Spain withdraws from the Energy Charter Treaty

On 14 May 2024, the Spanish Official Gazette published Spain’s announced withdrawal from the Energy Charter Treaty (ECT) and the Energy Charter Protocol on energy efficiency and related environmental aspects (the Protocol). On 16 April 2024, Spain had given written notice of its decision to the Ministry of Foreign Affairs of the Portuguese Republic, the Depositary of the ECT. 

The denunciation of both the ECT and the Protocol will take effect for Spain on 17 April 2025, one year after the date of receipt of the notice by the Depositary. Spain’s denunciation of the former automatically entails the denunciation of the latter in accordance with the provisions of Article 20.2 of the Protocol, done at Lisbon on 17 December 1994.

What is the ECT?

The ECT was signed in 1994 by the EU and its Member States and almost 40 other countries around the world, with membership growing to over 50 contracting parties as of today. The ECT sought to establish open and non-discriminatory energy markets, promote international cooperation and foster capital flows in the energy sector. The treaty incorporated substantive investment protection provisions similar to those typically found in BITs. Of note, it also included in Article 26 a standing offer to arbitrate investment disputes between states and foreign investors under the ICSID Convention and Rules, the UNCITRAL Rules, or the Stockholm Chamber of Commerce (SCC) Rules.

How did we get here?

As we previously reported, Spain’s Minister for Energy and Ecological Transition announced the country’s intention to withdraw from the ECT back in early October 2022. The main reason (and the reported one) was discomfort with the results of the ECT modernisation process. The European Commission had previously considered modernising the treaty, but the revision failed to convince the majority of Member States. According to the Spanish Government, the Revised ECT text was not sufficiently aligned with the Paris Agreement. The Spanish Government asserted that the ECT jeopardises the climate objectives set by Spain and the EU by discouraging the promotion of energy transition policies, for fear of being sued by a foreign investor before an arbitral tribunal.

However, the fact that Spain has been targeted by more than 60 claims by investors under the ECT, most of them related to the amendments in the feed in tariffs and subsidy regime, also explains Spain’s stance. Additionally, there are still unresolved tensions arising out of intra-EU claims and the enforcement of intra-EU ECT awards, in the latest instance with a German court dismissing Spain’s request for an anti-enforcement injunction. 

In any case, Spain’s withdrawal is aligned with the EU position. In July 2023, the European Commission proposed that the EU Member States withdraw en bloc from the treaty.

On 24 April 2024, the European Parliament approved the withdrawal of the Union from the ECT.[1]The Rapporteurs invited the Commission to “continue promoting a coordinated exit of all Member States in order to limit the negative effects of the sunset clause and to effectively prevent intra-EU disputes”. The Rapporteurs called on the Commission “to continue its efforts to reach agreement with the Member States on an inter-se agreement that would codify the interpretation that the ECT does not apply and was not meant to apply to disputes between a Member State and an investor of another Member State concerning an investment made by the latter in the first Member State”. Furthermore, they called on the Commission to “reach out to partner countries and propose a second agreement allowing non-EU ECT Contracting Parties willing to withdraw to neutralise the sunset clause on a reciprocal basis”.

As of today, Italy, Poland, France, Germany, the Netherlands, Slovenia and Luxembourg have also denounced the ECT. The UK recently announced its withdrawal from ECT citing the failure of the modernisation programme.

What are the effects of the withdrawal and what will happen on April 2025 once the withdrawal takes effect?

Current arbitration proceedings against Spain should not be affected by Spain’s withdrawal. Proceedings should continue without any impact and by no means will it imply the end of claims by Spanish investors or claims against Spain under the ECT. In the same line, the protection granted to existing investments should not be affected by Spain’s withdrawal. This is because the sunset clause of the ECT grants protection to investments already made in the territory of a withdrawing contracting party for a further 20 years (Article 47.3 ECT). However, the withdrawal will affect new investments in Spain. This means that new investors should consider whether and how their investments can be protected by the use of alternative treaties containing robust substantive and procedural protections. We encourage you to consult your Freshfields contact to discuss your particular situation. What is clearer than ever though is the crucial importance of proper investment structuring to secure treaty protection of investment within the EU.

[1] European Parliament legislative resolution of 24 April 2024 on the draft Council decision on the withdrawal of the Union from the Energy Charter Treaty (06509/2024 – C9-0059/2024 – 2023/0273(NLE)).