In June 2022, the Energy Charter Treaty (“ECT“) The Contracting Parties reached an agreement, in principle, on the modernization of the ECT. A key amendment is the addition of hydrogen and other green energy sources to the investment protection provisions of the ECT. This Legal Update explains the implications of this change for hydrogen projects and other projects that are part of the energy transition.
Background of the ECT and its modernization
The ECT, a multilateral treaty in force since 1998 designed to promote open and competitive energy markets, is the most frequently invoked international investment agreement. The ECT provides foreign energy investors with numerous substantive protections, including fair and equitable treatment and protection against unlawful expropriation and unreasonable/discriminatory treatment. Investors may bring claims against ECT Contracting Parties in international arbitration tribunals for violations of their ECT substantive rights.
Pressure mounted for governments to withdraw from the ECT by the end of 2021 because it protected fossil fuel investments, potentially conflicting with climate change policies that promote the phasing out of such investments (including the Paris Agreement of 1995, the European Green Deal of 2019 and carbon neutrality policies 2050). In parallel, the ECT has undergone a modernization program, with some states and industry players advocating that the ECT be modified to promote and protect the green energy transition, rather than scrapping the ECT altogether.
On June 24, 2022, the modernization “field” prevailed as the ECT Contracting Parties agreed, in principle, to modernize the ECT. The ECT is scheduled to be formally adopted during the Energy Charter Conference on November 22, 2022, when the final text will be published. The text will enter into force 90 days after ratification by three quarters of the Contracting Parties.
How will the modernized ECT support hydrogen projects and the energy transition?
A fundamental change is the addition of hydrogen to the investment protection provisions of the ECT. The revised ECT text will also include investments in ammonia, biomass, biogas and synthetic fuels1.
This is a welcome development, which means that the modernized ECT will support energy transition efforts, including investment in hydrogen and other green energy sources, for at least two reasons:
- The transition process will take time, various interests will need to be balanced, and the repeal of the ECT could set a bad precedent for new investors. It could also prompt existing investors to initiate proceedings before the termination of the treaty affected their rights in relation to protected hydrogen products.
- History shows the need for a general protection structure in times of transition, in the absence of a dialogue between States and investors. Just look at the fact that the majority of TCE cases relate to investments in renewable energy: as of October 2020, they comprised around 60% of TCE cases.two
Importantly, once the modernized ECT comes into force, investors will be able to invoke the ECT in the event that States take certain measures that are in disagreement with or detrimental to their hydrogen projects (and other projects related to the transition energetic).
Next steps for investors
In light of the above, investors should carefully consider how the modernization of the ECT will affect their projects located in the States that are Contracting Parties to the ECT, taking legal advice when necessary. The authors and the Hydrogen Team in general are well placed to advise on these issues.