Out-Law News 2 min. read

UK announces Energy Charter Treaty withdrawal, citing need to focus on net zero strategy

The UK has announced that it will leave the Energy Charter Treaty (ECT), due to what it described as the failure of efforts to align the Treaty with its net zero commitments.

The announcement, made on 22 February, followed a statement in September 2023 by UK energy security minister Graham Stuart that the UK would be reviewing its membership of the ECT if plans to update it were not adopted. The announcement does not in itself produce any legal effects. The formal withdrawal of the UK’s membership requires one year’s written notice, and the treaty’s ‘sunset clause’ will continue to offer then existing covered investments in the UK protection for 20 years.

The ECT, which entered into force in 1998, was designed to encourage and protect cross-border investments in the energy sector. It defines energy investments widely, including fossil fuels, nuclear energy, and all types of facilities, including renewable facilities, for the production of electricity. The ECT also established the Energy Charter Conference, an inter-governmental organisation which meets on a regular basis to discuss issues affecting energy cooperation.

The UK government’s decision to withdraw from the ECT comes at a time when efforts at modernising the ECT have not resulted in a successful conclusion and several EU member states have also announced their intentions to withdraw. The European Commission and Parliament have called for a coordinated exit from the ECT by the EU itself and all EU member states, although this is not a unanimously supported position.  

Should the UK wish to proceed with its stated intention to formally withdraw from the treaty, it must give one year’s written notice of termination to the ECT Depositary, which is the government of Portugal, under article 47(1). This is normally done via diplomatic channels, and if the UK gives such notice, this fact would be published rapidly on the website of the Brussels-based Energy Charter Secretariat.

The one-year notice period would run from the date when the UK’s notice is received by the Depositary, should notice be given. During this period, the UK will continue to be a full member of the ECT, and the full range of rights and responsibilities for itself, for covered UK investors and for foreign investors with covered investments in the UK will continue to apply as currently in force. 

Following the expiry of this one-year notice period, unless the notice specifies a later date, the UK will cease to be a contracting party to the treaty, according to article 47(2). However, under article 47(3) – often known as the ‘sunset clause’ – foreign investors with covered investments in the UK made prior to the expiry of the notice period will continue to enjoy the right to investment protection and to seek investment arbitration against the UK for a period of 20 years following the end of the notice period. 

The purpose of sunset clauses, which are frequently found in investment treaties, is to provide protection to investors which have invested while the relevant treaty was in force and in reliance on its investment protection guarantees following the termination of that treaty by one of its parties. Their duration often corresponds to a typical payback period for investment in the sector in question. 

The ECT’s sunset clause, for example, was invoked by the UK-based group of investors Rockhopper Exploration Plc, Rockhopper S.p.A and Rockhopper Mediterranean Ltd against Italy, which had withdrawn from the ECT with effect from 1 January 2016. As Rockhopper had made a covered investment in Italy prior to the effective date of Italy’s withdrawal, it was able to pursue investment arbitration against Italy with respect to actions taken by Italy subsequently to its withdrawal. Rockhopper’s claim against Italy ultimately resulted in an award in Rockhopper’s favour of €185 million plus €6,675,391 for decommissioning costs.

The ECT sunset clause under Art 47(3) works symmetrically. This means that UK investors with covered investments in other ECT contracting parties made prior to the effective date of the UK’s withdrawal will also continue to enjoy investment protection and investment arbitration rights against that contracting party for a period of 20 years following the UK’s effective withdrawal date.

The UK’s 22 February announcement did not refer to the ECT’s sunset clause.

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