Reinvigorated Energy: How Treaty Reform Impacts the Future of Foreign Investment

A new frontier in the global energy sector induced by reform to the Energy Charter Treaty.

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The longstanding global norms devised for the energy investment sector, governed by the Energy Charter Treaty (ECT), have been largely upended in recent history.[2] These changes culminated in the proposal of significant and historic reforms to the ECT through treaty amendments by the Energy Charter Conference on  December 3, 2024.[3] The proposed reforms under this amendment aim to align the treaty with changing climate objectives and address long-standing concerns related to energy sector investor-state dispute settlement (ISDS).[4] 

Background on the Push for ECT Reform

Established in 1994, the ECT was designed to facilitate cross-border energy investments.[5] Since taking effect, however, the ECT has faced intense criticism for disproportionately protecting fossil fuel investments and allowing investors to challenge sovereigns’ energy policies through ISDS mechanisms.[6] Over 160 investor-state disputes have been filed under the ECT, raising concerns about its compatibility with the Paris Agreement[7] and evolving state climate obligations under international law.[8] As a result of these concerns, ten key individual Contracting State Parties and the European Union (EU) have announced their formal withdrawal from the ECT, citing incompatibility with their climate change goals.[9] 

These withdrawals follow a decision by the Court of Justice of the European Union (CJEU) passed down in Republic of Moldova v. Komstroy in September 2021.[10] The Komstroy decision built on the previous landmark CJEU opinion in Slovak Republic v. Achmea B.V. interpreting the ECT’s compatibility with EU law.[11] Expanding on its holding in Achmea, where it found bilateral investment treaties (BITs) between EU Member States incompatible with EU law, the CJEU determined in Komstroy that intra-EU disputes under Article 26 of the ECT were also incompatible with EU law.[12] By rejecting intra-EU BITs and Article 26 of the ECT as contrary to EU law, these opinions intend to prevent EU Member State investors from bringing investor-state arbitration claims against EU Member States under the arbitration clause within the relevant BITs—thereby creating a potential jurisdictional bar to tribunals overseeing intra-EU disputes.[13] Despite these decisions by the CJEU, a large majority of international tribunals have continued to recognize their jurisdiction over these disputes, even when intra-EU dispute claims are brought under BITs or the ECT.[14] In doing so, courts have prompted issues involving the enforcement of awards where successful arbitration claims are later brought in front of courts bound by EU law, who have consistently refused enforcement and set-aside such awards.[15] 

Key Amendments of the Modernized ECT

After several years of deliberation and negotiation, the amendments to the ECT were agreed upon by the governing body of the Energy Charter Conference on December 3, 2024.[16] The amendments aim to provide numerous changes with significant implications in investor-state disputes under the ECT.[17] A major reform to the ECT from the most recent Energy Charter Conference comes in the form of phased exclusion of fossil fuel investments from protection under the ECT in the EU, United Kingdom (UK), and Switzerland.[18] Any new fossil fuel investments beginning after the effective date of the ECT amendments (September 3, 2025) will no longer be afforded protection under the ECT.[19] 

In order to comply with EU law, intra-EU ISDS claims will be explicitly excluded from protection under the amended ECT.[20]  The amendments to Article 24(3) of the ECT provide that EU investors cannot bring claims against EU Member States, even if the arbitration is seated outside of the EU.[21] Another substantial amendment comes in the form of clarification of the Fair and Equitable Treatment (FET) Standard and the addition of Articles 13(2) and 13(3) of the ECT; taken together these changes provide an applicable standard for direct and indirect expropriation criteria and define the threshold of the FET standard.[22] These amendments provide for non-discriminatory regulation measures, especially those accounting for combatting climate change, to no longer be considered expropriation unless the regulation is “manifestly excessive,” providing greater flexibility and protection to Contracting States and elevating the standard for challenges to environmental policies made by investors.[23] Procedural changes introduce additional constraints on investor claims and alter the arbitration framework moving forward by requiring investors have substantial business activities in their home state to qualify for treaty protections.[24] These constraints, in turn, increase the difficulty for shell companies to bring claims, and ban post-dispute restructuring to gain protection under a treaty.[25] 

Future Impact of the ECT Amendments

The amendments provided intend to emphasize the “urgent objective” of combatting climate change and its effects in investment policies and practices.[26] The modernized ECT represents a critical turning point in the evolution of investor-state arbitration.[27] While some states have opted to exit the treaty all together, the agreed upon reforms ensure that for those remaining Contracting Parties, the arbitration framework will function under a more restrictive and state-favorable model.[28] The modernized ECT (amended version) will apply to the ratifying Contracting Parties beginning on September 3, 2025, and those who have withdrawn from the ECT will remain bound by the unamended treaty for 20 years following their withdrawal, due to the treaty’s sunset clause.[29] Despite the significant amendments and the negotiation required to implement them, substantial uncertainty and ambiguity remain as to the future of energy sector investment.[30] Moving forward, both investors and States must adapt to these changes as the global energy sector shifts, redefining the landscape of investor-state arbitration under the ECT.[31]

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[1] Adam Winsor, Windmills (photograph), Flickr (Aug. 29, 2010), https://www.flickr.com/photos/avius/.

[2] Diego Zannoni, The Legitimate Expectation of Regulatory Stability Under the Energy Charter Treaty, 33 Leiden J. Int’l L. 451 (2020) (providing background information on framework giving rise to recent changes and increase in relevant disputes incentivizing amendment and contracting EU Parties’ exits).

[3] Energy Charter Secretariat, Decision of the Energy Charter Conference: Amendments to the Energy Charter Treaty, Res. CCDEC 2024, 12 GEN (Dec. 3, 2024), https://www.energycharter.org/fileadmin/DocumentsMedia/CCDECS/2024/CCDEC202412_EN.pdf (documenting amendments made to ETC through 2024 statutory conference and providing specific changes made in each article).

[4] David Turner, The ECT Reform Finally Moves Forward: Fossil Fuels Phased Out and Intra-EU Disputes Excluded, Baker Botts (Feb. 10, 2025), https://www.bakerbotts.com/thought-leadership/publications/2025/february/the-ect-finally-moves-forward-with-fewer-members-but-significant-changes (expanding upon dichotomy between adapting to changing climate objectives and retaining equality in protection under treaty for dispute resolution modernized ECT intends to solve).

[5] Id. (providing background information on intention and creation of ECT).

[6] Id. (outlining alleged issues within ECT in practice over decades of changing climate objectives and disputes).   

[7] The Paris Agreement, U.N., https://www.un.org/en/climatechange/paris-agreement (last visited May 9, 2025) (referring to legally binding document adopted by 197 countries at UN Climate Change Conference (COP21) in Paris, France, with overarching goal of reducing global average temperature through State climate practice).  

[8] Turner, supra note 4 (describing concerns about the ECT compatibility with climate obligations imposed by international law); Statistics, Int’l Energy Charter (Dec. 1, 2023), https://www.energychartertreaty.org/cases/statistics/ (analyzing ISDS disputes statistics and demonstrating high volume of investor-state disputes under ECT).

[9] Turner, supra note 4 (alleging contracting parties departing from treaty is result of inability to achieve State climate change goals while conforming with treaty causing many leading States to leave beginning in early 2024).  

[10] Republic of Moldova v. Komstroy, CJEU Case C-741/19 (Sept. 2, 2021) (providing interpretation by CJEU on compatibility of ECT under EU law).

[11] Slovak Republic v. Achmea B.V., CJEU Case C-284/16 (Mar. 6, 2018) (asserting previously certain treaties and uses in disputes between EU member states are incompatible with EU law).

[12] Johannes Tropper, The Completion of the Modernisation of the ECT and the Provisional Application of the Modernised ECT, Kluwer Arbitration Blog (Dec. 30, 2024), https://arbitrationblog.kluwerarbitration.com/2024/12/30/the-completion-of-the-modernisation-of-the-ect-and-the-provisional-application-of-the-modernised-ect/ (expanding upon ruling from CJEU effects on EU investment disputes, including incompatibility with EU law and prompting many EU Member State reevaluation of ECT).

[13] Markus Burgstaller & Scott Macpherson, EU Member States Reach Agreement on ECT Arbitration Clause, Hogan Lovells (July 1, 2024), https://www.hoganlovells.com/en/publications/eu-member-states-reach-agreement-on-ect-arbitration-clause (highlighting practical effect of CJEU rulings on intra-EU investor state arbitration clauses located in BITs and ETC Article 26).

[14] Id. (recognizing issue arising from tribunals granting jurisdiction over claims brought under invalid arbitration clauses as recognized by EU law, taking toll on enforcement and awards).

[15] Id. (describing detrimental effect of CJEU rulings on arbitral awards against EU Member States where courts of EU consistently decline validity of awards).

[16] Conway Blake, Samantha J. Rowe, Jeffery Sullivan & Patrick Taylor, Modernized ECT: Narrower Protection, Greater Transparency, Fewer Parties, Debevoise & Plimpton (Jan. 24, 2025), https://www.debevoise.com/insights/publications/2025/01/modernised-ect-narrower-protection-greater (providing information on date ECT amendments were agreed to by representatives of parties to ECT within governing body of Energy Charter Convention).

[17] Id. (indicating major changes to each article amendment and potential for impact on future of investment dispute resolution).

[18] Turner, supra note 4 (identifying changes in fossil fuel investments as one of major shifts introduced in amended ECT and protection provided by treaty). 

[19] Id. (clarifying that while current fossil fuel investments will continue to receive protection for ten-year transition period, any new fossil fuel investments following official implementation of ECT amendments does not receive coverage).

[20] Burgstaller & Macpherson, supra note 13 (commenting on Modernized ECT attempt to comply with EU case law by strictly prohibiting disputes between EU nations under treaty).

[21] Id. (explaining specific amendment intended to resolve the award enforcement issue through explicit exclusion of intra-EU disputes within treaty).

[22] Turner, supra note 4 (providing material amendments and clear applicable standards to streamline energy dispute resolution).

[23] Id. (describing how changes adopted collectively strengthen position of states in energy arbitration proceedings and reduce potential scope for investor claims).  

[24] Id. (explaining procedural changes requiring elevated standard for investors to assert environmental claims and effect this will have on investor claims by imposing additional requirements to achieve protection).

[25] Id. (providing information on procedural hurdles created to prevent “treaty shopping” and other investor friendly standards for brining claims). 

[26] Blake, Rowe, Sullivan & Taylor, supra note 16 (conveying importance of climate considerations and need for global energy investment practices to reflect urgent concerns of climate change).

[27] Turner, supra note 4 (speculating on innovative nature of amendments to ECT and inevitable lasting effects on field and practice of energy investment).

[28] Id. (outlining material change of energy dispute resolution framework as result of Contracting Parties withdrawing and amendments implemented).

[29] Id. (declaring result of amended “Modernized ECT” and lasting legal effects to both parties ratifying and those who have withdrawn).

[30] Id. (explaining remaining uncertainty in energy dispute resolution despite amended ECT and future of energy investment expects to face significant changes as result).

[31] Id. (commenting on future necessity for both Sovereigns and foreign investors to alter investment plans and comply with amended ECT).