Energy Security, Energy Transition, and Foreign Investments: An Evolving Complex Relationship

Abstract

Energy has historically enticed significant interest from foreign investors. Simultaneously, it has perpetually held a pivotal position in any nation’s framework. Consequently, governments have long regarded energy security as a paramount concern, crucial for ensuring national stability. Energy security, simply put, is defined as “the availability of sufficient supplies at affordable prices”. However, a more contemporary perspective also emphasizes the necessity for long-term sustainability in the supply. This perspective adds a new foundational element—sustainability—to the concept of energy security. Stemming from this premise, two phenomena in the energy sector emerge that could impact international foreign direct investment (FDI) flows. Firstly, the transition from hydrocarbons to renewable sources necessitates substantial investment, wherein foreign investments could play a pivotal role. Secondly, there is an increasing trend of States utilizing FDI for strategic objectives. The acquisition of strategic energy infrastructure by foreign entities is now perceived as a risk to the energy supply security of nations. Consequently, several States have bolstered their FDI screening mechanisms to assess potential impacts on supply security, infrastructure operation, and national security in general. These two aforementioned phenomena may sometimes conflict. This article aims to analyze the intricate relationship between energy security, energy transition, and foreign investments. The author posits that an overly broad interpretation of national security and the misuse of screening mechanisms could serve as instruments for shielding the domestic economy, potentially undermining the foreign investment legal framework. Such an approach in the energy sector could have a “chilling effect,” leading to a reduction in FDI and impeding the energy transition or the attainment of other energy-related objectives. At the same time, a deep reform of the international investment regime is required, which should go through a modification of International Investment Agreements (IIAs) clauses but also through a more environmentally friendly approach by investment arbitration tribunals. It appears extremely difficult to find a balance between international investment law and environmental/climate change law. In this context, the Energy Charter Treaty (ECT), which has recently undergone a “modernization process”, is assumed to be a test bench.