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Energy treaty reform could see investors in fossil fuels, renewables lose cover

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RWE is seeking compensation for a power plant that it built three years before the Netherlands decided on a coal phaseout.
Source: Carl Court/Getty Images News via Getty Images

In 2015, German utility RWE AG completed a new €3 billion coal power plant in the small Dutch seaport of Eemshaven, firing up two highly efficient boilers among a smattering of wind turbines that dot the gusty coastline.

The Eemshaven project was one of three coal stations commissioned in the Netherlands that year despite rising awareness of the need for drastic climate action, including the adoption of the Paris Agreement on climate change. Three years later, a court ruling on emissions cuts compelled the Dutch government to announce the phaseout of coal-fired power generation by 2030, putting an expiration date on the investments made by RWE and other companies like France's Engie SA and Germany's Uniper SE.

Now RWE is suing the Netherlands for compensation to shut down its Eemshaven plant early, taking advantage of the Energy Charter Treaty, or ECT, an international trade accord dating back to the 1990s that protects foreign investments in energy supply and has come under increasing fire for undermining Europe's climate goals.

The EU is set to intensify talks aimed at reforming the treaty in March, in a bid to make it more compatible with its own targets for cutting emissions. But the bloc faces an uphill battle to convince other signatories, which include Japan, Turkey and Australia, to drop protections for fossil fuels.

Since any change would need unanimous consent, that has led environmentalists and even some EU member countries to advocate for abandoning the treaty altogether, with green groups arguing that the EU's reforms fall far short of what is needed to make the ECT climate-compatible anyway.

In its latest proposal in mid-February, the EU said it wants to immediately end protection for any new coal or oil investments under the accord. But new gas plants would continue to be covered until 2030 if they emit less than 380 grams of CO2 per kWh and can be converted to low-carbon gas. All existing fossil fuel investments would be protected for 10 years after the amendment takes effect, up until 2040 at the latest.

"Even if all the EU proposals would be accepted, the ECT would continue to be an obstacle for countries that want to phase out coal, oil or gas," said Cornelia Maarfield, trade and climate project manager at Climate Action Network Europe, an environmental group. "That means we would see more cases like the one from RWE."

Green impact

The ECT allows foreign investors to seek compensation from states for almost any measures that lower expected profits, through a investor-state dispute settlement mechanism that has been used in more than 130 arbitration cases so far.

Abandoning the ECT could have wide-ranging effects not just for fossil fuel investors but also renewable energy developers, who to date have lodged twice as many claims as fossil fuels and secured double the amount of damages.

SNL Image

Most of the claims stem from Spain's decision to retroactively cut subsidies for renewable power projects, which triggered a flurry of lawsuits over the past decade from developers and financiers seeking to recoup their investments.

Some of them say that while by no means perfect, the ECT is a vital instrument to provide investment security. They worry that leaving the treaty without putting other safeguards in place will dent appetite to put private money into renewable energy in other countries that could decide to follow Spain's playbook. France has already floated cutting solar tariffs, for example.

"We would have never made investments if we knew we wouldn't get the [protection from the ECT]," said one investor involved in a case against the Spanish government, speaking on the condition of anonymity. They described the ECT as "political risk insurance."

"The EU is trying to do away with the ECT without solving the problem," the investor said. "[It] is turning a blind eye to inconsistencies across the member states."

To leave or not to leave

The European Commission is continuing to push for a reform but will consider other options, including withdrawal, if the EU's demands continue to fall on deaf ears, a commission official said. After three rounds of preliminary talks in 2020, the ECT's more than 50 signatories will convene in March for the first of five sessions planned for this year.

The bloc is facing rising pressure from within. Ministers in France and Spain have voiced impatience with the talks and suggested that the EU should ditch the treaty if it cannot get other countries to accept its proposals. Italy is the only EU member to have left the ECT to date.

SNL ImageInvestors in Spain made heavy use of the ECT after the government withdrew renewables subsidies.
Source: Pablo Blazquez Dominguez/Getty Images News via Getty Images

One issue hampering a broader withdrawal is a sunset clause, which binds countries to honor the treaty for existing investments for 20 years after leaving.

Maarfield points out that EU member states could simply decide to forgo any action within the bloc. If others like the U.K. and Switzerland went along, she estimates this could cut the number of cases by as much as two-thirds.

But lawyers say the EU and its members states do not have the authority to disregard the ECT's sunset clause.

In the meantime, more arbitration cases could be filed, especially as countries continue to tighten their climate targets. Uniper, one of the other Dutch coal plant owners, has already threatened legal proceedings under the ECT, although it has yet to request arbitration.

Amandine Van den Berghe, a trade expert at ClientEarth, another environmental group, described RWE's lawsuit over Eemshaven as "an aggressive response to necessary and foreseeable action by the Dutch government" and criticized companies for trying to shift their losses from stranded assets onto states.

But as long as they have an option, fossil fuel owners are likely to keep trying.

RWE points out that the construction of Eemshaven was supported by the Dutch government at the time. Without subsidies for a conversion to biomass, which is already underway at the plant, the company estimates it will not be profitable past 2030. In Germany, the company is getting €2.6 billion from the government for shutting down all of its brown coal capacity over the next 15 years.

"We do not by any means question the coal phase-out decided by parliament," Roger Miesen, CEO of RWE Generation, told a Dutch parliamentary committee in early February. "However, we do not consider it right that the law does not provide for compensation for the resulting disruption to the company's property."