The UK and others exit the Energy Charter Treaty – what does this mean for energy sector investors?

In March 2024, we wrote about the UK Government's announcement of its intention to withdraw from the Energy Charter Treaty (ECT), the background to this decision and the implications for energy sector investors. Since then, the UK, other state signatories and the EU have taken further steps to break away from the ECT. While there remains talk about the modernisation of the ECT, its days - at least in its current form - are numbered. 

In this article, we remind energy sector investors what steps they should be taking to protect their investments in light of these developments. 

What you need to know

• On 28 May 2024, the Depositary of the ECT confirmed receipt of the UK's written notification of withdrawal from the ECT, with the withdrawal to take effect on 27 April 2025¹. Meanwhile, France, Germany and Poland have already left the ECT; Spain, Luxembourg, Slovenia and Portugal have given written notification of withdrawal; and Ireland, the Netherlands, Denmark are close to following suit. On 30 May 2024, the Council of the EU gave the "final green light"²  for the EU and Euratom to withdraw following an EU Parliament vote approving the exit.
• These latest developments will impact those who have invested in the European energy sector, investors from withdrawing states who have invested in other ECT states, and those seeking to make new investments in the energy sector. It is imperative that those investors consider alternative means to protect their investments against political risks and regulatory change, including by concluding appropriate contractual safeguarding mechanisms and/or bilateral investment treaty protection.
• Energy sector investors with existing problems vis-à-vis one of the withdrawing states are in a particularly difficult position and need to act quickly to avoid being left with no course of redress at public international law.

Implications for energy sector investors

Energy sector investors in withdrawing states (and investors from withdrawing states investing in other ECT signatory states) should consider the following: 

1. Those looking to make new energy sector investments should not delay. Withdrawal from the ECT takes effect at least one year after written notification. (In this regard, the UK's withdrawal will take effect on 27 April 2025.) Once withdrawal takes effect, new energy investments (both in, and by investors from, the withdrawing state) will not be protected under the ECT. However, investments already made at this point in time will likely continue to enjoy protection for a period of 20 years under the so-called 'sunset provision' of the ECT.
2. There remains a risk that withdrawing states also abandon the sunset provision (although whether this is achievable under international law is a controversial point). Investors therefore should take steps to maximise the protection of their investments through different mechanisms. Most importantly, it would be prudent for investors to seek to negotiate appropriate investment protections with the host-state in their contractual agreements related to the investment. For example, so-called 'freezing' or 'stabilisation' clauses can be used. These clauses specify key regulatory parameters for the foreign operations that would otherwise be subject to changes of the domestic regulatory framework, or taxation, and guarantee them for the life of the investment. Having robust contractual protections will become more important in the absence of ECT protection.
3. It will also be crucial for investors to consider whether they can benefit from investor protections contained in bilateral investment treaties (BITs), as an alternative to the ECT (the investment protection chapter of which operates as a multi-lateral investment treaty). Many states maintain a broad network of BITs which typically include similar protections to those contained in the ECT, including an obligation to accord fair and equitable treatment to foreign investors, and not to expropriate their investments without effective compensation. For example, Spain is a party to more than 80 bilateral investment treaties and France is a party to more than 100. Ideally, investors would look to rely on BITs entered into between the relevant withdrawing state and a non-EU Member state. Where BITs are not available under the current corporate structure of the investment, investors should consider restructuring. If such restructuring is done before a specific dispute arises, it is typically considered permissible and helps attract the highest protection possible.
4. Investors with existing disputes should accept the host states' offer to arbitrate that is included in the ECT as quickly as possible. This will help ensure that a neutral dispute resolution forum remains available if the dispute further escalates, even in cases of withdrawal and termination of the sunset provision. At least as a first step, it is not necessary to initiate a full arbitration to preserve the corresponding rights, but relevant notices must be given to start cooling-off periods running.
5. While the EU has now confirmed that it will withdraw from the ECT, the Depositary of the ECT is yet to confirm receipt of formal notification of withdrawal (and withdrawal will not take effect until at least one year after written notification). There is still time for investors to bring claims against the EU. In October 2023, the first ever ICSID claim against the EU was registered and the ECT has been listed as the applicable instrument in that dispute³. However, investors are unlikely to be able to wait to see how that case concludes before taking similar steps.
6. The ECT covers much more than protection of foreign investments: its stated purpose is to provide a legal framework to promote long-term cooperation in the energy sector. As matters stand, there is no multilateral instrument that replaces the ECT's legal framework, and so the latest developments are likely to have a significant impact on international cooperation in the energy sector more generally. It remains to be seen how the 'holes' left by the ECT will be plugged (if indeed there is any attempt to do so at all).

Looking forward – actions to take

In respect of the UK, in our last article we noted the government's insistence that it remains an attractive destination for energy sector investors across the board, including in continuing to support investment in North Sea oil and gas⁴. However, with the upcoming general election this is subject to change – particularly in the event of a new Labour government, which may leave UK energy sector investments further vulnerable. 

Further exits from state signatories are inevitable, with Ireland, the Netherlands and Denmark all having confirmed their intention to withdraw. While there remains talk about the modernisation of the ECT (and it has been confirmed that EU member states which are still party to the ECT and are present at the Energy Charter Conference expected to take place in late 2024 shall exercise their votes at that Conference in such a way as not to prevent the adoption of the modernised ECT⁵), its days - at least in its current form - are numbered. 

Energy sector investors should continue to follow the developments closely and be on the lookout for further exits. It is crucial they remain alive to these developments and obtain early legal advice to ensure their investments continue to attract the maximum investment protection available under public international law and that any available causes of action are pursued in a timely manner.

^{1. Depositary of the ECT press release, 28 May 2024.}

^{2. Council of the EU press release, 30 May 2024; Council Decision (EU) 2024/1638 of 30 May 2024 and Council Decision (EU) 2024/1677 of 30 May 2024.}

^{3. Klesch Group Holdings Limited & others v. European Union (ICSID Case No. ARB(AF)/23/1), investorstatelawguide.com.} 

^{4. Department for Energy Security and Net Zero and The Rt Hon Graham Stuart MP press release, 22 February 2024.}

^{5. Council Decision (EU) 2024/1644 of 30 May 2024 and Council Decision (EU) 2024/1644 of 30 May 2024, Article 1(2).}