial owner and corporate structure as applicable, of any natural or legal person that provides the Third-Party Funding.29

10. The Amendments described above will apply on a provisional basis from 3 September 2025; however, a contracting party may choose to opt out of such provisional application.30 The Amendments enter into full force 90 days after the Amendments have been ratified, but the Amendments shall only apply between the contracting parties that have ratified, accepted or approved them.

III. POTENTIAL IMPLICATIONS OF THE AMENDMENTS

11. The Amendments mark the most significant update to the ECT in its 30-year lifetime and the potential implications are likely to be wide ranging. The remainder of this blog focuses on the implications of the Amendments for intra-EU ECT arbitrations and global climate change.

A. Intra-EU ECT Arbitrations

12. The Amendments regarding intra-EU arbitration may bring an end to new intra-EU arbitrations against States that are subject to the modernised ECT text. This may in turn create an incentive for European investors to restructure prospective investments via non-EU States to continue benefiting from ECT investment protection. For investors considering this option and planning to reroute investments, the Amendments to the definition of “Investor” take on an additional significance. Entities can no longer qualify as an “Investor” of a different contracting State simply by being organised in accordance with the law of that State; they must now also conduct “substantial business” there. Investors considering restructuring must therefore carefully review the new ECT definition of “substantial business” and ensure they fall within it.31

13. However, under Article 47.3 of the ECT, any State that withdraws from the ECT will be bound by the ECT terms “as of the date when that Contracting Party’s withdrawal from the Treaty takes effect for a period of 20 years from such date.” Accordingly, for states whose withdrawal has already taken effect – which include France, Germany, Italy, Poland, Slovenia and Luxembourg – the unamended ECT is likely to continue to apply for the 20-year sunset period and the new term excluding intra-EU arbitration is unlikely to have a binding effect. 

14. This may create a complex situation where tribunals are required to apply the unamended ECT to an intra-EU arbitration and therefore to determine to what extent the exclusion of intra-EU arbitration in the Amendments really was clarifying the legal position under the unamended text, or if an intra-EU arbitration could still be possible where the Amendments have not taken effect. Further, if any tribunals do decide that intra-EU arbitration is still possible under the unmodernised ECT text, a surprising outcome arises where the EU states that objected most to the protection of fossil fuels under the ECT (and left the ECT because of it) may end up being bound by the more generous protections of fossil fuels under the unamended ECT text, while that protection may be phased out for the States that have remained (as discussed below).

B. Global Climate Change

15. The environmental Amendments substantially change the protection afforded to fossil fuel investments. It is notable that these Amendments are set to remove the ECT’s protection eventually from nearly all fossil fuel investment in EU member States that remain members of the ECT, which represents a substantial portion of the ECT’s membership.

16. However, it appears unlikely that this development will silence the ECT’s climate change critics. Indeed, within days of publication of the Amendments, climate action groups have described the amended text as “still not being compatible with achieving climate goals,”32 and “fail[ing] to solve fundamental issues.”33 Notably, the International Institute for Sustainable Development (“IISD”) – a think tank funded in part by States including the United States, UK, France, Germany, and Australia – has also criticized the environmental Amendments.34 The IISD has reiterated its position that the Amendments are “too modest, too piecemeal, and too untested to transform the ECT into an instrument that is compatible with the global climate agenda.35

17. Those groups focus on the fact that the majority of ECT contracting parties (which are outside the EU) have still not signed up to any meaningful reduction in protection of fossil fuels and, even for those that have, protection will only cease for existing oil and gas investments in 10 years’ time.

18. It is unclear whether this continued public hostility toward the ECT will result in further withdrawals by member States from the treaty in the coming years, or whether the successful conclusion of the modernisation process has – at least for now – stemmed the bleeding. 


1 UN Trade & Development Policy Hub, Investment Dispute Settlement Navigator, accessed 8 December 2024 - https://investmentpolicy.unctad.org/investment-dispute-settlement.

2 Text of the Energy Charter Treaty, dated 17 December 1994, at Article 2 (corrected by the Protocol of Correction of 2 August 1996).

3 Statement made by Rt Hon Graham Stuart, Minister of State (Department for Energy Security and Net Zero), dated 22 February 2024.

Decision of The Energy Charter Conference on Modernisation of the Energy Charter Treaty, dated 28 November 2017.

Decision of The Energy Charter Conference regarding Finalisation of Negotiations on Modernisation of the ECT, dated 24 June 2022.

European Parliament resolution on the outcome of the modernisation of the Energy Charter Treaty (2022/2934(RSP), dated 24 November 2022.

Borderlex News and analysis on trade policy in Europe, Interview: A new Energy Charter Treaty as a complement to the Paris Agreement, dated 18 June 2020.

Specifically, amendments have been made to the definition of “Economic Activity in the Energy Sector” which forms part of the definition of “Investment”, which in turn is the basis of the investor protection in Part III of the ECT.

These Amendments shall enter into force one year after the date of their approval by the Energy Charter Conference.

10 Decision of The Energy Charter Conference on Modifications and Changes to Annexes to the Energy Charter Treaty, dated 3 December 2024 (“Annex Amendments”).

11 Decision of The Energy Charter Conference on Modifications and Changes to Annexes to the Energy Charter Treaty, dated 3 December 2024, at Annex NI.

12 Provided that those member States are contracting parties to the ECT.

13 This is subject to certain specific exceptions, including for electrical energy produced from petroleum gases and other gaseous hydrocarbons through power plants and infrastructures enabling the use of renewable and low carbon gases.  For the full list of exceptions see Annex NI to the amended ECT: Decision of The Energy Charter Conference on Modifications and Changes to Annexes to the Energy Charter Treaty, dated 3 December 2024, at Annex NI.

14 Decision of The Energy Charter Conference on Modifications and Changes to Annexes to the Energy Charter Treaty, dated 3 December 2024.

15 Amendments, at Article 5.

16 Amendments, at Article 4.19.

17 Amendments, at Article 5.5.

18 Amendments, at Article 6.10.

19 Amendments, at Article 5.12.

20Republic of Moldova v. Komstroy, Case C‑741/19.

21 Subject to a potential opt-out for States in relation to claims by entities owned or controlled by citizens or nationals of a third state, if that entity has no substantial business activities in the area of the contracting party in which it is organized.

22 Amendments, at Article 2.9.

23 Decision of The Energy Charter Conference on Modifications and Changes to Annexes to the Energy Charter Treaty, dated 3 December 2024, at Section I.3.

24 Amendments, at Article 4.3 (“(a) arbitrariness, such as blatant unreasonableness; (b) targeted discrimination on wrongful grounds, such as gender, race or religious belief; (c) fundamental breach of due process, including a fundamental breach of transparency in judicial and administrative proceedings; (d) denial of justice in criminal, civil or administrative adjudicatory proceedings; (e) abusive treatment such as harassment, duress or coercion; or frustration of an Investor’s legitimate expectations where these were central to its Investment, and arose from a clear and specific representation or commitment by that Contracting Party upon which the Investor reasonably relied in deciding to make or maintain the Investment”).

25 Amendments, at Article 4.14.

26 Amendments, at Article 6.5.

27 Amendments, at Article 6.7.

28 Amendments, at Article 6.7.

29 Amendments, at Article 6.7.

30 With the exception of modifications in Sections A and B of Annex NI which shall enter into force on 3 September 2025.

31 Amendments, at Article 2.9.

32 E3G Think Tank Report, The Energy Charter Treaty remains the most dangerous investment treaty to the energy transition, dated 4 December 2014.

33 Sustainability Views, Energy Charter Treaty update fails to solve fundamental issues, dated 6 December 2014.

34 IISD Explainer, Why the Energy Charter Treaty Modernization Doesn't Deliver for Climate, dated 12 December 2024.  See also, list of IISD funders available here.

35 IISD Report, Uncertain Climate Impact and Several Open Questions, dated October 2022; referenced in, IISD Explainer, Why the Energy Charter Treaty Modernization Doesn't Deliver for Climate, dated 12 December 2024.

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