Reed Smith In-depth

Key takeaways

  • The United Kingdom has announced its intention to withdraw from the Energy Charter Treaty (ECT). This follows a series of withdrawals by other signatories in 2022-2023.
  • Once withdrawal takes effect, new investments of UK investors (or investments of inward investors into the UK energy sector) will no longer be protected by the ECT.
  • Investors would accordingly be well advised to consider alternative protections, including the availability of other international investment agreements (IIAs).
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What is the Energy Charter Treaty?

The ECT is a legally binding IIA which was intended to promote inter-governmental cooperation in the energy sector and facilitate investment in fossil fuels. It was born out of the break-up of the Soviet Union and first signed in December 1994. The ECT is one of around 2,500 IIAs. It has been ratified by more states (56), and has given rise to more claims (162), than any other IIA.

The ECT contains mutual undertakings, made by nationals of the signatories, for the promotion and protection of investments in the energy sector in each other’s territories. These include commitments by the contracting states to accord investments of investors from other contracting states fair and equitable treatment and constant protection and security. These protections are directly enforceable under the investor-state dispute settlement provisions pursuant to which investors can bring claims directly against a contracting state through arbitration instead of through the local courts.

Who is protected by the ECT?

Any national (including body corporates) of a contracting state to the ECT which holds a covered investment in the territory of another contracting state may benefit from the protections in the ECT.

“Investment” is defined broadly in the ECT as “every kind of asset” and includes “tangible and intangible, and movable and immovable property”, “a company or business enterprise”, “claims to money” or “any right conferred by law or contract”. To fall within the scope of the ECT, the “investment” must be associated with an economic activity in the energy sector.1

Examples of protected investments under the ECT include: shares in a Spanish company which had rights to three solar power plants in Spain;2 ownership of a local subsidiary in Albania which owned and operated a tank farm;3 a shareholding in a Hungarian electricity company;4 a shareholding in two Turkish utility companies which had concluded electricity concession agreements with the Turkish Ministry of Energy;5 and a shareholding in a Hungarian company which owned and operated a power plant in Hungary.6

Why has the United Kingdom chosen to withdraw?

On 22 February 2024, the UK announced that it was withdrawing from the ECT, claiming that it is “no longer fit for purpose”.7

The UK is the eleventh party to announce its withdrawal, following in the footsteps of, amongst others, France, Germany, Spain, the Netherlands and Luxembourg. In July 2023, the European Union also proposed a coordinated withdrawal by the Union and all its member states on the basis that the European Commission “considers the Treaty to be no longer compatible with the EU’s climate goals under the European Green Deal and the Paris Agreement, predominantly due to concerns over continued fossil fuel investments”.

This widespread denouncement of the ECT follows efforts over a five-year period to modernise its text to better align it with modern energy priorities and commitments on climate change.

Stakeholders highlighted the perceived constraints on the signatory states’ regulatory space to adopt energy transition policies as well as continued support and protection for investments in fossil fuels in contradiction of net zero targets (see, for example, the pending claim against the Netherlands arising out of its 2019 law prohibiting the use of coal for electricity production8 and the claim brought by a UK investor against Italy in connection with the latter’s reintroduction of a ban on oil and gas exploration in a coastal area9).

Reflecting these concerns, the proposed amendments included broader coverage for renewable energy investments and the ability for each contracting state to unilaterally exclude investment protections for fossil fuels in its territory.

Despite reaching an agreement in principle on the revised text in June 2022, the parties were ultimately unable to reach a common position, prompting a series of withdrawals by EU member states.