Spain’s exit of the Energy Charter Treaty is official: what now?

The Energy Charter Treaty (ECT) and the Protocol entered into force in Spain on 16 April 1998. This multilateral treaty aimed to promote international investment in the energy sector and provide protection for the investments of investors from State conduct that breached its terms. The ECT then allowed these investors to bring international arbitration proceedings against the host State of their investment. There were initially 56 Signatories and Contracting Parties to the ECT, including both the European Union (EU) and Euratom.

However, there has been much tension lately surrounding the ECT, particularly, at the level of the EU, leading many States to announce their intention to withdraw from this Treaty (see, e.g., United Kingdom to withdraw from the Energy Charter Treaty). And now Spain has made it official.

On 16 April 2024, Spain gave written notice of its decision to withdraw from the ECT and, on 14 May 2024, the withdrawal was published in the Spanish Official Gazette. The denunciation of both the Treaty and the Protocol shall take effect for Spain on 17 April 2025 (one year after the date of receipt of Spain’s notification to the Treaty’s depository). Once Spain’s withdrawal from the ECT becomes effective, what will be the legal position of Spanish investors? What about those investors seeking to bring a claim against Spain? Find below our analysis on the matter.

What happens on April 2025 when Spain’s withdrawal takes effect?

Spain’s decision to exit the ECT does not have retroactive effects with regard to proceedings already initiated. Therefore, Spain’s withdrawal from the ECT will not affect the arbitration proceedings pending, which will continue to run their course.

Spain’s withdrawal does not entail either the immediate end of claims by Spanish investors or claims against Spain under the ECT. The ECT contains a ‘sunset clause’ in Article 47(3), whereby investments made under the ECT on the effective date of withdrawal, continue to be protected by the provisions of the Treaty for 20 years from that date. Thus, the provisions of the ECT will continue to apply to investments made before 17 April 2025 for the next 20 years. However, new investments made after the withdrawal takes effect will not be entitled to protection.

Why has Spain withdrawn from the ECT?

The main factors that have led Spain to take the decision to exit the ECT are tensions arising from Spain’s climate change commitments; and, tensions between EU law and the ECT.

Tensions arising from Spain’s climate change commitments

The ECT has been criticized by many civil groups on the grounds that the protections offered to fossil fuel investors might be an obstacle to the clean energy transition.

In recent years, in an attempt to adapt to global concerns, the ECT Secretariat has been actively involved in the process of modernizing the ECT text to reflect climate change commitments. The modernization proposal sought to broaden protection coverage for renewable energy investments by including provisions for the protection of investments relating to carbon capture, use and storage and green hydrogen. The text also proposed a carve-out that would allow Contracting Parties to exclude investment protection for fossil fuels in their territories, taking into account their individual energy security and climate goals. After years of negotiations, in June 2022, the ECT Signatories reached an ‘agreement in principle’ in relation to the proposed modernised text. However, the EU Council failed to agree on whether the EU should be in favour of renewing the ECT and, in November 2022, the vote on the adoption of the agreement was postponed.

In July 2023, the European Commission proposed a ‘coordinated withdrawal’ from the ECT by the EU and its Member States and, more recently, in March 2024, the EU Council approved a proposal for the EU’s withdrawal, which was confirmed by the European Parliament in April. The EU has finally resolved that the ECT is no longer compatible with its climate goals under the European Green Deal and the Paris Agreement, given that, in the EU’s opinion, the protection for fossil fuel investments causes regulatory chill for States seeking to phase out fossil fuels.

Many European countries have already withdrawn from the ECT or have triggered the process to do so. France, Germany, and Poland’s withdrawal from the ECT took effect at the end of 2023. Luxembourg’s withdrawal will become effective by mid-2024. The UK, the Netherlands, Slovenia, Denmark, Ireland and Portugal have also announced their intention to withdraw from the ECT.

Tensions arising out of intra-EU claims under the ECT

In parallel to the above discussions, the ECT has been in the spotlight of the arbitration community since the 2018 Achmea judgment, in which the European Union Court of Justice (CJEU) found investor-State arbitration clauses in intra-EU BITs to be incompatible with the autonomy of EU law. This resulted in a heated debate on what would happen with the ECT. This question was answered in the 2021 Komstroy judgment, in which the CJEU held that intra-EU investment arbitration proceedings under the ECT were incompatible with EU law.

This debate has been followed with great interest from Spain. Indeed, Spain has faced more than 60 claims by investors under the ECT mainly related to the changes to Spain’s feed-in tariff and subsidy regime for solar and wind power plants. At least 39 of these claims were filed with the International Centre for Settlement of Investment Disputes (ICSID), of which 20 are still pending. Unsurprisingly, the Achmea and Komstroy judgments have been the basis for Spain’s objection to jurisdiction in the various cases brought under the ECT against the State.

So far, the only arbitral panel known to have upheld an intra-EU objection was the one in Green Power v Spain, in an unanimous Stockholm Chamber of Commerce award issued on 16 June 2022. The panel dismissed the claim brought by Danish investors and upheld the primacy of EU law, which it described as a ‘lex superior’ that overrides EU Member States’ obligations under treaties, including the ECT.

In addition to overcoming objections to intra-EU investment arbitration based on the Achmea and Komstroy judgments, EU investors who seek to obtain or enforce an arbitral award favourable to intra-EU investments face yet another challenge. This stems from EU state aid laws contained in Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU), which prohibit EU Member States from granting an economic advantage to companies on a selective basis if doing so would distort competition. In this regard, the European Commission has already stated that an investment arbitration award constituted State aid in two cases: the ICSID awards Micula v Romania and Antin v Spain.

As a result, investors have increasingly turned to non-EU jurisdictions to seek to enforce assets in order to enforce payment. A number of enforcement proceedings are underway in the UK, the US and Australia. Of particular note is the judgment of the English High Court of Justice, rendered on 24 May 2023, which upheld an order recognising an ECT award in Infrastructure Services v Spain, opening the door to the possibility of seizing Spanish sovereign assets in the UK. However, the Court of Appeal’s decision on Spain’s appeal against the High Court’s judgment is pending. In the same vein, on 14 May 2023, a US Appeals Court upheld the recognition of the ICSID award Micula v Romania.

The latest development in this tumultuous relationship is a recent decision by the Swiss Federal Supreme Court, which has rejected the Komstroy doctrine in the interpretation of intra-EU investor-State disputes. The Swiss Court dismissed a challenge to the award issued in EDF v Spain, which ordered Spain to pay EUR 29.6 million to the investor after finding a breach of the fair and equitable treatment standard under the ECT. The judgment of the Swiss Court, dated 3 April 2024, is accessible here (in French).

Spain had argued that the arbitral tribunal lacked jurisdiction to hear intra-EU investor-State disputes, as EU law should prevail in a conflict of laws between public international law (ECT) and EU law. Spain argued that the application of EU law and the observance of the Komstroy judgment was mandatory because the investor was part of the EU and Spain is a Member State. For its part, the investor claimed that the award’s reasoning was correct as the tribunal was not bound by the Komstroy and Achmea judgments.

The Swiss Court considered that there was no reason to conclude that Spain’s unconditional consent to arbitration under the ECT did not cover its dispute with EDF, stating that it was “not convinced” by the Komstroy judgment that the investor-State arbitration clause of the ECT does not apply to intra-EU investment disputes. It further stated that the CJEU’s judgment was made solely to preserve EU law and did not take into account international law and international rules on treaty interpretation. The Swiss Court also found that the CJEU’s judgment was not binding on Switzerland, as it is not a member of the EU.

Final considerations…

To date, neither Spain nor the EU has agreed any equivalent protection to replace the ECT. As a result, investors in the energy sector will be left in a situation of uncertainty as to whether they will receive any protection for the risks they take when investing. However, for those investments made before Spain’s withdrawal, Spanish investors and those considering bringing a claim against Spain can still benefit from the sunset clause for the next 20 years.

Stay tuned for further developments regarding the enforcement of intra-EU investment awards, following the Swiss Court’s judgment challenging the Komstroy doctrine.

Authored by Gonzalo Ardila, Silvia Martínez, Aida Rodríguez, Alejandra Ruiz, and Alejandro Montanero.