Spain prepares to leave Energy Charter Treaty

Spain is preparing to withdraw from the Energy Charter Treaty (ECT), which protects foreign investment by companies in energy infrastructure and has been the basis of claims for billions of euros in compensation from the Spanish state.

Spain's planned exit from the ECT follows Italy's withdrawal in 2015 and comes ahead of the Energy Charter Conference on 22 November, when its 53 signatories are expected to approve updates designed to bring its articles into line with national and international climate change targets that the treaty, which was signed in 1998, predates.

Spain's withdrawal was largely expected after its energy and climate minister, Teresa Ribera, earlier this year said the amendments do not go far enough.

Withdrawal from the treaty is unlikely to save Spain from having to defend itself from the compensation claims made when it was a signatory, while the lack of a regulatory safety net could discourage investors as the country attempts to attract billions of euros in foreign capital to help finance the planned decarbonisation of its economy, including the addition of 59GW of renewables capacity in 2021-30.

But Spain's exit will prevent claims from future investors in areas such as green hydrogen and the lithium supply chain, where regulation is in its infancy and likely to change as new realities arise.

It will also be supported by climate activists among the members of the Socialist-led coalition in power in Spain, who have called for the treaty to be scrapped, claiming it opposes the 2015 Paris Agreement.

The Spanish state is facing compensation claims for about €10bn in settlements from ECT-related investor-state disputes concerning its power-sector reforms introduced from 2010 onwards, which first cut renewables subsidies and then abolished the subsidy system altogether and replaced it with an incentive scheme.

A decree law in November 2019 offered renewables firms that withdraw their lawsuits a stable regulated rate of return on investment until 2031, but most plaintiffs rejected the offer and have continued with their cases in international arbitration courts.

Article 43 of the ECT protects energy investments made in countries that are signatories for 20 years after their withdrawal from the treaty, which was used as the basis for London-listed Rockhopper Exploration's €190mn compensation, which the Italian government was ordered to pay in August.

By Jonathan Gleave