European states’ creative pathways to avoid Energy Charter Treaty compensation

The multilateral Energy Charter Treaty (“ECT”) has emerged as the most prolific basis for investment treaty claims by investors against European states. While EU Member States are in the process of terminating their intra-EU BITs in the wake of the Court of Justice of the European Union’s (“CJEU”) Achmea judgment, they have not yet agreed on an approach regarding the ECT (see our analysis here and here). However, recent Spanish and German efforts seek to end or avoid intra-EU ECT claims while the treaty remains unchanged. How should affected investors react?

• Spain incentivises investors to drop claims

Due to a series of energy reforms reducing subsidies for renewables since 2011, Spain is currently respondent in 36 out of the 58 total ECT claims pending at the International Centre for Settlement of Investment Disputes (“ICSID”). Some of these claims have already resulted in awards – most in favour of the respective investor. However, Spain has been vigorously defending against these claims, including seeking annulment of awards at ICSID’s annulment committee and asking courts to refrain from enforcing awards.

Spain is relying on the CJEU’s Achmea decision, which had found the arbitration provision of the BIT between the Netherlands and Slovakia to be incompatible with EU law (see our analysis here). Spain, supported by the European Commission, argues that this also applies to Article 26 of the ECT on dispute resolution – but has so far failed to convince tribunals and courts of this view.

At this impasse, Spain has opened a new pathway: Royal Decree-Law 17/2019 promises investors superior incentives for renewables and greater legal certainty until 2031. But these benefits come with a catch: the new regime is only available to investors who, regarding the earlier energy reforms, commit not to pursue arbitration against Spain, to withdraw from pending arbitrations and to refrain from enforcing already existing awards. It has been reported that this offer, which has been extended from September until the end of 2020, has so far been taken up by the investors in Masdar v Spain, RREEF v Spain and Stadtwerke München, RWE and others v Spain. In all of these cases, investors had already obtained a favourable award, with annulment proceedings pending. 

In general, investors should query at the outset of any claim, whether pursuing their treaty rights is economically and politically viable, taking account of the claim’s prospects throughout the entire lifespan of proceedings, including enforcement and execution after successfully obtaining an award. Diligent planning of a treaty claim will also consider the impact of that claim on the relationship with the host state and the continued ability to do business in that state, if desired. Spain’s offer demonstrates vividly that this economic and political calculus may well change over the course of an investment treaty claim. Apart from the amount of that claim compared to the amount of future incentives, it is also an important factor whether the investor owning the treaty claim is still the owner of the renewables plant entitled to such future incentives. It will therefore be interesting to see if Spain’s offer ends the saga of Spanish renewables cases, or if the majority of claimants will weigh the attractiveness of Spain’s new incentives regime against continuing their claims differently.

• Germany seeks waiver of ECT claims in coal exit

Similarly, Germany is trying to find ways to avoid further claims regarding its Energiewende – the effort to replace fossil and nuclear power by renewable energy. It is already facing two ECT claims in this context: one is brought by Swedish Vattenfall in relation to Germany’s exit from nuclear power and the other by Austrian STRABAG regarding regulatory changes in offshore wind power. The next key component of Germany’s Energiewende is the planned exit from coal power, including both mining and power generation, by 2038.

In June 2020, the German Cabinet, i.e. the Chancellor and Federal Ministers, agreed on a draft public-law contract to be concluded with the operators of coal power plants and mines in Germany. The contract sets out a path for winding down coal power in Germany and includes a compensation mechanism. Notably, however, it also requires that the operators waive all rights arising out of the ECT and other investment treaties, noting in Clause 24 that “…the Federal Republic of Germany is of the opinion that EU law, especially Art. 267 and 344 TFEU, excludes investment arbitration out of or in connection with bilateral or multilateral investment treaties, including the ECT, in the intra-EU setting…” (our translation). 

The contract is subject to parliamentary approval and promulgation of a “Coal Exit Law”, as well as the EU Commission’s approval under State aid rules. The subject remains politically volatile, also with a view to the recent German Constitutional Court’s judgment quashing the compensation clauses in the country’s nuclear exit law as unconstitutional. The only certainty is that Germany has become more wary of potential investment treaty claims due to its energy transition.

Conclusion 

Change is coming to the ECT’s investment protection mechanism as efforts to modernise the treaty remain under way. While this is a long-term project, the recent examples from Spain and Germany show that states also aim at reaching short-term amicable solutions. Even when an investor is not inclined to pursue a treaty claim (at all, or to the end), a full and complete analysis of such claim’s prospects is helpful to be in a position to negotiate an alternative compensation with host states on equal footing.