Transition to clean energy, one of the dominant themes of the 2025 World Economic Forum (WEF) that took place in Davos in January, is expected to drive significant investment into emerging and developing economies (EMDEs) over the next decade, going well beyond the more well known and larger markets of India, Brazil and China.

Academic research suggests that improved access to arbitration promotes further foreign direct investment (FDI).[1] Bilateral investment treaties (BITs) — of which over 2,500 are in force today[2] — have been shaping the global investment landscape for many decades.

A number of concerns have been expressed suggesting that these agreements need to be updated to match the needs of new energy investment; however, the opinion seems to be divided.[3]

So far, there have been a few examples of updated treaties, which also suggest a move away from the traditional “fair market value.” The concept of fair market value is often referred to in investment treaties and, more importantly, in a transactional context and general financial reporting. In other words, some BITs have departed from what can be described as the investors’ conventional expectation of compensation basis.

This article addresses two trends and their interaction — firstly, the transition to clean energy and, secondly, how arbitration for such matters is also developing, particularly in the more visible investor-state part of the market, and what impact such arbitration might have on clean energy (and other) investment.

Clean Energy Investment Demand on the Rise

The key idea behind the energy transition agenda is to shift the world toward renewables, make them the main source of energy, and thereby reduce the negative footprint on the planet. This transition will affect not only oil and gas production and power generating facilities, but also more efficient energy storage systems, including long-distance distribution networks supported by digitalisation, as well as electrification of industry sectors (for example, transport).

The latest data from UN Trade and Development (UNCTAD) indicates that developing economies increasingly account for more FDI compared to developed nations. During 2024, they received USD 854 billion of global FDI, which was the fifth consecutive year when EMDEs accounted for the greater share of global investments (compared to developed economies). The majority of the FDI continues to benefit the largest players in emerging Asia (China and India), followed by Latin America and the Caribbean (e.g., Argentina, Brazil and Mexico).

However, investment in clean energy projects is lagging; it was almost 20 percent down in both 2022 and 2023, with 577 new projects across EMDEs. Investments in energy and gas supply across the EU as well as Asia and Africa also fell by 25 percent in value in 2024.

The current level of investment into clean energy is far from sufficient: The current annual spend of approximately USD 800 billion[4] needs to triple to USD 2.8 trillion within 10 years to achieve the balance of climate and energy consumption objectives.[5] IFC estimates that 60 percent of that funding will have to come from the private sector, to reach USD 1 trillion annually by the early 2030s.[6]

As the majority of renewable energy investment has been concentrated in advanced economies and China (almost 90 percent of clean energy infrastructure investments since 2021), other countries appear to have been at a disadvantage. For example, the average level of per-capita investment in sub-Saharan Africa — despite improvement in energy regulation and security, as well as its renewable energy potential — was about 40 times less than the global average between 2020 and 2023.[7]

An energy transition study prepared by the WEF makes a range of additional observations highlighting further regional imbalances along the transition path:[8]

• Despite the progress achieved across emerging Asia in developing regulatory and policy frameworks, the region continues to rely on coal energy.
• Emerging Europe has been improving its renewable energy capacities, albeit it remains restricted by energy imports and consumer affordability concerns.
• The Middle East and North Africa rely on oil production, and clean energy investments have slowed down recently.
• Latin America and the Caribbean region expanded their mix beyond hydropower to include solar and wind, but will require further investment.

The International Energy Agency estimates that clean energy investment needed from EMDEs excluding China needs to increase by a factor of seven times by the early 2030s, to achieve the “Net Zero Emissions by 2050 Scenario,” with concessional funding of around USD 80–100 billion required.[9]

A Range of New Energy Disputes

The scale of additional investment required, particularly going into lesser known frontiers, suggests more future cross-border disputes. This is due to a number of reasons, such as the volume of private investment needed to be made over a relatively short space of time, higher risk of new projects in EMDE markets, and competing priorities from other sectors supporting more immediate budgetary needs, e.g., amongst the commodity-dependent countries.

New project contracting is likely to give rise to a spectrum of issues ranging from regulatory disputes following changes in the legal environment, to M&A and general transactional disruptions (for example, joint ventures), to construction-related activity, to consumer activism and financing-related actions.

Investment risks associated with the EMDE environment itself can also range from those of domestic political unrest and evolving regulation (e.g., taxation and investment incentive programmes, licensing, interconnection) to skills and infrastructure shortages.

The ability to enforce contracts and access to arbitration are generally considered to be the principal risk mitigation tools protecting the investor. Arbitration statistics reported by the International Chamber of Commerce (ICC) indicate the highest demand has been coming from cases involving the energy and construction sectors. These two contributed to over 45 percent of new cases registered in 2023.[10]

Historically, energy projects involving EMDEs also produced some of the largest international arbitration claims, particularly against governments. Disputes involving sovereign states reported by the World Bank’s International Court for Settlement of Investment Disputes (ICSID) include seven new cases registered in 2024 that concern renewable energy projects in EMDEs — three of these featured Honduras as the respondent, a country now leaving the World Bank’s ICSID Convention.[11]

Is There Impact on Valuation Basis?

When it comes to investment treaty disputes, particularly those relating to the energy sector currently undergoing significant changes, quantification of damages has often been one of the key considerations by the parties and the arbitral tribunals.

The general valuation principles employed in valuation of damages in relation to conventional fossil energy projects are mostly transferable to those involving renewable sources and supporting infrastructure. The common elements are long-term investment horizons, regulatory changes, market price volatility, as well as an array of ESG challenges. Albeit there are different considerations arising from energy transition including, for example, carbon emissions credits, preferential tariffs for certain renewable projects, availability and cost of financing. As a result, some of the impact on value following energy transition could include:

• Reduction in value of those plants seen to either have a shorter economic lifespan or to be less economically viable (e.g., coal and oil-fired)
• Values tied to returns in the current market with continuously changing market dynamics
• Uncertainty and/or increased costs of recent technologies affecting longer term reliability and/or initial investment costs, such as large offshore wind farms
• Increased interest rates against the recent decrease in power prices already leading to reduced valuations

The basis of value, the fundamental premise on which reported values are based (from the investors’ as well as other parties’ perspectives) is, however, not something that should change easily at the time when private investors are expected to accelerate global investment flows into new energy projects.

“Fair market value” is commonly used in the analysis of quantum of compensation, and the basis of value is defined as:

[T]he price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, each acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or to sell and when both have reasonable knowledge of relevant facts.[12]

In practice, three primary valuation approaches used in appraising compensation of “fair market value” on investment-related claims include the income, market, and asset-based approaches.

Interestingly, several examples of new investment treaties involving EMDEs appear to tilt the board and result in valuations that do not produce a “fair market value” in the outcome.

For example, under Article 33.6 of the Colombia-Spain BIT signed in 2021, any award of damages lower than 50 percent of the value initially claimed by the investor shall be further reduced by 2 percent of the difference between the amount claimed and the amount awarded. This treaty also expresses a preference for market-based and asset-based methods, such that the valuation should, to the extent possible, be based on “information on recent market transactions on comparable assets and commercial and/or administrative records related to the value of the investment.”[13]

The South African Development Community Model BIT (2012), in a departure from the commonly applied “fair market value” standard, requires compensations to be determined on a “fair and adequate” basis, with three options to choose from. Two options refer to a “balancing approach,” such that compensation reflects “an equitable balance between the public interest and interest of those affected.”[14]

The India-Belarus BIT (2018) requires the tribunal to consider whether mitigating factors warrant a discrete discount to the award, and take into account “mitigating factors” that can include “current and past use of the investment, the history of its acquisition and purpose, and compensation received by the investor from other sources.”[15]

Conclusions

Albeit there has not been any published award based on these novel approaches aimed to discourage “excessive” investment claims, it is unclear whether this evolution may assist EMDEs in attracting the desirable scale of green energy investment.

Discouraging and further discounting traditional valuations as a result of legislation-driven changes is unlikely to provide the security of returns for investors. Also, switching between various investor protection mechanisms signals a higher risk premium as a result of policy instability. Overall, whilst seeking to reduce potential damages on the part of governments is understandable, changes to that may end up also reducing investment or at least making it more expensive.

The views and opinions expressed in this article are solely those of the author(s).

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