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Dropping the ECT: hampering net zero investments in renewables?

As several EU member states plan or consider withdrawing from the ECT, some industry insiders believe this will undermine attracting foreign investments in renewables 

As net zero principles are gradually more and more embedded in investment strategies, asset owners are increasingly paying attention to the regulatory framework governing such standards, 

As a result, a growing number of investors, regulators and managers are engaged in various climate initiatives that are being undertaken at every level. 

One of these initiatives, the Energy Charter Treaty, has seen widespread attention recently, mainly owing to the fact that a number of states within the EU are set to withdraw from it. 

Renewable energy rows

The Energy Charter Treaty (ECT) is a multilateral treaty that establishes a legal framework to promote and foster cooperation in the energy sector between EU Member States. 

Notably, it allows investors to file investment arbitration claims directly against ECT member States for violations of protections under the treaty. The ECT currently has over 50 signatories and contracting parties, all of which are states except for the European Union and Euratom. 

In its early days, whilst the majority of investment arbitrations initiated under the ECT related to disputes stemming from fossil energy, the number of claims relating to renewable energy sources has drastically increased. 

Now more than 60% of ECT disputes arise from renewables, such as wind and solar energy projects, as opposed to oil and gas. 

According to the ECT Secretariat website, there have been more than 92 renewables cases under the ECT. Such disputes arise because States offer incentives to attract renewables investors, but then renege on their promises after the investment is made. 

Numerous renewable energy sector disputes have arisen under the ECT between renewable energy investors and Czechia, Italy, and Spain. 

Although these states initially offered incentives to invest in their respective renewable energy sectors, many governments then rolled back and revoked their renewable energy incentives policies.

As a result, aggrieved investors claimed that such regulatory changes violated their right to fair and equitable treatment (FET) afforded under the ECT and other IIAs.Withdrawal by EU Member States 

The recent negotiations to modernise the ECT have largely focused on promoting sustainable development, combatting climate change, and a gradual phase-out of fossil fuels by individual Contracting Parties. 

“These efforts have been rebuffed after a number of EU member states announced withdrawals from the ECT, undermining their commitments to promoting and attracting foreign investment in renewables,” explained London-based Tomas Vail, investor-state arbitration lawyer and founder of Vail Dispute Resolution. 

Vail told Net Zero Investor that “these concerted withdrawal announcements by several EU member states such as Spain, Germany, Belgium among a host of other States from the ECT evince a larger wariness among contracting states that asset owners will continue to use investment arbitration to enforce their legal rights when infringed upon by states.” 

Withdrawal by the UK from the ECT: a possible blunder? 

In the wake of the withdrawal announcements by a score of EU Member States, there are growing calls from asset owners, managers and politicians for the UK to do the same. 

However, this perceived euphoria of being emancipated from the ECT may be short-lived. 

“Withdrawal does not entail an immediate release from the obligations under the ECT. What remains to be seen is the application of the sunset clause in the ECT which generally continues to protect existing investments for 20 years after a host state’s withdrawal,” Vail said. 

Moreover, Vail stressed that “withdrawing from the ECT would be a major misstep in achieving greater renewable capacity, given that many ECT disputes arise from wind and solar energy projects, as opposed to oil and gas.” 

“There is no apparent link between withdrawing from the ECT and the fight against climate change, as providing the right to a stable legal regime ultimately supports investment in wind and solar projects,” Vail explained. 

The ECT has a major role to play in upholding renewable projects, he stressed. 

“By learning from the mistakes of the past and implementing this into a modernised treaty as the UK has been planning to do, a much more stable and attractive framework could be created for a renewable infrastructure, than if there were no structure in place at all,” Vail concluded. 

Authors: Michiel Willems

Originally Published: https://www.netzeroinvestor.net/news-and-views/withdrawal-by-the-uk-from-the-ect-a-shrewd-move-or-major-net-zero-blunder

Publish Date: 1 June 2023