UK withdraws from the Energy Charter Treaty

The UK government has given notice of the UK’s withdrawal from the Energy Charter Treaty.

The Energy Charter Treaty provides a multilateral framework to promote investment in the energy sector within its contracting states, which are principally in Europe but also include states in Central Asia and the Middle East such as Kazakhstan and Yemen.

The treaty provides a number of protections for energy investments, for example rights relating to expropriation and protection from unreasonable or discriminatory measures, and allows investors to bring claims against contracting states before arbitral tribunals where those protections are infringed.

Criticism and attempted reform

In recent years, critics of the Energy Charter Treaty have argued that it is an outdated mechanism for the protection of energy investments, and could inhibit the energy transition by allowing fossil fuel investors to bring claims against contracting states for measures which end or restrict fossil fuel projects (such as, for example, the claims brought by Uniper and RWE against the Netherlands in relation to the introduction of a phased ban on the use of coal to generate electricity).

In response to those concerns, a process to modernise the Energy Charter Treaty began in 2020. A modernised version of the treaty, including a ‘flexibility mechanism’ to allow contracting states to exclude protection for fossil fuel investments, was agreed in principle in June 2022 but has yet to be formally adopted after multiple postponements of the vote. The UK government announced last September that it was reviewing the UK’s membership of the Energy Charter Treaty pending the outcome of the modernisation process; however, the UK’s notification of its withdrawal from the treaty indicates that these efforts were insufficient to change the UK’s position.

In February, the government issued a statement that the UK would withdraw from the treaty, as it had concluded that “there is still no clear route for adopting the modernised treaty”, and that “the failure of the modernisation process means the Treaty is no longer fit for purpose”. The Depositary of the Energy Charter Treaty confirmed on 28 May that it had received the written notification required to formally effect the UK’s withdrawal.

The UK’s withdrawal will take effect from 27 April 2025. The Energy Charter Treaty includes a sunset clause, and so claims can still be brought in relation to investments made before 27 April 2025 for 20 years from that date. This applies both to investments made by UK energy investors in other contracting states, and to investments made in the UK by investors from other contracting states.

Other withdrawals

The UK is one of a number of countries that have decided to withdraw from the treaty rather than wait the final outcome of the modernisation process, with others including France, Germany, Spain, Poland, Luxembourg, the Netherlands, Denmark and Ireland.

Update: In a widely anticipated move, on 27 June 2024 the European Council announced that it had notified the Energy Charter Secretariat of the withdrawal of the EU and its nuclear agency Euratom from the treaty. This approximately halves the membership of the treaty.

As a result, the end of the Energy Charter Treaty anticipated in our predictions for 2024 looks ever-closer, even if the protections for existing investments will remain in place for some time to come under the sunset clause.