In June 2022, the Energy Charter Treaty ("ECT") Contracting Parties reached agreement, in principle, on the modernisation of the ECT. One key amendment is the addition of hydrogen and other green energy sources to the ECT's investment protection provisions. This Legal Update explains the implications of this change for hydrogen projects and other projects forming part of the energy transition.
Background to the ECT and its modernisation
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 grants foreign energy investors numerous substantive protections, including fair and equitable treatment and protection against unlawful expropriation and unreasonable/discriminatory treatment. Investors can bring claims against ECT Contracting Parties before international arbitration tribunals for violations of their substantive ECT rights.
Pressure mounted for governments to withdraw from the ECT by the end of 2021 because it protected fossil-fuel investments, arguably conflicting with climate change policies that promote the phase-out of such investments (including the Paris Agreement 1995, the 2019 European Green Deal and 2050 carbon neutrality policies). In parallel, the ECT has been undergoing a modernisation programme, with some States and industry players advocating for the ECT to be amended to promote the transition to, and protect, green energy, rather than scrapping the ECT altogether.
On 24 June 2022, the modernisation "camp" prevailed since the ECT Contracting Parties agreed, in principle, on the modernisation of the ECT. The ECT is scheduled to be formally adopted during the Energy Charter Conference on 22 November 2022 when the final text will be published. The text will come into force 90 days after the ratification by three-fourths of the Contracting Parties.
How will the modernised ECT support hydrogen projects and the energy transition?
One fundamental change is the addition of hydrogen to the ECT's investment protection provisions. The revised text of the ECT will also include investments in ammonia, biomass, biogas, and synthetic fuels1.
This is welcome development meaning that the modernised ECT will support the 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 revocation of the ECT could set a bad precedent for new investors. It could also prompt existing investors to commence proceedings before termination of the treaty affected their rights in relation to protected hydrogen products.
- History shows the need for some overarching protective structure in times of transition, absent a dialogue between States and investors. One need only look at the fact that the majority of ECT cases relate to renewable energy investments: in October 2020, they comprised c.60% of ECT cases.2
Importantly, once the modernised ECT comes into force, investors will be able to invoke the ECT in case of certain measures taken by States which are at odds with, or detrimental to, their hydrogen projects (and other projects pertaining to the energy transition).
Next steps for investors
In light of the above, investors should carefully consider how the modernisation of the ECT will impact their projects located in the States that are Contracting Parties to the ECT, taking legal advice where necessary.