UK to exit the Energy Charter Treaty – what does this mean for energy sector investors?
11 March 2024
11 March 2024
On 22 February 2024, the UK Government confirmed it will withdraw from the Energy Charter Treaty (the ECT), referring to an alleged "failure of efforts to align it with net zero"1. The ECT is a multilateral investment treaty that protects investments in the energy sector in more than 50 signatory states. In this article we consider the background to the UK Government's announcement, as well as the implications for energy sector investors.
Several signatory states have cited environmental concerns as the reason behind their withdrawal from the ECT, claiming that the ECT's investment protection provisions constrain their ability to regulate for climate action and thus inhibit the transition to Net Zero.
At the core of this "concern" are the obligations the ECT imposes on host states to treat foreign investors in accordance with fundamental rule of law standards such as the fair and equitable treatment standard, the need to observe obligations assumed vis-à-vis foreign investors and the obligation to compensate investors at fair market value for any measures with expropriatory effect. Expropriation involves depriving an investor of the value of their investment, a concept which includes but is far wider than just physical seizure.
The ECT gives foreign investors a direct avenue to pursue their rights against the host state in a neutral forum: international arbitration. Accordingly, steps taken by signatory states in their attempts to reach Net Zero (e.g. introducing regulations to limit fossil fuel production and energy generation) could be challenged by energy sector investors via the ECT (as are such measures generally in the energy sector) and, if they were found to be incompatible with the rule of law standards enshrined in the ECT, monetary compensation for damages suffered could be awarded.
A recent example in which a foreign investor seeks such judicial review is a case brought by London-listed oil and gas company Ascent Resources PLC against the Republic of Slovenia in relation to state measures including a fracking ban, which Ascent Resources claims "have destroyed the value of [its] investments in the Slovenian energy sector, and which have de facto deprived [it] of its right to produce gas in Slovenia"2. The company believes that the measures adopted by Slovenia breach its rights under the ECT and the UK-Slovenia bilateral investment treaty, and have caused damages in excess of EUR 500 million which it seeks to recover in international arbitration under the rules of the International Centre for Settlement of Investment Disputes, a specialised public international law organisation that exists under the auspices of the World Bank Group. A decision is pending.
Other high-profile cases under the ECT include claims by Swedish energy group Vattenfall which sought compensation from the Federal Republic of Germany in relation to the accelerated phase-out of nuclear energy for the commercial generation of electricity in Germany, and a series of claims by renewable energy investors from around the globe against Spain, the Czech Republic, and Italy in relation to (retroactive) changes to the remuneration framework for existing solar /PV and wind farms.
States initially focussed on reforming the ECT, including with a view to better support the transition to Net Zero and the ECT signatory states even reached an 'agreement in principle' in June 2022, which concluded the modernisation talks. Several EU Member States effected by such claims rejected the modernised ECT in late 2022 and subsequently announced plans to withdraw altogether. This was followed by a proposal from the European Commission in July 2023 for a coordinated withdrawal of the EU and all its Member States. With the UK being the latest signatory state to announce an intention to exit, modernisation negotiations are now at an impasse.
In light of these latest developments, energy sector investors in withdrawing states (and investors from withdrawing states investing elsewhere) should consider the following:
Withdrawing signatory states must send a written notification of withdrawal to the depositary of the ECT for the withdrawal to take effect. It is not clear when the UK Government intends to send such notification, but in the meantime it maintains 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. This, however, is subject to change in the event of a change in government, which may leave UK energy sector investments vulnerable.
It is unlikely that the withdrawals from the ECT will end here, not least because of the impact on other signatory states of those who originally promulgated the treaty being seen to eschew its protections and assert its inconsistency with Net Zero aims. There are few similar examples of Western democracies advocating the removal of international law protections.
Energy sector investors should 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 scope of available investment protection and that any available causes of action are pursued in a timely manner.
1. Department for Energy Security and Net Zero and The Rt Hon Graham Stuart MP press release, 22 February 2024.
2. Ascent Resources PLC press release, 15 August 2022.
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.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.