Difficult week for the Energy Charter Treaty

On 22 February 2024, the UK Government confirmed its intention to withdraw from the Energy Charter Treaty (ECT), and formally gave notice of its withdrawal on 26 April 2024. This marks a significant development in the UK’s international energy strategy, and calls the future of the ECT regime further into question. Yesterday, 30 May 2024, the EU followed suit with the Council of the EU formally adopting the decision on the co-ordinated withdrawal of the EU from the ECT.

The UK’s withdrawal is the latest in a series of withdrawals by ECT member states¹ which have followed several unsuccessful attempts to modernise the treaty and align it with modern standards of investment protection and energy and climate objectives, including the Paris Agreement. On 28 May 2024, the ECT Depositary confirmed receipt of the UK’s written notification of withdrawal, and confirmed that it will take effect from 27 April 2025, one year after the Depositary received the UK’s notice. The date also marks the start of a 20-year countdown until the UK’s withdrawal takes effect for existing investments under the ECT, in accordance with the treaty’s sunset clause in Article 47(3).

In addition, last year, the European Commission proposed that its member states and Euratom withdraw in a coordinated manner, to ensure the equal treatment of investors across the EU. In April 2024, the EU Parliament consented to the EU withdrawing from the ECT, and on 30 May 2024 that decision was formally adopted by the Council of the EU.

 

The ECT: a brief overview

The ECT was initially signed in 1994 with the aim of promoting international investment in the energy sector. At the time, fossil fuels dominated global power generation, and the treaty sought to facilitate cooperation on energy matters such as trade, investment, transit, and energy efficiency. Because of the wide protections it affords to investment in both fossil fuels and renewable energy, it became the most frequently invoked multilateral investment treaty, featuring in 162 disputes between states and foreign investors as of 31 May 2024.

However, over time, the ECT has faced criticism over its use in protecting investments in fossil fuels. A perception emerged that the ECT was preventing states from decommissioning fossil fuel infrastructure and complying with their obligations under the Paris Agreement. As global energy priorities shifted toward cleaner and more sustainable technologies, a consensus that the ECT required updating started to grow, and was later cemented by the commitments around the world to achieving net-zero emissions.

As a result, in 2017, the Energy Charter Conference initiated discussions on modernising the ECT, with a goal of adapting the treaty to the evolving energy landscape. After 15 rounds of negotiations, the Modernization Group recommended a revamped text for the ECT, which aimed to extend protections to renewables, including carbon capture, utilisation, and storage (CCUS), as well as hydrogen.

Originally slated for a vote in November 2022, the modernised ECT encountered challenges, with several EU member states withdrawing their support. The culmination of these events was the UK Government’s confirmation that it would withdraw from the ECT.

 

UK withdraws from the ECT

On 22 February 2024, the UK Government officially announced its decision to withdraw from the ECT. This decision came after a comprehensive review process of the UK’s membership that began in September 2023. The UK Energy Security and Net Zero Minister, Graham Stuart, expressed concerns about the compatibility of the ECT with the UK’s transition to cleaner and more affordable energy sources, particularly renewables, and highlighted that the current form of the ECT did not adequately support countries striving to adopt cleaner energy solutions. He also cautioned about the potential for the treaty to penalise the UK for its proactive efforts in advancing these initiatives.

On 26 April 2024, the UK Government notified the Government of Portugal, which is acting as the ECT Depositary, of its withdrawal from the ECT. The ECT Depositary confirmed receipt of the UK’s written notification of withdrawal from the ECT in an official letter dated 27 May 2024 confirming that the UK’s withdrawal will take effect from 27 April 2025.

 

Impact of the UK’s withdrawal on foreign investors

Importantly, the UK’s withdrawal will not have an immediate effect. This is because according to Article 47(2) of the ECT, such withdrawal “shall take effect upon the expiry of one year after the date of the receipt of the notification by the Depositary”. In addition, the ECT’s “sunset clause” – Article 47(3) – guarantees that the ECT protections “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.”

The UK’s withdrawal will impact investors differently. The withdrawal will only become effective on 27 April 2025, which means the ECT will continue to apply to all qualifying investments for one year after the UK’s written notification to the ECT Depository (ie 26 April 2025). This includes both investors with existing investments and investors who will make a new investment during this period.

That said:

1. UK investors with existing investments in the energy sector located in other ECT contracting states, and investors from one of the ECT contracting states with existing investments in the UK, will continue to benefit from the protections under the ECT for another 20 years after the UK’s withdrawal took effect (ie until 27 April 2045); however,
2. UK investors who, at any point after the UK’s withdrawal takes effect on 27 April 2025, make new investments in the energy sector in other ECT contracting states, and investors from one of the ECT contracting states who make new investments in the energy sector in the UK, will no longer be able to benefit from the protections under the ECT.

In practice, this means that new investors will have to rely on other investment treaties that might offer similar levels of protection to investors as the ECT. In that respect, the UK remains a signatory to 85 bilateral investment treaties, and 25 other treaties with investment provisions with other states, that remain in force. Failing that, investors will have to rely on the applicable domestic law. This may cause strategic difficulties, as domestic law does not afford the same standards of protection as the ECT and other international investment treaties and does not allow investors to resort to international arbitration, forcing them to litigate disputes before domestic courts. In the context of international investment, many will regard this as unsatisfactory.

 

Options available to investors

The UK’s departure from the ECT is said to be founded on its commitment to cleaner energy and net-zero goals. While it will have an important impact on new investments, which will no longer benefit from the same substantive protections, existing investments will remain protected for another 20 years.

As a result, investors are advised to monitor any new developments closely, and seek legal advice to understand what protections they might be afforded under the ECT and other investment treaties, and for how long. They might also want to take other proactive steps to protect their investments, including restructuring their investments to obtain access to one of the applicable treaties that remain in force, or securing express guarantees for investment protection with local governments or bespoke investment agreements providing access to international arbitration.

 

Further thoughts

It appears that the ECT’s days in the EU have finally been numbered.

In July 2023, the European Commission proposed a coordinated withdrawal from the ECT by the EU, its member states and Euratom. It appeared to back-track on its position in February 2024, when it put forward another proposal that the EU member states should not oppose the ECT’s modernisation at the Energy Charter Conference. However, the latest developments have removed any doubts over the future of the ECT in the EU. In April 2024, the EU Parliament adopted a joint-recommendation from the Committee on Industry, Research and Energy, and Committee on International Trade that the EU and Euratom should withdraw from the ECT and on 30 May 2024, the Council of the EU formally adopted the decision on the co-ordinated withdrawal from the ECT, which entered into force on the same day. However, as part of a political compromise known as the “Belgian roadmap”, the member states of the EU will be allowed to support the modernisation of the ECT during the next Energy Charter Conference.

The vote of the ECT signatories on the adoption of the modernised version of the ECT is scheduled to take place at the Energy Charter Conference in November 2024. As the legal landscape continues to evolve, keep a close eye on any new developments.

Please contact the authors of this article or your usual DLA Piper contact if you would like further information.

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¹France, Germany, Poland, Luxembourg, Slovenia, Portugal and most recently Spain have formally notified the ECT Depositary of their withdrawal, and Spain, the Netherlands and Denmark have also having announced their intention to withdraw.