The United Kingdom Announces Its Intention to Withdraw From the Energy Charter Treaty

On 22 February 2024, the UK government confirmed the UK’s withdrawal from the Energy Charter Treaty (ECT), blaming a failure of efforts to modernise the treaty and align it with net zero aims. The UK joins nine EU member states, including France, Spain, and Germany, in withdrawing from the treaty.

The ECT is a multilateral treaty that was designed to promote international investment in the energy sector. It gives foreign investors the ability to bring international arbitration proceedings against the host state of their investment, to seek damages where the host state is found to have breached the ECT.

The ECT was signed in 1994, and historically was intended to protect fossil fuel investments, production and transportation and focus on ‘East-West’ cooperation after dissolution of the USSR. Over time, however, the scope of the ECT has become broader, and many cases have also been brought in relation to solar, wind, and other renewables investments following the general shift of focus to renewables sectors.¹ The ECT has become the most litigated investment agreement in the world, with the majority of disputes being intra-EU.²

The UK and EU (which accounted for over half of the members of the ECT) had been at the forefront of efforts to modernise the ECT, and an agreement in principle on amendments to modernise the text was reached in June 2022. However, a vote on the proposed amendments scheduled for November 2022 was postponed at the eleventh hour after EU members were unable to reach consensus. In the weeks leading up to the vote, France, Germany, Luxembourg, the Netherlands, Slovenia, Spain, and others announced their intention to withdraw from the ECT. On 24 November 2022 the European Parliament passed a resolution calling on the European Commission (EC) to begin a co-ordinated exit of all EU members from the ECT, and in July 2023 the EC announced its proposal for the EU block’s coordinated withdrawal.

While the UK remained an advocate for modernisation, in September 2023 the UK announced that it would review its membership of the ECT if there were no agreement on modernisation by November 2023. This announcement came after the rescheduled April 2023 vote on modernisation amendments was also postponed.

On 22 February 2024, the UK confirmed it would indeed withdraw from the ECT. The UK’s actual withdrawal will take effect one year after the Depository of the ECT receives notification of the withdrawal.³ The UK Government has said it “will now instigate”⁴ the process, so formal notification can likely be expected soon (but as at the current date does not appear to have been issued).

In any event, in practice the UK’s withdrawal will not have much short-term (or even mid-term) impact. Even after formal withdrawal, Article 47(3) of the ECT, also known as the ‘sunset clause’, provides investors with 20 years’ continued protection for investments made as at the date the withdrawal takes effect. Legal recourse via arbitration for investors of the UK, or into the UK, could therefore remain a possibility until 2045 at the very earliest. This is much longer than the 10 years of protection for existing fossil fuel investments which was being discussed under the modernisation efforts. Withdrawal should also not affect pending cases or the enforcement of arbitral awards already rendered.

We have previously written about indications provided by EU countries to ‘neutralise’ the sunset clause, but while arguments may arise in relation to UK-related investments, it remains in doubt as to whether the UK has any option but to see out the 20-year sunset provision. As such, investor protections under the ECT are likely to remain in place for quite some time, particularly as Contracting Parties failed to reach consensus on modernising the treaty before departing.

¹ https://www.energychartertreaty.org/cases/statistics/

² https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en

³ Article 47(2) of the ECT

⁴ https://www.gov.uk/government/news/uk-departs-energy-charter-treaty

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.