The existing energy investment order: fit for the transition?

Investment in the energy sector is, by its very nature, international. Such investment is increasingly important in the contemporary global economy, as we move towards net-zero greenhouse gas emissions by 2050. Energy projects require substantial upfront financial investment, usually over extended periods with high set up (capex) costs. High levels of investment for a sustained period often expose investors to a range of potential risks, which can be both commercial and political in nature. Increasingly, cross-border energy investment is crucial for achieving global energy objectives set out under the Paris Agreement. These Paris Agreement commitments are implemented through Nationally Determined Contributions (NDCs), the success of which is largely reliant on a stable investment environment.
In order to meet the goal of net-zero hydrocarbons by 2050, the deployment of renewable energy technologies and the development of efficient energy infrastructure is critical. These innovations will require the cross-border flow of capital and technology. Such investment across borders inherently contains risk, not only economically, but also geopolitically, in the sense that such innovations are vulnerable to any concerns surrounding energy security. Accordingly, states seeking to secure reliable and diversified energy supplies need investment protection mechanisms in order to protect these cross-border investments. Specifically, such investment protection mechanisms need to mitigate the risks associated with long-term investments, whilst also fostering international cooperation in the energy sector. In sum, robust legal frameworks to protect foreign investment in energy are critical in order to manage the circumstances that surround the energy transition. These circumstances include the need for substantial capital outlay for energy innovations, the need to achieve energy targets in order to fulfil ambitious climate goals and increasing awareness about the geopolitical implications of international investment.
Treaties for the protection of energy investments are designed to protect foreign investments within the energy sector, primarily against non-commercial risks. Such investment agreements are concluded in order to ensure that a stable, transparent and predictable legal framework is established so as to protect the parties to the investment. The more stable the investment, the more likely that capital will flow across state borders into energy-related projects. Investment agreements established under relevant international treaties seek to balance the rights of the investor and host state. Specifically, investors seek protection for their assets, whilst host states wish to attract investment without abrogating the right to regulate in the public interest. This balance between investor protection and the state shifts depending on a range of factors, including state interests, investor needs, geopolitical risk and internal political machinations.
The pinnacle of investment protection in the energy sector was the establishment of the Energy Charter Treaty (ECT) in 1994. The ECT sought to protect both investors and host states in the period after the fall of the iron curtain and the collapse of the Soviet Union, by facilitating cross-border energy transactions. Although encompassing all forms of energy, the members of the ECT were particularly focussed on the cross-border movement of oil and gas. After the recession that particularly affected Eastern Europe in the 1980s and early 1990s, the ECT sought to foster cooperation between energy-rich former Soviet states and capital-rich but energy-poor Western European nations.
The first questions about the suitability and acceptability of the ECT appeared in 2009, with the withdrawal of the Russian Federation. Arbitration cases arising from the provisions of the ECT rose substantially in the period after 2012, peaking in 2015 when 26 new arbitrations were filed. Of the total 162 ECT cases to date, 59% involve renewable energy, 34% fossil fuels and 3% nuclear energy. There have been growing concerns about whether the ECT is a suitable instrument to protect investment projects in renewable energy, leading to growing discontent amongst member states. As will be outlined in Section 3 below, such discontent has driven several member states to withdraw from the ECT entirely, as they see the protections of the ECT and the climate goals of The Paris Agreement as being fundamentally misaligned.
This chapter examines energy investment protection from the early investor protection arrangements that were crystallised in contractual agreements through to the conclusion of the ECT. Specifically, in Section 2, it examines the economic, geopolitical and historical importance of investor protection. To this end, it will examine early protections that were put in place prior to the Organisation of Petroleum Exporting Countries (OPEC), increased protection after the oil crisis of the 1970s, and the development of investor protection through international treaties, culminating in an examination of the ECT. The chapter then turns, in Section 3, to conceptualise disillusionment with energy treaties in view of States’ climate change objectives and NDCs under the Paris Agreement. In Section 4, this chapter will speculate as to the potential future of energy governance and investor protection that will characterise the energy transition. Finally, Section 5 of the chapter will set out the main themes of the book.