Spain withdraws from the Energy Charter Treaty

By publishing its announcement in the State Official Gazette (Boletín Oficial del Estado) on 14 May 2024, Spain has formalised its decision to withdraw from the Energy Charter Treaty (ECT or “the Treaty”). This confirms the Spanish government’s notice of denunciation sent to the Portuguese Ministry of Foreign Affairs, the depository of the Treaty, on 16 April 2024.

By way of background, in Octobre 2022, Teresa Ribera, the Spanish Minister for Energy and Environmental Transition, officially informed the European Commission that Spain would withdraw from the ECT. She explained that the modernisation process of the text of the Treaty had not led to sufficiently satisfactory results allowing the ECT to meet the objectives set by the Paris Agreement and the European Green Deal. She also considered that the modernised text does not sufficiently protect the integrity of the EU legal order, particularly concerning the dispute resolution mechanism contained in the ECT, which refers investor-state disputes to international arbitration.

In March 2024, the Spanish Parliament approved the Foreign Affairs Commission’s proposal to terminate its membership to the ECT. Shortly thereafter, the European Parliament voted for a coordinated exit of the European Union from the ECT.

Spain has been sued by foreign investors in 51 arbitrations under the ECT since 2012. All of these cases arise in the renewable energy sector. Starting in 1998, the Spanish government adopted policies to encourage investments in the renewable energy sector, which first involved supporting energy producers by providing either a fixed premium on top of market price or a feed-in tariff. These subsidies were not limited in time and were particularly significant for solar installations.

In 2004 and in 2007, further measures introduced additional incentives for energy producers in both solar and wind industries, which successfully led Spain to double its amount of wind and solar power, thereby becoming one of the largest renewable energy producers in Europe.

When the 2008 financial crisis caused havoc across the global economy, Spain adopted new policies fundamentally reforming the incentives scheme in the industry, including reducing and subsequently terminating premiums paid to producers in 2013 and replacing the FIT model with an entirely new framework. What ensued was a massive wave of claims lodged by foreign investors seeking to recover losses caused by these new measures. Investors continue to initiate claims against Spain, with the latest cases filed as recently as in 2022.

There were initial doubts about the effects of the ECJ judgment in Achmea v Slovakia on the jurisdiction of arbitral tribunals hearing claims under the ECT in intra-EU arbitrations. However, most arbitral tribunals in cases against Spain have decided to retain their jurisdiction, but awards rendered against the state have encountered hurdles at the enforcement stage.

As with the withdrawal of other European states, the sunset clause in Article 47.3 of the ECT will allow foreign investors in Spain to continue to benefit from the standards of protection provided in the Treaty for another twenty years. This time limit will start to run on 17 April 2025, date on which the termination of the Treaty will become effective. Investments made after this date will no longer be protected by the ECT.