The Future of Energy – Risk Management Trends
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The Energy Sector, even while in transition, is facing exceptional challenges and unrelenting scrutiny. Changes to prior business practices, adoption of new technologies, and the management of political upheaval and ever-increasing social pressures bring new areas of risk. How the sector and those within it plot a route through these challenges and these risks will be key to success going forward.
As cross-border dispute resolution lawyers, we outline below four of the major risk factors we see facing the Energy Sector as it navigates these threats and opportunities towards a renewable future.
The stalled modernisation and EU abandonment of the Energy Charter Treaty (ECT)
The ECT, once a vehicle for co-operation and stability in developing the energy sector, faces an uncertain future as an increasing number of EU states have announced their intention to withdraw, which in turn has undermined the efforts to modernise the ECT to reshape it towards the energy transition. France, Germany, Spain, Belgium, the Netherlands, Luxembourg, Poland and Slovenia have all announced their intention to withdraw, and the European Commission has reportedly told member countries that a joint EU exit appears inevitable. The EU Parliament has also passed a resolution calling for withdrawal from the ECT.
The ECT had been due to be modernised to align it with the Paris Agreement and more contemporary environmental objectives. Changes include a flexibility mechanism for contracting states to end protections for existing fossil fuel investments after 10 years from the entry into force of the new provisions.
So what now, and what protection is there for new investments?
While withdrawing parties will be released from obligation under the ECT one year from notification of withdrawal, it is important to note that ‘sunset provisions’ in the treaty will continue to extend treaty protections to existing investments for 20 years. This includes investment in renewable energy which have, in fact, made up the bulk of the claims brought under the ECT since its inception compared to traditional energy. A trend which perhaps reflects the shifting political landscape of many countries’ efforts, and then altered efforts, to creates incentives and disincentives within their energy policies.
For now investors should not assume that the ECT has ceased to apply or will not protect their existing investments. However, energy investors within the EU should be in little doubt of the direction of travel including the obstacles likely to arise in enforcing any award made under an intra-EU investment protection regime such as the ECT or an intra-EU bilateral investment…
