ECT data analysis: Results and Methods

Credit: Alexia Barakou

The Energy Charter Treaty allows energy companies to sue states in international arbitration tribunals for billions in compensation if they feel they have not been treated fairly. In discussions with Investigate Europe, numerous lawyers, academics, activists and politicians warned that companies could use the Energy Charter Treaty in the coming years to sue states if they pass necessary legislation to phase out fossil fuels. Investigate Europe’s analysis shows for the first time the potential for future ECT lawsuits.

The sum of 344.6 billion is immense. It is equivalent to more than 2 years of the European Commission’s total expenditure, including all Covid 19 relief packages, all agricultural subsidies as well as structural funds.

Affected by the enormous potential of possible energy charter lawsuits are states all over Europe. The UK alone has fossil fuel infrastructure worth more than 140 billion euros, the owners of which could sue the state in international arbitration courts. Germany follows with 56 billion, then France, Italy, Denmark and the Netherlands with more than 15 billion euros each.

If one converts the value of the infrastructure to the inhabitants of the states, it becomes apparent that small states could also be massively affected by possible energy charter lawsuits. Compensation payments could have there an even greater impact on the state budget. In Denmark, for example, there is an infrastructure value of 2,700 euros per inhabitant. In Malta and Estonia it is approximately 1,000 euros. In Germany it is 671 euros. In the analysis, the average value is 660 euros per inhabitant.

The analysis also shows that the value of fossil infrastructure is unevenly distributed among the different sectors. Pipelines, for example, are the largest sector with a value of 148 billion euros, followed by oil and gas fields, which are worth 126 billion euros. Both sectors alone account for almost 80 percent of the value of Energy Charter-protected fossil infrastructure in the EU, the UK and Switzerland.

This is particularly controversial because additional pipelines are currently being laid all over Europe that could soon become obsolete. this includes the trans-Adria pipeline and Nord Stream 2. If Europe’s governments decide in the near future that they have to get out of coal, oil and gas, the pipeline operators could sue for billions in compensation.

A complete overview of the data by state and sector can be downloaded as spreadsheet.

How did we evaluate the data?

The treaty text of the Energy Charter leaves open how the amount of compensation payments shall be determined. Therefore, the calculation practices of the arbitration tribunals sometimes differ significantly. Investigate Europe has chosen an investment cost approach for this analysis to calculate the present value of gas and coal-fired power plants, LNG terminals, gas pipelines and oil and gas fields.

Due to the vague wording of the contract, investors can sue not only for investment costs but also for future lost profits. These are sometimes awarded to them by arbitration courts. The actual sum of possible compensation claims could therefore be even higher than we have calculated here.

Investigate Europe used data collected and provided by the analysis services “Global Energy Monitor” and “Oil Change International” as the basis for the calculation.

While we had sufficiently good data on oil and gas fields, coal-fired power plants and on gas-fired power plants, liquefied natural gas (LNG) terminals and pipelines, we could not include coal mining in the calculations due to insufficiently good data.

For our analysis, we looked at five different categories of fossil infrastructure:

Gas pipelines: 148.0 billion euros, 42.9 % of the total, 283 euros per capita.

Viewed per inhabitant, it becomes clear that smaller states such as Denmark, Malta and Estonia are also affected. In the overall total, Germany in particular stands out, where pipelines account for the bulk of the value of total German Energy Charter assets.

CountryBillion €€ per capita
Denmark7.381267
Malta0.541046
Estonia1.33998
Finland4.06735
Austria5.39605
Slovakia3.17580
Germany45.66549
Greece5.61523
Latvia0.86451
Sweden4.57442

Oil and gas fields: €126.2bn, 36.6% of the total, €242 per capita

Particularly striking here are the large values for the UK and Denmark, whose oil and gas fields in the North Sea are making an impact.

CountryBillion €€ per capita
United Kingdom99.101479
Denmark8.501459
Romania8.78454
Netherlands2.80161
Italy5.5793
Ireland0.3162
Cyprus0.0446
Slovenia0.0942
Germany0.8510
Czechia0.043

Gas-fired power plants: 33.5 billion euros, 9.7 % of the total, 64 euros per capita.

The Netherlands is particularly striking here, with the highest per capita value of gas-fired power plants.

CountryBillion €€ per capita
Netherlands3.88223
Ireland0.79158
Italy8.91149
United Kingdom9.45141
Belgium1.62141
Spain4.6398
Hungary0.8587
Greece0.6864
Slovakia0.3157
Romania0.5629

Coal-fired power plants: 20.7 billion euros, 6% of the total, 40 euros per capita

CountryBillion €€ per capita
Netherlands4.29246
Germany8.30100
Poland3.5794
Czechia0.6964
Croatia0.1845
Bulgaria0.2434
Spain0.9119
United Kingdom1.2619
Slovakia0.1017
Portugal0.1514

LNG terminals: 16.3bn euros, 4.7% of the total, 31 euros per capita.

CountryBillion €€ per capita
United Kingdom9.18137
Cyprus0.09100
France3.7756
Spain2.5454
Finland0.1833
Sweden0.088
Italy0.417

Methodology

The ECT does not contain explicit provisions on the calculation of possible damages. Possible approaches are the respective current value of an investment or the profits to be expected in the future. We have decided to follow the first approach here, as the expected profits are a clearly uncertain quantity. Our approach inevitably leads to a conservative result. This is because in cases where the expected profit turns out to be higher than the investment costs, investors will claim the higher sum in arbitration courts. Otherwise, they would stick with the investment cost approach.

We originally made our calculations in US dollars. We then converted the results to the rate 1 US dollar = 0.87 €. (Source: European Central Bank calculator, average from 2020-02-10 – 2021-02-08) For the population figures of the countries, we used data from Eurostat, as of 2020-01-01.

Countries and installations considered

Our analysis covers installations in the EU, the UK and Switzerland. As another member of the European Economic Area (EEA) and signatory to the Energy Charter, we would have included Norway in our analysis, but the state has never ratified the treaty. With its many oil and gas fields, in which numerous foreign investors hold shares, Norway would be strongly affected by the Energy Charter.

We have limited our analysis to plants that have at least one shareholder based in another Energy Charter country. Investments that are wholly owned by domestic companies, or those based outside the Energy Charter (ECT), were not included. This is a conservative assumption, as we do not take into account the possibility of relocation and letterbox companies. With such measures, it is conceivable that installations not actually affected by the ECT will nevertheless fall under the ECT.

In our analysis, we assume the following members of the ECT:

Afghanistan, Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Japan, Jordan, Kazakhstan, Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Moldova, Mongolia, Montenegro, Netherlands, North Macedonia, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Tajikistan, Turkey, Turkmenistan, UK, Ukraine, United Kingdom, Uzbekistan, Yemen

Although Italy has withdrawn from the Energy Charter, Italian companies still have the right to sue under the Energy Charter due to the 20-year transition period. Also, installations located in Italy continue to be covered by the Energy Charter. Therefore, Italy is considered in our analysis in the same way as other ECT members.

Oil and gas fields

In considering the oil and gas fields, we refer to a study by the analysis service “Oil Change International”. They have taken the investment costs of the last 20 years as a measure of the current value of the field.

Gas Pipelines

The data basis for these plants comes from the Global Energy Monitor. Pipelines in operation or under construction are considered. Local distribution grids, for which not enough data is available, are not included.

In the case of multinational pipelines, the length of the pipelines is distributed among different countries. Here, the respective length was estimated from the course of the pipeline.

The value of a pipeline is estimated at US$5.04 million per kilometre of length. The value of pipelines is not subject to significant depreciation.

Liquefied Natural Gas (LNG) Terminals

The data basis for these plants comes from the Global Energy Monitor. Terminals in operation or under construction are considered.

The value is estimated according to the type of terminal and the capacity in million tonnes per annum (mtpa). The value of LNG terminals is not subject to significant depreciation.

For export terminals on new land (“greenfield”) US$1501m per mtpa. For export terminals on existing land (“brownfield”): US$458 million per mtpa. For terminals where no information is available as to whether an LNG terminal is built or floating on new or old land: US$458 million. For floating import terminals: US$170 million per mtpa. For land-based import terminals: US$247 million per mtpa.

Coal-fired power plants

The data basis for these plants comes from the Global Energy Monitor. Plants in operation or under construction are considered.

The investment costs for a coal-fired power plant are approximated at 2 million US dollars per MW of installed capacity.

The lifetime of a coal-fired power plant is assumed to be 40 years. The value is depreciated on a straight-line basis over the operating time. I.e. after 20 years, 50% of the value remains. The minimum value of a coal-fired power plant in operation is assumed to be 12.5% (5/40) if the power plant is already older than 35 years.

Gas power plants

The data basis for these plants comes from the Global Energy Monitor. Plants in operation or under construction are considered.

The investment costs for a gas-fired power plant are estimated at 1.0 million US dollars per MW of installed capacity for combined cycle power plants. Other gas power plant technologies are estimated at 0.5 million US dollars per MW.

The lifetime of a coal-fired power plant is assumed to be 30 years. The value is depreciated on a straight-line basis over the operating time. I.e. after 15 years, 50% of the value remains. The minimum value of a coal-fired power plant in operation is assumed to be 17% (5/30) if the power plant is already older than 25 years.