Unravelling the UK’s Energy Charter Treaty Withdrawal 

A formerly-stalwart champion of the Energy Charter Treaty (‘ECT’), the UK confirmed its intention on 22 February 2024 to withdraw from the treaty. Its actions, in untethering itself from the ECT, follows those of nine EU Member States,[1] and calls from the European Commission for a co-ordinated EU withdrawal.[2] The UK’s withdrawal significantly shifts its approach to energy policy and international investment protection. In this blog, we examine the decision’s rationale, and explore its legal and geopolitical implications, analysing its impact on various stakeholders and potential future challenges.  

Disentangling the ECT’s Promise  

Within the ‘invisible college’ of international law, where pacts are woven with threads of ink and consequence, tremors reverberate through the fabric of a once-venerable agreement. The ECT’s tapestry—weaved in an era of fossil-fuel dominance—promised foreign investors security and predictable investor protections. Its aim was to shield them from capricious changes in national policies by enabling investor-state dispute settlement (‘ISDS’) claims against ECT signatory states for violating obligations to promote and protect energy-related investments.[3] Signed in 1994 (and entering into force in 1998), the ECT offered stability in an unpredictable geopolitical environment.

The ISDS mechanism, which was historically prevalent in most multilateral and bilateral investment treaties, has come under increased fire for being opaque, inconsistently applied and unpredictable, with the EU denouncing it from 2015.[4] Other criticisms of such clauses are that they significantly inhibit countries’ regulatory autonomy. It is noteworthy that, historically, ISDS claims have been prevalently used by investors from the EU, UK, Australia and the US, with the majority of fossil fuel and mining ISDS claims between 1995 and 2021 brought against countries in the Global South.[5]

While the UK (which has never been subject to an ECT claim) and the EU assert that their concerns regarding the ECT emanate from that treaty’s interference with their net zero ambitions, a closer examination reveals broader sovereignty, energy security, and political issues. Notably, despite the dominant narrative’s focus on the ECT’s potential harm to environmental efforts, 59% of claims brought under it actually relate to renewable energy investments.[6] A likely driver for withdrawal is that investment treaties like the ECT make it difficult for countries to reduce energy dependency, with foreign governments often using state-owned gas pipelines to prevent diversification of energy supply.[7] The EU has also taken issue with the fact that the ECT, to an extent, challenges the primacy of EU law: an ECJ ruling in Komstroy[8] found that intra-EU arbitration under the ECT is contrary to EU law. In relation to the UK’s withdrawal, some commentators[9] note that a driver for departure may relate to whether the ECT could lead to claims in relation to new petroleum licenses awarded under the Offshore Petroleum Licensing Bill. 

ECT Modernisation Efforts

Agreed in principle in June 2022, the modernised ECT aims to extend the scope of protected investments to include energy transition projects (such as CCUS, biomass, and hydrogen products). It also includes a ‘flexibility mechanism’ that allows states to exclude investment protection for fossil fuels in their territories to align with domestic energy security and climate objectives. Moreover, the modernised ECT also introduces a definition for ‘indirect expropriation’, which affirms governments’ regulatory autonomy to protect legitimate policy objectives (including public health, safety, and environmental objectives).  

However, several EU Member States unilaterally rejected the modernised ECT, which its parties had scheduled for adoption in November 2022. Those EU states resolved that the modernised ECT would continue to remain incompatible with climate commitments. Notably, during the ECT modernisation negotiations, the UK and EU had chosen to exclude fossil fuel-related investments from the treaty’s protection, including for existing investments after 10 years from the new treaty’s entry into force. 

 The Impact of Withdrawal 

The ECT’s unwinding will not allow the UK to immediately renege on its commitments. Its ‘sunset clause’—under article 47(3)—grants existing covered investments continuing protections for 20 years after the UK’s effective withdrawal date, although the UK’s membership of the ECT will have ceased. Crucially, these protections—and arbitration rights— only apply to covered investments made before the UK’s withdrawal. Effective withdrawal will occur one year after the UK notifies its withdrawal from the treaty.  During this one-year notice period, the UK’s membership, along with the UK’s full range of rights and obligations under the ECT, will continue to apply. So, despite withdrawal, during the 20-year sunset period, covered investors may still initiate claims against the UK government under the ECT.

In a recent case, a UK-based investor group, led by Rockhopper Exploration Plc (‘Rockhopper’)—along with its Italian subsidiary—invoked the ECT’s sunset clause in a compensation claim against Italy.[10] Rockhopper alleged a violation of investor protection provisions caused by the Italian Parliament’s reintroduction of a prohibition on oil and gas exploration within Italian territorial waters. Rockhopper made a covered investment in Italy, prior to Italy’s withdrawal from the ECT on 1 January 2016. This investment enlivened an ISDS claim under the ECT, subsequent to Italy’s withdrawal. The tribunal ultimately found that Italy committed an ECT-prohibited expropriation, awarding Rockhopper damages of €184 million, along with approximately €6.7 million in decommissioning costs, with additional interest.[11]

However, withdrawal from the ECT may result in companies pricing in the additional regulatory uncertainty into their contractual arrangements or seek additional commitments and support packages from governments when making investments, especially in the renewables sector. 

Beyond the Law

Considerable uncertainties also remain about what alternative mechanisms for dispute resolution might emerge to rebalance these priorities. Investors may have recourse to dispute resolution under specific support regimes or via procedures in specific regulated sectors. Alternatively, there may be recourse under bilateral investment treaties or under public law doctrines, such as judicial review in the UK. Despite the legal avenues for redress, countries with well-defined, consistent, and transparent regulatory frameworks—coupled with industrial policies, targeted at generating stable returns, underpinned by respect for the rule of law —could instil more investor confidence, while ensuring accountability and environmental safeguards.  

[1] The following EU Member States have notified their withdrawal from the ECT: Germany, France, Poland and Luxembourg. Additionally, Denmark, Ireland, Portugal have announced their intention to do so. Italy withdrew from the ECT in 2016.  

[2] European Commission proposes a coordinated EU withdrawal from the Energy Charter Treaty (europa.eu)

[3] Article 26, Energy Charter Treaty.

[4] Reform of the ISDS mechanism - European Commission (europa.eu)

[5] Manuel Perez-Rocha, “Missing from the climate talks: corporate powers to sue Governments that limit pollution”, Foreign Policy in Focus (Institute for Policy Studies, November 2021).

[6] Renewable energy investors continue to rely on treaty protection: updated statistics on Investment cases under the ECT - Energy Charter.

[7] Armin Steinbach, The EU’s Turn to ‘Strategic Autonomy’: Leeway for Policy Action and Points of Conflict, European Journal of International Law, Volume 34, Issue 4, November 2023, Pages 973–1006.

[8]Case C‑741/19 Republic of Moldova v Komstroy.

[9]UK quits treaty that lets fossil fuel firms sue governments over climate policies | Climate crisis | The Guardian

[10]ICSID tribunal finds that Italy committed an unlawful expropriation under ECT’s Art. 13(1) – Investment Treaty News (iisd.org).

[11] Rockhopper Exploration Plc, Rockhopper Italia S.p.A. and Rockhopper Mediterranean Ltd v. Italian Republic, ICSID Case No. ARB/17/14 [319]