UK announces withdrawal from Energy Charter Treaty

We published an article about the UK's recent announcement that it intends to withdraw from the Energy Charter Treaty (ECT).  

Here are the key takeaways for investors in the energy sector:

• The ECT was introduced to promote international investment in the energy sector by providing protections for investors in fossil fuels.
• Proposals to modernise the Treaty came in the wake of the Paris Agreement and called for better support for states wishing to introduce cleaner technologies.  A proposed modernised text was announced in 2022, but adoption of the text was postponed after EU Member States failed to agree on a common position.  Several states consequently withdrew from the Treaty.
• In February 2024, the UK followed suit and announced its intention to withdraw, remarking that 'Remaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero.'
• The withdrawal will mean that any protections under the ECT for new energy investments in the UK will cease one year from the date of formal notification of withdrawal (which at the time of writing has not yet taken place). 
• However, Article 47(3) ECT (also known as the ‘sunset clause’) provides that the provisions of the Treaty will continue to apply to existing investments (ie those already in existence at the date of the state's withdrawal) for a period of 20 years from the date of withdrawal (ie one year from the date of formal notification of withdrawal). 
• So while the latest announcement might raise concerns among UK investors, pre-existing investments within the UK by contracting parties, or UK investments already made in any remaining contracting parties, would continue to have access to protection under the ECT until at least 2045.
• The European Commission is trying to find a workaround to the long-lasting effect of the sunset clause to assist Member States in achieving net zero by 2050, but no solution has yet been found.  As such, it seems likely that investor protections under the ECT are to remain in place for a significant period of time, despite its critics.