UK announces withdrawal from the Energy Charter Treaty

The road to modernisation

Following criticism of the ECT for being ‘anti-climate’ and too investor-friendly, the EU Commission launched a modernisation process which aimed to align the ECT more closely with the goals of the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement in order to support the energy transition. States have expressed concern that, to implement the energy sector reforms necessary to fight climate change, member states will have to introduce policies potentially adverse to the interests of fossil fuel (and also renewables) investors. This will expose states to claims under the ECT which offers those investors certain safeguards, including compensation and that changes need to be made to address this. However, with member states at different stages of the energy transition (and some more reliant on fossil fuels than others) the level of political will to amend the ECT has been mixed and achieving consensus difficult.

In June 2022, following 11 rounds of negotiation, all 53 member states reached ‘tentative agreement’ in principle on the modernisation of the ECT. The proposed amendments included phasing out protection of fossil fuel projects and extending treaty protection to new forms of energy and energy related technology, including hydrogen and CCUS.

However, reaching the necessary consensus to then ratify changes was more challenging: the draft text needed to be adopted by the Energy Charter Conference, approved by the EU Council and European Parliament and ratified by 75% of member states. In October 2022, the EU Council failed to reach a qualified majority in favour of the modernised treaty due to France, Germany, the Netherlands and Spain abstaining from the vote.²  This meant that the modernised treaty could not be put to a vote at the Energy Charter Conference in November 2022. The European Parliament then passed a resolution to seek a coordinated exit on the basis that the ECT was incompatible with the EU’s climate goals under the European Green Deal, the Paris Agreement and EU climate law. Later, on 7 July 2023, the European Commission proposed a coordinated EU withdrawal from the ECT.³

The result, therefore, after several years of negotiations has been impasse – the ECT member states’ vote is postponed indefinitely while discussions as to the way forward continue. Although no further progress has yet been made with the EU’s withdrawal, there appears to be little motivation amongst other contracting states to push forward the modernisation process. After the Energy Charter Conference in November 2023 failed to break the deadlock, the UK (which had played a leading role in brokering the ‘tentative agreement’) expressed frustration with the slow progress of the modernisation process.

Meanwhile, France, Germany and Poland have formally withdrawn from the ECT. Like the UK, eleven other member states have announced their intention to withdraw from the ECT – and it is likely that more will follow. The sentiment from European states seems to be that the modernisation proposals do not go far enough. By contrast, the position of other member states, including Japan, is that the modernisation process is not necessary.⁴  With such divergent views among the ECT’s member states, it perhaps comes as no surprise that the modernisation has stalled and the ECT faces an uncertain future.

Impact of UK withdrawal on cross-border investment

In order to withdraw, the UK must provide one year’s notice under Article 47(2) of the ECT. No announcement has been made as to when the UK will commence formal notification of withdrawal. Once the UK has withdrawn, treaty protections will not be available for any new energy investments. Investments made pre-withdrawal will continue to benefit from treaty protection for 20 years under the sunset clause at Article 47(3) of the ECT and we have seen a number of claims made against Italy since its withdrawal in 2016. UK investors investing in other member states will also be impacted as they will no longer have qualifying investor status to benefit from the Treaty.

The UK’s withdrawal from the ECT could deter international investors looking to invest in the UK’s energy industry (both in traditional forms of energy and in renewables). They may see the government’s move as an indication of regulatory instability over coming years as the UK navigates towards net zero. That instability may impact investment value and without the protections of the ECT investors may be left without recourse to the state for compensation. That said, the UK will remain a party to an extensive network of other (mainly bilateral) international investment treaties which may offer similar protections to the ECT.

Future UK involvement

Given the length of time existing investments will continue to benefit from treaty protection, the UK may remain involved in the modernisation process even following its withdrawal. If it does so, it may be able to influence negotiations so that, if ultimately agreed, the amendments (such as including reduction of the timeframe in which investments benefit from protection) apply to member states which have withdrawn from the ECT. If this cannot be achieved, the member states which have withdrawn may surprisingly find themselves in a worse off position than those who have chosen to stay with the ECT.

For further information on previous developments relating to the ECT, please refer to our previous articles here, here and here.