Modernization of the Energy Charter Treaty approved: What investors need to know

These amendments strengthen the Contracting Parties’ ability to adopt regulations in pursuit of public policy objectives like environmental protection and climate change mitigation, potentially affecting the ability of foreign investors to bring investor-State claims. This development followed a wave of withdrawals from the ECT by a number of Contracting States in recent years. 

Renewable energy and fossil fuel investors will now need to carefully consider the impact of both the amendments and withdrawals on the protection of their existing and planned investments in ECT countries. They may need to consider (re)structuring investments in order to benefit from adequate protections under investment treaties and/or contractual mechanisms.

What sparked the ECT reforms?

The ECT is a multilateral investment treaty that aims to encourage foreign investment and international cooperation in the energy sector. It affords qualifying foreign investors with qualifying investments wide-ranging protections, and permits them to commence arbitrations directly against the host State should those protections be infringed during the lifetime of their investment.

The ECT was criticised in some quarters due to the number of claims brought by investors under it. These included claims based on changes to the host State’s regulatory landscape designed to combat climate change. The EU also objected to investors based in EU states bringing claims against another EU State under the framework of the ECT.

The Energy Charter Conference therefore embarked on a mandate to modernise the ECT. Following 15 rounds of negotiations over two years, the Energy Charter Conference adopted an agreement in principle for modernising the ECT. The text was due to be signed in November 2022. However, this was delayed due to disagreements surrounding the ECT modernization process, which resulted in an exodus from the ECT. Germany, France, the United Kingdom, Spain, the Netherlands, Poland, Slovenia, Luxembourg, Portugal, Denmark, Norway, and the EU have notified their withdrawal from the ECT in recent years. We wrote on the impact of these withdrawals in an earlier briefing, which can be accessed here.

On 3 December 2024 though, two and half years following the agreement in principle, the Energy Charter Conference announced that the amendments to the ECT had finally been approved.

How will the ECT change?

Some of the key amendments are summarised below.

Commitment to environmental protection

The modernized ECT reinforces the Contracting Parties’ commitment to environmental protection and combatting climate change, including by strengthening the Contracting Parties’ right to regulate (e.g., in relation to climate change mitigation) and reaffirming their commitments under multilateral environmental agreements, such as the Paris Agreement.

Contracting Parties may choose to exclude fossil fuel investments from protection

A new “flexibility mechanism” allows Contracting Parties to exclude protection for fossil fuels related investments in their territories. The following specific exclusions have already been made:

• The EU and the UK opted to carve-out fossil fuel related investments from protection on the basis that investments made after 3 September 2025 will not be protected, and existing investments will be protected for 10 years from the entry into force of the modifications. As the UK and EU are due to withdraw from the ECT in April and June 2025, respectively, the effect of these exclusions remains to be seen.
• Switzerland has carved-out investments made on or after 3 September 2025 related to non-low carbon and non-renewable hydrogen and certain synthetic fuels.

The list of exclusions will be reviewed every five years.

Protections extended to new energies

Protection has been extended to specifically cover new green technologies and cleaner energies (such as biomass, biogas and synthetic fuels). Going forwards, this “Energy Materials and Products” list will be reviewed every five years (along with the “flexibility mechanism”), so that it can be updated in light of technological and political developments.

More stringent requirements to qualify for protection

There are more stringent requirements for an investment to qualify for protection. Investments must fulfil an “indicative list of characteristics”, including “commitment of capital, the expectation of gain or profit, a certain duration or the assumption of risk”. Certain types of investments will also be excluded, such as judicial/administrative decisions and arbitral awards.

The category of “investors” that will qualify for protection has also been tightened. The definition of “investor” now requires entities to have “substantial business activities” in their home State to pass the threshold. Previously, this requirement could only be asserted by Contracting Parties through a denial of benefits clause. The amended text provides that relevant circumstances in making this assessment “may” include whether the investor entity “has a physical presence”, “employs staff”, “generates turnover”, or “pays taxes” in the area of the Contracting Party. In addition, natural person investors are excluded if they were a resident of, or had the nationality of, the host State at the time the investment was made or acquired.

Narrowed scope of investment protections

The scope of investment protections that are commonly relied upon by foreign investors in investor-State arbitrations have narrowed. For instance, the amended ECT lists the types of measures by a host State that will constitute a breach of the obligation to afford the investor “fair and equitable treatment”.

There are also new definitions of “direct” and “indirect” expropriation. Notably, the amendments expressly provide that non-discriminatory measures that are designed and applied to protect legitimate policy objectives, such as public health, safety and the environment (including with respect to climate change mitigation and adaption), will not constitute an indirect expropriation except in “rare circumstances” where the impact of the measure is “so severe” that it is “manifestly excessive”.

The Most-Favoured Nation (“MFN”) clause has also been curtailed to exclude the import of more favourable dispute resolution provisions from other investment treaties, and to clarify that substantive provisions in other investment treaties do not in themselves constitute “treatment” for the purpose of MFN protection.

Exclusion of intra-EU claims

The investor-State dispute settlement provisions in the amended text expressly do not apply as between EU States, meaning that an investor domiciled in one EU State would not be able to bring an ECT claim against another EU State.

When will the changes come into force?

The amendments in Sections A and B of Annex NI to the ECT come into force on 3 September 2025. The amendments to the ECT and the remaining parts of its Annexes will provisionally apply from 3 September 2025, unless a Contracting State opts out of provisional application by 3 March 2025. The amendments to the ECT will fully enter into force for a Contracting Party that has ratified them on the 90^th day after three quarters of the Contracting Parties have ratified the amendments. If a Contracting Party has not ratified by this time, the amendments will come into force 90 days following its own ratification.

A State whose withdrawal from the ECT is effective before the modernized ECT comes into effect may continue to be bound by the original ECT for 20 years pursuant to its “sunset clause”. It is possible, however, that this position may change if withdrawing Contracting Parties enter into a side agreement to disapply the sunset clause. The effectiveness of any such agreement remains to be tested.

How will the changes affect me?

Whether the changes will affect an existing or future investment largely depends on the Contracting Parties involved, including whether they have withdrawn from the ECT, and the nature and timing of the investment.

When the modernized ECT comes into effect, qualifying renewable energy investments will continue to be protected under the modernized ECT. Qualifying fossil fuel investments will also continue to be protected, unless the host State has made a relevant declaration under the flexibility mechanism. Investor claims may be affected by amendments aimed at reinforcing the State’s right to regulate to pursue climate change mitigation policies.

If a Contracting Party has withdrawn from the ECT before the modernized ECT comes into force, the “sunset clause” may continue to protect existing investments that were made before the withdrawal came into effect for a period of 20 years. New investments will not be protected.  

What should I do?

Renewable energy and fossil fuel investors should review existing and planned investments in ECT countries. Investments that previously would have qualified for protection under the ECT may no longer benefit due to the amendments and/or the ECT withdrawals. Energy companies may wish to consider (re)structuring investments so as to ensure they benefit from adequate protections under the ECT, other multilateral or bilateral investment treaties, and/or contractual mechanisms.