Recently the Energy Charter has been appearing in the news due to some ground-breaking arbitrations taking place on the basis of investment protection mechanisms that the Treaty offers for its members. The YUKOS case, which might cost the Russian state some $50 billion, was arbitrated under the Energy Charter Treaty. The resulting three final and non-appealable awards are considered to be landmark decisions in the legal understanding of the interaction between taxation and investment protection under the Treaty.
In addition to these significant cases, Dr Rusnák argues the reason why investment protection became so prominent recently has to do with the fact that the Charter has dropped off the radar of politicians and decision-makers for a long time:
'After all the ups and downs of the Energy Charter Process', argues the Secretary General, 'we can see that, despite the potential of the Charter—the idea which was very prophetic for the times when it was drafted in the early 1990s—the ECT was almost totally forgotten, at least within the Western part of the constituency. In the East (Russia and other former Soviet Union countries), the Charter had been a very topical matter, addressed on the level of presidents, whereas in the EU it was addressed on the level of desk officers. This imbalance was indeed very concerning, and at some point the ECT was totally lost from the political scene. There are several serious consequences of that, as the ECT is an integral part of the acquis communautaire [note 1], which has to be respected.
Many reforms in the EU have been designed without taking into account the obligations, provided by the ECT, of the countries vis-à-vis the investors. However, if one doesn’t know the law, that doesn’t mean the law doesn’t exist.'
One of Dr Rusnák’s initial tasks when he became Secretary General was getting the ECT back on politicians’ agendas, both within the Charter constituency and beyond. At that stage, the first challenge that had to be overcome was the one within the organisation itself:
'The Energy Charter was a very rare example of an organisation in the 21st century that kept all proceedings secret, or with restricted access.
In order to improve at least basic awareness of the Charter, the key was to ensure more transparency and to open the Charter Process to the public. In November 2013, after thorough discussions between the members of the ECT, the concluding documents of the Energy Charter Conference were made publicly available.
In the same year, the Knowledge Centre was established to support and improve the awareness about the Energy Charter and open the Secretariat to newcomers from different countries all over the world, and allow them to learn more about the Charter and to use the knowledge accumulated here over the last 20 years.
That knowledge is pivotal to get a better understanding of how changing energy policies affect the investment environment, how relations between countries develop and how the ECT and the Charter Process can be used in addressing these challenges.
Energy is crucial for all countries and their economies, and has implications for all aspects of modern states, from social issues to questions of war and peace. The main foundation of governments’ strategies is always energy.'
In that sense, the establishment of the European Coal and Steel Community and Euratom, which marked the inception of the EU, is a textbook example. Turning to contemporary EU reality, the recent Energy Union initiative, introduced against the backdrop of geopolitical tensions and energy security concerns, has to be viewed in the context of the long-lasting EU struggle for integration of energy markets and policies across its membership.
'Energy Union - the third attempt to address the 'Lubbers Plan' of the 1990s'
As Dr Rusnák elaborates, 'the Energy Union is the third attempt to address the idea behind 'Lubbers Plan' [note 2] of the 1990s, when the then-Prime Minister of the Netherlands introduced the concept of Energy Communities.
At the heart of it was the proposal of the fourth basic Treaty (complementing the Treaties of Rome) that should have gone beyond the European Union, creating a level-playing field for consumers and suppliers of energy on the international level. From this very idea, the Energy Charter was born.
From that moment and with a 10-year cadence, the very same idea has come back, first in the early 2000s, when the European Energy Community was established, and today, with another reincarnation in the shape of the Energy Union. In order to evaluate the success of the latter, one has to understand three basic elements', continues Dr Rusnák.
'a) The European Union is an energy deficient island and will remain one, at least for the next 20-25 years, regardless of the successful development of RES.
b) This means that Europe has to interact with the neighbourhood, and today—unlike in the early 1990s—the neighbourhood is global. Europe doesn’t have many legal and political energy instruments to deal with the rest of the world. The global energy market is always changing—today it is a buyers’ market, while years ago it was very much a sellers’ market. Over the next years, it is likely to change two to three times—this volatility is inherent to the market.
c) Recently, we have seen how cheap shale gas in the US has led to the increased use of coal in the EU for electricity generation, despite all efforts of the EU to decarbonize its economy. Availability of energy does matter, but so does its price.'
4 pillars of energy security in 2015
When talking about energy security in Europe, Dr Rusnák argues that we should go beyond the EU’s energy trilemma in order to reach a more holistic understanding of the concept.
This idea could be traced to the Charter’s modernisation process, and essentially such an approach to energy security identifies four key pillars: security of supply, demand, transportation and addressing energy poverty.
Dr Rusnák develops the rationale behind this conceptualization as follows:
1) Security of supply
'Initially, the notion of energy security evolved from the need for security of supply. Energy security was perceived—and this understanding is reflected in the 1991 Energy Charter Declaration—to be interchangeable with security of supply. In the 70s, it was relevant when the IEA was created as a consequence of the oil shocks; it was relevant in the 90s, when Europe had to redefine its energy relations. Today’s complex international energy relations show us that this simplistic understanding is hardly enough.'
2) Security of demand
'Nobody challenges the importance of security of supply—its relevance is clear. However, the issue of security of demand is as fundamental as supply, even from the state policy perspective of energy consuming countries. Companies and governments in energy producing countries have to make investment decisions today to ensure that oil or gas will be delivered to consumers in ten years. Therefore, the voice of security of demand has to be listened to.
When the EU sends signals that it doesn’t care too much about security of demand, what reaction can we expect from the producers beyond Europe?
It is clear that Europe is not communicating properly about that question, to the extent that the Minister of Petroleum and Energy of Norway, Mr Tord Lien, feels the necessity of highlighting the issue of security of demand at the launch of the EU’s Energy Union initiative.
Although it is not enough, the general message is ‘take security of demand very seriously’.'
3) Safety and security of energy transportation/transit
'Neither security of supply nor security of demand are feasible without security of transportation. The latter is just as important as security of supply and demand.
There are well-known cases of disruption of transit through pipelines, and the same applies to energy transportation through the high seas. Take the example of one of the most dangerous threats to transport of oil: piracy. Since the end of the Cuban crisis, major naval operations have been carried out in order to prevent pirates from hijacking oil tankers in the high seas hundreds of miles off the shore'.
4) The last element, which concludes the ‘security quadrat’, is addressing energy poverty.
'Much more emphasis has to be put on fighting energy poverty. The latter has always been seen from the perspective of development, but it has to become an energy governance issue, and the Energy Charter is about governance. There is no other international organisation that has such legally binding rules other than the Energy Charter.
Therefore, as the Secretary General, I personally feel obliged to address the issue of energy poverty. The holistic approach to energy security that includes the latter is proposed in the new version of the Energy Charter for the upcoming adoption at the Ministerial Conference on the International Energy Charter in The Hague in May 2015 ('The Hague II').
In fact, energy poverty is a multifaceted issue. We have heard about the number of people who died in Europe during recent harsh winters, as they couldn’t afford to heat their homes. Do we need a clearer message than that? In some developing countries the picture is dramatically different—in Sub-Saharan Africa electrification is just 30%.
The Energy Charter is strenuously working on deepening discussions with world leaders on the topic of considering the Energy Charter as a platform to transition from the 1991 sole focus on security of supply to the four pillars of energy security in 2015.
Energy Charter as the platform for the EU’s energy diplomacy
The ECT provides the first level of legally binding cooperation, which today is covering most of Eurasia. This is a basic legal framework that constitutes a plateau on which the EU deepened and broadened its internal cooperation in a true partnership with countries beyond the EU.
However, as Dr Rusnák elaborates, the role of the Energy Charter Treaty is barely reflected in the proposal of the Energy Union, while its potential for providing a powerful instrument of energy diplomacy is very strong:
'In my mind, in the next 20-30 years, the EU will need to maintain good and stable relations with its energy suppliers. Not only when it comes to point-to-point energy delivery through energy corridors, which is a simplistic way of looking at energy relations that is a bit last century. At the Energy Charter, we are trying to get new countries on board to reach the same plateau level developed through the 1991-1994 negotiations [note 3].
This is a very basic level of cooperation, but it can be shared with a much wider number of countries. That would create a platform on the basis of which European energy diplomacy can operate and energy corridors can be built—not only the ones that we are aware of today, like the Southern Gas Corridor, but going beyond that. We need to invest in building alliances and address the issues of energy affordability and efficiency.
The ECT is the key instrument of energy diplomacy to achieve this. Currently, the Energy Union initiative still lacks the strong outward perspective needed to succeed. Europe should listen to all providers of energy, and listen to the needs of countries that must invest now in order to be able to deliver energy to Europe in 10-15 years. We have strong cooperation with counties that we are linked to in terms of security of energy transportation (both on land through pipelines and on the sea). At the same time, boosting regional cooperation is very important. Energy (and RES especially) is very much a regional game: the bigger the territory you have interconnected, the more stable it is.
Regional cooperation is indeed the key to success and from this point of view there is no other better tool than the ECT. It took a long time to agree upon the basic rules that it provides in Europe, but these are universal rules, not based on a single ideology or political strategy, and thus completely applicable to Africa, Asia, and Latin America.
At the same time, the ECT is technologically neutral. As at the end of the day, we have to use the entire variety of energy sources available and the ECT is friendly to all of them. This is an important asset, which gives countries enough flexibility to choose the proper energy mix that fits their geographical and economic conditions.
Also, it is important to understand that the Energy Charter Treaty is a crucial instrument for both energy producers and consumers. It is a well-forgotten fact that the Charter was put forward by two, back then, very strong energy exporting countries: the Netherlands and the UK, and it didn’t happen by chance.'
The Energy Charter Secretariat monitors the implementation of the 1994 Energy Charter Treaty and provides support to the Treaty-based international organisation, the Energy Charter Conference (52 states). The Treaty strengthens the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thereby mitigating risks associated with energy-related investment and trade. The Treaty focuses on: the protection of foreign investments; non-discriminatory conditions for energy trade; reliable energy transit; the resolution of state-to-state and, in the case of investments, investor-state disputes; and energy efficiency policies.
The International Energy Charter is a political declaration to be adopted in The Hague on 20 May 2015. It is designed to spread fundamental principles of international energy cooperation to new partner countries.
This series of materials is part of a wider awareness-raising campaign aimed at promoting the renewed role and creating further momentum behind the Energy Charter in today’s global energy markets.
- acquis communautaire is the EU’s common internal legislation
- The 'Lubbers Plan' was ‘a chain of negotiations [initiated by the then-PM of the Netherlands, Ruud Lubbers,] between multiple world states which intended to create an institutional framework for the promotion of a wider-European energy trade, including active investment flows between 'east and west'’, ‘Modernization of the Energy Charter’, Dr Urban Rusnák, 27 December 2013, Russia in Global Affairs Journal
- The European Energy Charter established in 1991, provides the political foundation for the Charter Process, while the Energy Charter Treaty was established in 1994