UK Withdraws from the Energy Charter Treaty – Key Points for Investors in the Energy Sector

On 22 February 2024, the UK government announced its intention to withdraw the UK from the Energy Charter Treaty (ECT).

The ECT provides substantive protections to foreign investors making investments into projects in the energy sector – including renewable projects – and enables investors whose rights have been affected by government action to bring claims in international arbitration to protect those rights. There are currently more than 50 countries who are parties to the ECT.

An extensive effort has been underway among the ECT parties to amend the provisions of the ECT, in order to “modernise” it. These efforts have stalled in the last year or so, leading the UK Government to conclude that amendment discussions have reached an impasse and that “The European Parliament elections in 2024 mean modernisation could now be delayed indefinitely”. A number of European countries, including France, Germany and Poland, have already announced their withdrawal from the treaty.

In announcing its intention to withdraw, the UK Government also stated that “The Energy Charter Treaty is outdated and in urgent need of reform, but talks have stalled, and sensible renewal looks increasingly unlikely. Remaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero.”

The ECT has notably been used by many investors in renewable energy projects to safeguard their rights against government actions that impacted those renewables investments. The withdrawal will mean that UK investors making investments into energy projects abroad, whether renewables or oil and gas projects, will no longer be able to rely on the ECT to protect their rights in new projects, once the withdrawal takes effect.

Similarly, foreign investors making investments in the UK energy sector will not be able to rely on the ECT’s protections for new projects, once the withdrawal takes effect.

The withdrawal of a member from the ECT is governed by Article 47 of the ECT. The withdrawal will take effect one year after the date when written notification is received by the Depositary of the ECT (the Government of the Portuguese Republic). According to public records, the UK has not yet completed that formal step required under the Treaty.

Once the withdrawal takes effect, new projects will therefore not benefit from the protections of the treaty. However, existing projects (whether by UK investors abroad or foreign investors in the UK) will continue to benefit from protection: the ECT contains a safeguard commonly referred to as a “sunset clause” (Article 47(3)), which provides that “the provisions [of the ECT] shall continue to apply to Investments made in the Area of a Contracting Party by Investors of other Contracting Parties or in the Area of other Contracting Parties by Investors of that Contracting Party as of the date when that Contracting Party’s withdrawal from the Treaty takes effect for a period of 20 years from such date.” [emphasis added]

In other words, existing investments covered by the ECT at the time when the withdrawal takes effect (more or less one year from now) will continue to enjoy the protection of the ECT for a further 20 years. This means that until that long-stop date expires, investors will still be able to commence or pursue arbitration proceedings under the ECT in respect of investments that pre-dated the effective date of the UK’s withdrawal from the ECT. That said, businesses with potential claims would be well advised to consider whether such claims should be made sooner rather than later; the situation remains dynamic and further changes may come. In any future arbitrations, it should be expected that the withdrawal will place further emphasis and scrutiny on establishing the exact time when an investment is deemed to have been made for the purposes of an ECT claim.

It may also be that the UK adding its name to the list of countries exiting the ECT encourages other states to follow suit. The EU has already expressed its intention for EU member states to withdraw from the treaty. Close attention should be paid to developments in this area over the coming months and years.

Businesses making foreign investments in the energy sector will need to consider the implications of the UK’s withdrawal from the ECT carefully with their advisors and, where possible, seek alternative means to protect their investments. This is not limited to UK companies, or to companies making investments in the UK, since other countries may well take the same step in due course. It may be that, with proper advice, adjustments can be made to improve the position for investors making investments in foreign energy projects. The options available will depend on the parties involved and nature of the investment, but may include:

1. Considering the application and (varying) scope of other Investment Treaties to which the UK is a party.
2. Ensuring, where relevant, that contracts include appropriate and unambiguous dispute resolution mechanisms by way of arbitration (and in some cases, expressly excluding the jurisdiction of national courts and state immunity).  In particular, regard will have to be had to the seat of arbitration.
3. Incorporating investment vehicles in alternative jurisdictions, where doing so would ensure investment treaty protection.

At Mantle, our team is dedicated to resolving disputes in the energy sector. We know the energy business and have many years of experience navigating issues with foreign investments in the renewables and oil and gas sectors. We assist clients with investment treaty structuring advice and, where necessary, fight for our clients’ investment treaty rights in arbitrations. If you think you may be impacted by the UK’s decision, please do not hesitate to ask us what it means for your business.

Posted by: Alexander Slade and Alice Andreoletti