On December 3, 2024, the Energy Charter Conference adopted and approved the modernization of the Energy Charter Treaty (ECT) and its Annexes. This post discusses the changes introduced by the new text of the ECT and their potential impact on the rights of investors in the energy sector.

History of the modernization process

The Energy Charter Treaty is an international treaty designed to address the security of energy operations and investments. One of the important aspects of the ECT are the investment promotion and protection [1] and the investor-state dispute settlement (ISDS) provisions [2].

Since 2017, there have been discussions about modernizing the ECT. In 2018, the list of topics for the modernization has been approved. Followed by lengthy negotiations, the final text of the ECT modification has been adopted and approved on December 3, 2024 [3].

The modifications to the Energy Charter Treaty shall enter into force in accordance with Article 42(4) of the ECT [4]. However, the modernized ECT and most of its Annexes shall apply on a provisional basis starting from September 3, 2025. States may opt-out from this provisional application.

The main changes to the substantive protections of investments

The modernized Energy Charter Treaty includes multiple modifications to the substantive protection granted to investors and investments. Below is an overview of the main changes affecting investor’s rights.

• Economic Activity in the Energy Sector
  • The definition of the Economic Activity in the Energy Sector is expanded to include “capture, utilisation and storage of carbon dioxide in order to decarbonise the energy system.”
  • At the same time, the Annex NI, which contains lists of exclusions from the Economic Activity in the Energy Sector has been expanded, as now it includes State-specific exclusions for EU and its member states, Switzerland, and UK. Notably, the UK, and EU and its member States will be excluding from their protection fossil fuels. Nevertheless, this change is less impactful , as both EU and UK have announced in 2024 their intention to withdraw from the ECT. There are, however, member states of the EU who did not withdraw and remain parties to the ECT.
    
• Definition of Investment
  • The definition of the investment is modified to include an explicit legality requirement at the time of making or acquiring of the investment.
  • It also clarifies that the investment must be made by an investor “of a Contracting in the Area of another Contracting Party.”
  • Furthermore, it requires that for an asset to be considered an investment it has to possess the “characteristics of an investment”. The new definition provides a laundry list of these characteristics, which include commitment of capital or other resources, expectation of gain or profit, certain duration, and assumption of risk.
  • The definition more clearly than the previous text of ECT provides that the assets must be associated with the Economic Activity in the Energy Sector.
  • This new definition is narrower compared to the previous text of the ECT and places additional requirements on investors, for their assets to be considered “Investments.”
    
• Protection and promotion of investments
  • The modernized ECT limits the protection of investors to Fair and Equitable Treatment (FET), full protection and security, most favorable treatment (MFN), umbrella clause, compensation for losses in case of war or other armed conflict, expropriation protection, rights regarding key personnel and freedom to transfer related to Investments.
  • The amended treaty removes, from the Investment Promotion and Protection chapter, language referring to stable and transparent conditions for investors, as well as freedom from discrimination as an obligation separate from FET.
    
• FET
  • The modernized ECT includes an explicit definition of when the breach of FET occurs.
  • It restricts that the breach of FET occurs through a measure or a series of measures that constitute: (1) arbitrariness, such as blatant unreasonableness; (2) targeted discrimination on wrongful grounds, such as gender, race or religious belief; (3) fundamental breach of due process; (4) denial of justice in criminal, civil or administrative adjudicatory proceedings; (5) abusive treatment such as harassment, duress or coercion; or (6) frustration of an investor’s legitimate expectations.
  • The legitimate expectations do not include general expectations that the legal/regulatory framework will not change.
  • Furthermore, the legitimate expectations must arise from a clear and specific representation of the Host State, and must have been central to the investment.
  • The ECT further clarifies that the breach of another provision of the ECT, or of any other international agreement, does not establish a breach of FET.
  • The inclusion of a more specific definition of FET is typical for the new generation investment treaties. However, this definition significantly restricts the protection under the FET compared to the previous wording of the ECT.
    
• Full protection and security
  • The modernized ECT clarifies that this protection refers to the physical security of investors and their Investments.
    
• MFN
  • The definition of the MFN is modified to require that the treatment accorded to investors be most favorable (rather than no less favorable) of that accorded in like situations to any investors (irrespective of whether they are from the Host State, any Contracting State, or any third State).
  • It is further clarified that MFN does not include dispute settlement procedures provided for in other international agreements.
  • Furthermore, the substantive provisions in other international treaties concluded between a Party to the ECT and a third Party do not themselves constitute “treatment,” but measures adopted by a party pursuant to such agreement may constitute such “treatment.”
  • The language of the MFN restricts the application of this provision compared to the previous text of the ECT.
    
• Expropriation
  • The modernized ECT changes the scope of the expropriation provision, protecting from direct or indirect expropriation, which are explicitly defined.
  • Direct expropriation occurs when “an Investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.”
  • Indirect expropriation occurs when measures or series of measures of a Contracting Party “an effect equivalent to direct expropriation, without formal transfer of title or outright seizure, in that it substantially deprives the Investor of the value of its Investment or of the fundamental attributes of property in its Investment, including the right to use, enjoy or dispose of its Investment.”
  • However, the sole fact that the State measures have “an adverse effect on the economic value” of the Investment does not establish indirect expropriation.
  • At the same time, the modernized ECT provides that in principle “non-discriminatory measures by a Contracting Party that are designed and applied to protect legitimate policy objectives, such as public health, safety and the environment (including with respect to climate change mitigation and adaptation), do not constitute indirect expropriations,” unless they are manifestly excessive.
  • The inclusion of a more specific definition of expropriation is typical for the new generation investment treaties. However, this definition significantly restricts the protection under the expropriation provision compared to the previous wording of the ECT.
    
• Freedom of transfer
  • The modernized ECT changes the circumstances in which the freedom of transfer of funds may be prevented, limited, or delayed.
  • It provides that the limitation is allowed if it is an equitable, non-discriminatory, and in good faith application of state laws relating to a specified list of circumstances, which includes among others bankruptcy or insolvency, dealing in financial instruments, criminal or penal offenses, as well as deceptive or fraudulent practices.
  • Furthermore, the limitation of freedom of transfer may take place in case a Contracting State experiences “serious balance-of payments or external financial difficulties, or threat of such events”, or serious difficulties (or threat of such difficulties) for the operations of the monetary or exchange rate policies.
  • The language of this provision restricts the scope of freedom of transfer compared to the previous text of the ECT.
    
• Right to regulate
  • The modernized ECT includes a new provision which explicitly provides for the States’ right to regulate.
  • It provides that the States have the right to regulate within their Areas “to achieve legitimate policy objectives, such as the protection of the environment, including climate change mitigation and adaptation, protection of public health, safety or public morals.”
  • This provision is not explicitly limited to any of the protections described in the ECT. However, its relation to other provisions, particularly the new provisions on expropriation which includes a small right to regulate carve-out, is not entirely clear.
    
• General and security exceptions
  • The modernized ECT also includes a new list of general exceptions and security exception allowing the Contracting States to protect, in specific circumstances, specified interests.
  • However, the protection from expropriation and right to compensation for losses are explicitly excluded from these exceptions.
    
• Sustainable development and climate change
  • The modernized ECT includes broader provisions pertaining to sustainable development and climate change, including an explicit provision addressing climate change and clean energy transition.
  • These provisions among others reaffirm the commitments existing under other international treaties, and recognize that each State has the right to develop its own sustainable development priorities.
  • The States are prohibited from lowering their standards of protection regarding environment or labor laws for the purpose of attracting energy-related investments.
  • At the same time, the environmental and labor laws cannot be a disguised restriction on energy-related investments.

Main changes to the ISDS under the ECT

The modernization also encompassed the Investor-State Dispute Settlement system. While it maintains the recourse to international arbitration as means of addressing breaches of the Energy Charter Treaty’s obligations by a State, there are several new provisions and mechanisms introduced. Below is an overview of the main changes in this respect.

• Applicability of the ISDS in the same Regional Economic Integration Organization (REIO)
  • The modernized ECT includes an explicit limitation on its applicability within a REIO. In particular, the ISDS provisions will not apply among States that are members of the same REIO in their mutual relations.
  • This provision is clearly an answer to the issues that arose with respect to the intra-EU ISDS application, which the EU wishes to curtail. Even though, EU itself has withdrawn from the ECT, the provision is designed to address the possible disputes between EU member states that remain parties to the ECT.
    
• Denial of benefits
  • A State may deny the application of treaty protections and ISDS provision to an investor or investment owned or controlled by a person from a non-Contracting Party with which it has no diplomatic relations or on which it has imposed measures for international peace, security, or human rights protection in line with the UN Charter.
  • This denial can be applied without prior notice.
  • This denial may take place even after the commencement of arbitration, but no later than the date for submission of arguments on preliminary questions, as determined by the court or tribunal.
    
• Frivolous claims
  • The modernized ECT provides for procedures for early determination in case of “frivolous claims.” There are two situations in course of arbitration in which objections seeking early determination may be filed.
  • Firstly, a State may file an objection arguing that a claim or part of it is manifestly without legal merit, based on substance, jurisdiction, or tribunal competence.
  • Secondly, the State may file objections that as a matter of law an award in favor of the investor may not be issued, even assuming the correctness of the facts alleged by the Investor.
  • In all these cases, there are time limits for filing the objections. Upon receiving the objection, the tribunal shall (1), if necessary, suspend proceedings on the merits, and (2) decide on the objections within the specified time. This may lead to issuance of the award without a hearing or even full submissions on the merits, if the tribunal finds the Investor’s claims are indeed “frivolous.”
  • The ECT further provides that in cases where the acquisition of ownership or control of the Investment took place when the dispute already arose, or was foreseeable “on the basis of a high degree of probability,” the tribunal shall issue an award declining jurisdiction, if it determines that main purpose of the acquisition was to submit a claim in arbitration. This provision addresses the issue of forum shopping, but how the tribunals will apply it in practice is yet to be seen.
    
• Security for costs
  • Another novelty is the inclusion of explicit provision on the security for costs in favor of the State.
  • A State involved in an arbitration may request that the tribunal orders the investor to post security for all or part of the costs of the proceedings.
  • In deciding this issue, the Tribunal shall consider all circumstances, including (1) whether the investor risks being unable or unwilling to honor the potential decision on costs against it, (2) the potential impact of the security for costs on the investor’s ability to pursue its claim, and (3) the conduct of the parties to the dispute.
  • In case the investor does not comply with the security for costs order, the proceedings may be suspended or terminated.
    
• Third party funding
  • Another new provision is the regulation of third-party funding in arbitration.
  • Third-party funding is defined as “any funding provided by a natural or legal person that is not a party to the dispute, to finance, directly or indirectly, the pursuit or defense of the arbitral proceedings” “through a donation or grant or through an agreement” “in return for remuneration dependent upon the outcome of the dispute.”
  • Each party shall be obliged to disclose to the other party and the tribunal the name and address, the ultimate beneficial owner, and the corporate structure (if any), of any natural or legal person that provides third-party funding.
  • The disclosed information may be considered when assessing the arbitrator’s impartiality and independence.
    
• Relief in arbitral awards
  • The modernized ECT lists the types of relief that a tribunal may award, limiting them to (1) monetary damages and any applicable interest, (2) restitution of property, in which case the State may pay monetary damage and any applicable interest instead of restitution, and (3) costs of the proceedings.
  • As such, the arbitral tribunals will not have the right to grant other types of final injunctive relief, in particular—specific performance on the part of the State.
  • The monetary damages cannot be greater than the loss suffered by the investor because of the breach, and punitive damages may not be awarded.
  • In practice, most investors seek monetary relief. At the same time, international law does not recognize, in principle, the concept of punitive damages. As such, this modification should not have a high impact on the investors’ claims or States’ obligations stemming from arbitral awards.
  • The tribunal, unless it determines it is unreasonable in the circumstances of the case, shall order that the costs of the proceedings be borne by the unsuccessful party. In case of partially successful claims, the costs’ allocation shall be proportionately adjusted. This is a standard applied by most tribunals even without such explicit language.
    
• Transparency
  • The arbitral tribunal established to resolve the dispute between the investor and State shall be obliged to apply the UNCITRAL Transparency Rules, which aim at making investor-state arbitration less confidential, and more public.
  • Transparency does not mean that the confidential or protected information will be publicly available.

Takeaways for stakeholders

The modernized Energy Charter Treaty introduces significant changes to the substantive protections afforded to investors—offering greater clarity on key provisions, while narrowing the scope of traditional protections. While the treaty preserves core investor rights such as compensation for expropriation and FET, these are now subject to more explicit limitations, including broader carve-outs for state regulatory measures tied to public policy goals.

Furthermore, the modernized Energy Charter Treaty introduces several changes to the ISDS system that investors need to navigate carefully. ISDS protections are now explicitly inapplicable within REIOs, such as the EU, limiting recourse in disputes involving member states. Procedural updates address frivolous claims and forum shopping, with stricter rules allowing early dismissal of claims lacking legal merit or jurisdiction. Investors may face new challenges, such as posting security for costs or disclosing third-party funding arrangements, which could affect arbitration strategies and costs. Relief in arbitral awards is now confined to monetary damages, restitution, or costs, excluding punitive damages or specific performance.

These changes are significant. However, their impact is somewhat restricted by the withdrawals from the Energy Charter Treaty announced in 2024 by the EU, some of its member states, and the UK. This limits the treaty’s applicability in some major jurisdictions.

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[1] Part III of the ECT.

[2] Article 26 of the ECT.

[3] Energy Charter Conference, Decision of the Energy Charter Conference on Amendments to the Energy Charter Treaty, 35th Meeting (Dec. 3, 2024) (Energy Charter Secretariat, Brussels, 2024).

[4]  Instruments of ratification, acceptance or approval of amendments to this Treaty shall be deposited with the Depositary. Amendments shall enter into force between Contracting Parties having ratified, accepted or approved them on the ninetieth day after deposit with the Depositary of instruments of ratification, acceptance or approval by at least threefourths of the Contracting Parties. Thereafter the amendments shall enter into force for any other Contracting Party on the ninetieth day after that Contracting Party deposits its instrument of ratification, acceptance or approval of the amendments.