Worldwide: Get The EIRA 2023 Report

INTRODUCTION TO EIRA

Adjustments to legal and regulatory frameworks and policy planning approaches are inevitable – and even necessary – for countries to successfully achieve a clean energy transition. As a result, governments worldwide are dramatically revising their public policy goals to ensure climate-compatible development, decarbonise high-emission sectors, and achieve net-zero emissions by mid-century.

Undoubtedly, the current energy transition will create new dependencies and energy security concerns, which will cause further changes to long-term policy trajectories. Countries will consider and apply the most appropriate policy, legal, and regulatory measures to reduce dependency on imported fossil fuels, promote resource diversification, and secure critical raw materials to support renewable energy technologies.

Due to these various considerations and resulting course corrections, financial flows into renewable energy sources and energy-efficient technologies have steadily increased in the last decade. While this is encouraging, it is relevant to note that attracting investments for renewable energy remains challenging, particularly in developing and least-developed countries. According to UNCTAD's World Investment Report 2023 (WIR), "a review of investment needs at the midpoint of the 2030 Agenda for Sustainable Development shows that the investment gap in developing countries across all SDG-relevant sectors has increased from USD 2.5 trillion in 2015 to more than USD 4 trillion per year today. The largest gaps are in energy, water and transport infrastructure. The increase is the result of both underinvestment and additional needs." Notably, the WIR highlights that more than 30 developing countries are yet to register even one utility-sized international investment project in renewables. FDI in the 46 least developed countries has dropped by at least 16% to USD 22 billion, accounting for less than 2% of global FDI.

While international donor agencies and State funding will contribute to financing the clean energy transition, the lion's share will come from private sector investments. These investments, particularly in innovative and new technologies, will be made by small and medium-sized enterprises needing certainty that legal and regulatory conditions under which investments were made will not be subject to sudden and unilateral changes. Moreover, the global fuel and financial crisis resulting from the war in Ukraine and the COVID-19 pandemic has significantly diminished risk appetite, and it is unlikely that emerging markets will be able to attract the required investments without a reliable regulatory framework.

As a treaty-based organisation, the International Energy Charter recognises the need for countries to strengthen the rule of law and promote energy security through open and competitive energy markets while respecting the principles of sustainable development and sovereignty over energy resources. Its mandate, unique under international law, encourages countries to implement well-designed legal and regulatory frameworks to considerably reduce the risk of lost investments and disputes between investors and States.

In this context, EIRA is an effort of the International Energy Charter to guide governments in making their legal and regulatory frameworks resilient and increase their preparedness for the energy transition. At the same time, the report aims to offer the investor community insights into countries' policy planning, their ability to mitigate legal and regulatory risks to energy investments and recent efforts to offer the private sector certainty on investment conditions.

In 2022, the Energy Charter Conference approved changes to EIRA's scope after more than three years of intensive analysis and discussions. The updated scope reflects the commitments made by countries under the Paris Agreement and the global efforts to combat climate change. It assesses whether countries have taken – or are taking – policy, legal and regulatory measures to build resilient energy systems and achieve a clean energy transition considering environmental, gender and corporate social responsibility issues. The report also examines measures to decarbonise high-emission sectors, reduce macroeconomic GHG emissions, adapt to climate-neutral energy systems, and coordinate clean energy generation with grid infrastructure development. It includes more detailed information on policy monitoring and evaluation mechanisms to assess whether countries are on track to achieving their policy objectives in the energy sector.

Given the critical importance of public accountability in policy implementation, EIRA now covers anti-corruption issues and transparency in public procurement processes. Through a new sub-indicator, there is added emphasis on steps being taken to liberalise electricity markets, promote competition, and make the power sector financially attractive for potential investors.

Finally, EIRA has expanded its scope in evaluating the rule of law. It now also examines governmental efforts to establish dispute prevention policies and early warning mechanisms and address investor grievances before they precipitate into full-scale disputes. On property rights, the report covers in more detail issues of indirect expropriation, evaluation of compensation and interest in the case of compulsory expropriation of property, and access to political risk insurance, among others.

With its comprehensive coverage, EIRA intends to help countries make smart regulatory choices and develop effective strategies that ensure investor confidence is established and retained over time. It aspires to deliver a range of practical benefits for countries and the international investment community by:

• Informing national and international stakeholders of the most recent legal and regulatory measures taken by countries to improve the investment climate in the energy sector;
• Providing support in identifying policy, legal and regulatory gaps and developing strategies to close these gaps;
• Tracking the progress made by countries in implementing the EIRA recommendations on mitigating legal and regulatory risks.

The EIRA report's eventual goal is to aid global efforts to accelerate clean energy access, stimulate progressive reforms to facilitate the clean energy transition, and systemically reduce legal and regulatory risks in countries that hope to attract much-needed investments.

RISK AREAS AND INDICATORS FOR EIRA

EIRA evaluates risks to energy investment that can be mitigated through adjustments to legal and regulatory frameworks. The risk level in each country is assessed through five indicators. The indicators reward countries for effectively mitigating and managing these risks through long-term policy planning, transparent decision-making processes, competent market oversight, and dispute prevention policies.

What are the risks assessed in EIRA?

EIRA analyses the following risks:

Unpredictable policy and regulatory change

Governments have the prerogative to adopt legislative and regulatory measures necessary to pursue legitimate public policy objectives. Nevertheless, a sudden and arbitrary change to established rules can detrimentally affect the interests of foreign investors. It can lead to increased or stranded costs for operating a business, reduce the attractiveness of investments, and distort competition. As a result of unpredictable legal and regulatory changes, foreign investors may reconsider investing in the country or relocate the investment. Therefore, governments must ensure consistency in policy planning and implementation and engage with investors before effecting legal and regulatory changes.

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Originally Published by International Energy Charter

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