There is an important need for new investment in order to meet growing global demand for energy. A significant risk to energy security is that policy frameworks can prevent investment capital from being mobilised and directed to the most efficient energy supply or energy-saving projects. The challenge is to reduce, as far as possible, these policy risks by creating a favourable investment climate based on openness, consistency and non-discrimination.
The Energy Charter Treaty takes a balanced approach to investors' access to resources. On the one hand, the Treaty is explicit in confirming national sovereignty over energy resources: each member country is free to decide how, and to what extent, its national and sovereign energy resources will be developed, and also the extent to which its energy sector will be opened to foreign investments. On the other hand, there is a requirement that rules on the exploration, development and acquisition of resources are publicly available, non-discriminatory and transparent.
Once a foreign investment is made in line with a country's national legislation, the Treaty is designed to provide a reliable and stable interface between this investment and the host government. The Treaty protects foreign investors against non-commercial risks such as discriminatory treatment, direct or indirect expropriation, or the breach of individual investment contracts. The need for stability in the relationship between investors and host governments is particularly acute in the energy sector, where projects tend to be long-term and highly capital-intensive.
The binding rules contained in the Energy Charter Treaty can play a significant and positive role in mitigating risks. This is because they provide investors with the possibility to protect their rights by taking the host government to international arbitration. Since the Treaty came into force in 1998, several investor-state disputes have already been addressed under the Treaty and successfully resolved, either by amicable settlement or by an arbitral award.
The existence of a functioning mechanism for the resolution of disputes provides persuasive encouragement for states to observe their obligations under the Energy Charter Treaty. As the Charter's Industry Advisory Panel has observed, "although dispute settlement provisions should normally be perceived as instruments of 'last resort', they are of significant value in providing a constructive framework for the resolution of investment related disputes and may thereby make a significant contribution to investor confidence and to a more reliable investment environment".