The Energy Charter Treaty (ECT) has long been the cornerstone of investment protection in the energy sector, offering enhanced legal protection for cross-border energy investments. However, the treaty has come under scrutiny in recent years, with critics taking the view that insofar as it safeguards energy production from any sources – including fossil fuel – the ECT hinders the energy transition and the achievement of sustainability goals. Moreover, following findings of incompatibility of intra-EU investment arbitration with EU law by the Court of Justice of the EU, the EU and its Member States pushed for the express exclusion of such disputes from the scope of the ECT.
Back in 2022, the Contracting Parties reached agreement in principle on the text of a “modernised” ECT. However, some Contracting Parties – including Denmark, France, Germany, Luxembourg, the Netherlands, Poland, Portugal, Slovenia, Spain and the UK – were dissatisfied with the proposed modernisation and instead moved to withdraw from the ECT altogether. The adoption of the modernised ECT was thus effectively stalled. The deadlock was broken in May 2024, when the Council of the EU voted in favour of the EU and Euratom withdrawing from the ECT, while at the same time allowing EU Member States to participate in the modernisation process (and remain in the ECT) if they wished to do so.
The amendments agreed in 2022 were adopted on 3 December 2024. The modernised version will provisionally apply from 3 September 2025, although Contracting Parties may opt out of provisional application before 3 March 2025.
The modernised text restricts the definition of protected investments and investors, and limits the scope of substantive protections. However, it retains one of its core features, namely investor-State dispute settlement (ISDS), and the benefits offered to foreign investors in the energy sector.
A more tailored framework: the potential exclusion of fossil fuels and clarified definitions of protected investments and investors
The modernised ECT allows Contracting Parties to exclude fossil fuel investments from treaty protection. Some Contracting Parties – including certain EU Member States – have already exercised this option, meaning that fossil fuel-related investments made in their territory after 3 September 2025 will no longer enjoy treaty protection. However, even if this option is exercised, pre-existing fossil fuels investments will remain protected for ten years after the entry into force of the new modernised ECT, although this transitional protection period will end at the latest on 31 December 2040.
The modernised ECT also clarifies the definition of a protected “investment”. To be protected, an “investment” must present certain characteristics such as the commitment of capital or other resources, the expectation of gain or profit, certain duration or the assumption of risk. There is no indication that these characteristics constitute cumulative criteria to be satisfied to have a protected “investment”. The tribunals will therefore likely retain a margin of appreciation when applying them in practice.
Additionally, an investment must be made or acquired in accordance with the law of the host Contracting Party. In other words, investments made illegally (eg through corruption) are now expressly excluded from the scope of treaty protection. This provision does not however exclude investments affected by “minor” illegalities, such as non-material mistakes in filing bureaucratic forms, which therefore remain protected.
The Contracting Parties also restricted the definition of protected “investors”. Thus, dual nationals, ie natural persons who are also nationals of the host State (or even just permanent residents) are no longer protected.
For legal entities, the modernised ECT now requires “substantial business activities” in the home State to qualify as an investor of that State. Determining the existence of substantial business activities will require a case-by-case analysis. Relevant factors include physical presence, employment of staff, generation of turnover and payment of taxes in the home State. Shell or mailbox companies will therefore most likely be excluded from the ECT protections.
A refined scope of substantive protections
The modernisation process has also narrowed down the scope of one of the most frequently invoked provisions in the ECT, its Article 10(1). This provision included States’ obligation to grant legal stability and fair and equitable (FET) treatment, as well as the non-impairment standard and the umbrella clause. The revised provision now just includes the FET and the full protection and security standards. Moreover, in an attempt to clarify the scope of the FET standard, the ECT now contains a list of measures that constitute a violation of that standard, namely (i) arbitrariness; (ii) targeted discrimination on wrongful grounds; (iii) breach of due process; (iv) denial of justice; (v) abusive treatment (including harassment, duress or coercion); and (vi) frustration of legitimate expectations reasonably relied upon by the investor in circumstances where such expectations were central to the investment and arose from clear and specific representations or commitments by the host State.
The modernised ECT also gives more deference to States’ regulatory powers, in that it provides that non-discriminatory measures designed and applied to protect legitimate policy objectives of Contracting Parties, such as health, safety and the environment, do not constitute indirect expropriation, unless the impact of such measures – in light of their objective – is “manifestly excessive”.
In this regard, the modernised text explicitly acknowledges States’ right to regulate in pursuit of legitimate public policy objectives. This includes measures aimed at environmental protection (including climate change mitigation and adaptation), public health, safety and public morals. This right is likely to be considered as a relevant factor to be balanced by ECT tribunals in future cases.
The modernised ECT also includes express references to international climate agreements (for example, the Paris Agreement) signalling a shift in the treaty’s focus toward aligning investment protections with global sustainability goals. Although these references are unlikely to have any direct effect on investors and their investments, arbitral tribunals ruling on claims that Contracting Parties have breached their ECT obligations may interpret those obligations in light of Contracting Parties’ climate change obligations.
ISDS remains at the core of investment protection
ISDS remains a core feature of the modernised ECT, continuing to provide investors with a mechanism to resolve disputes against States in an international forum. While the ISDS mechanism remains largely intact, the modernised ECT introduces procedural changes aimed at increasing transparency and addressing concerns about fairness. These include integrating the UNICTRAL Rules on Transparency, mandatory disclosure of third-party funding, mechanisms for the summary dismissal of frivolous claims, and the introduction of provisions regulating Contracting Parties’ requests for investors to post security for costs in investment arbitrations.
Importantly, the modernised text expressly excludes intra-EU disputes from ISDS under the ECT. Subject to the application of the ECT’s sunset clause, investors with intra-EU investments may therefore face greater risk in no longer having access to investment treaty arbitration under ECT.
Takeaways
The ECT – both old and new – is likely to retain its key role for cross-border energy related investments.
Foreign investors with energy investments in States that have withdrawn from the ECT may still be entitled to invoke its protections in relation to existing investments for a period of 20 years after the host State’s withdrawal (under the ECT’s sunset clause). Invoking the sunset clause for intra-EU investments may be more challenging as a result of a declaration signed by the EU and 26 of its Member States in June 2024 to the effect that this clause does not apply to intra-EU investments (the legal effects of this declaration remain to be tested in practice however).
For investors operating in jurisdictions that have adopted and will ratify the modernised ECT, significant substantive protections against political risks and adverse State measures remain in place. The ECT is positioning itself more clearly in line with international sustainability imperatives. Existing investments in fossil fuels will continue to be protected, at least during the transitional period, and some Contracting Parties have not yet opted to exclude the protection of future fossil fuel investments. As the energy landscape evolves, investors should actively evaluate their ECT rights not only to mitigate risks associated with new projects but also to fully understand the remedies available for their current investment portfolios.