Does the UK’s withdrawal from the ECT signify the end of protection for those who invest in the Energy sector?

The UK government has cited the failure of efforts to modernise the treaty in line with climate change objectives as the main driver behind its decision to withdraw. As we discuss in more detail below, withdrawal from the ECT will not impact investments already made but it will impact those who invest after the withdrawal date leaving their investments at risk of changes in government energy policy, something the ECT was designed to minimise.

The UK's withdrawal from the ECT is part of a larger trend, with nine EU member-states, including France, Spain, and the Netherlands, having already withdrawn from the treaty or having announced their intention to do so, the European Commission publishing a proposal in July 2023 for a coordinated EU withdrawal from it and EU Member States approving such a withdrawal on 7 March 2024. Though a modernised version of the ECT was nearly agreed in 2022, the vote regarding the reforms has been repeatedly delayed.

Impact of departure minimal

The impact of the UK’s departure on existing investors will be minimal. Firstly, unilateral withdrawal from the treaty only becomes effective one year after the Energy Charter Depository is notified in writing of the withdrawal. Secondly – and crucially – the UK’s departure will trigger the ECT’s “sunset clause” which provides that states unilaterally withdrawing from the ECT remain bound by it for a further 20 years with respect to pre-departure date in scope investments. Existing investors will therefore enjoy ECT protection for a further 21 years from 22 February 2024 effectively ensuring that older energy intensive hydrocarbon investments remain protected whilst new investments based on renewable cleaner energy sources will not be covered by the same investment protections, 

To minimise the risk of post-withdrawal claims, a number of EU member-states have cited the CJEU’s decisions in Achmea and  Komstroy  which held that the ECT’s arbitration mechanism to resolves disputes under the ECT is incompatible with EU law. This is part of a wider view by the CJEU that investor-state arbitration as a whole is incompatible with EU law because it does not respect the autonomy of EU law. While the courts of many EU member states have been following these rulings, this argument has not been successful in most arbitral tribunals which have been asked to rule on this issue and has failed in arbitrations seated outside the EU. Additionally, investors have been able to circumvent this argument by bringing claims in more favourable jurisdictions such as the United States, and following Brexit the UK is now insulated against this type of argument. There is, at present, little indication that former contracting states will be able to resist ECT claims arising during the sunset period.

On the one hand it appears that the EU may not have completely lost faith with the ECT. On 1 March 2024 the European Commission (EC) published a proposal for a “Council Decision on the position to be taken on behalf of the European Union in the Energy Charter Conference”  urging Member States who have not yet withdrawn from the ECT to refrain from blocking the modernisation of it. The Proposal recognises the substantial improvements the modernised version will bring and will be welcome news to those states who are still signatories of the ECT. Yet, on 7 March Member States approved in principle the co-ordinated withdrawal from membership of the ECT.

As contracting states ramp up their net-zero efforts, it is likely that energy investors will increasingly seek to rely on the ECT to protect their existing investments. At the end of February , London-listed Landsdowne Oil & Gas was reportedly preparing to file the first ECT claim against Ireland. While no ECT claims have been brought against the UK to date, its departure does little to insulate it against the risk of such claims while the sunset clause operates. What will be of interest to those thinking of investing in the energy sector in the future is what if anything will replace the ECT or will the proposed modernisation of the ECT be enough to encourage future investments in the jurisdictions which are still signatories.