UK announces withdrawal from the Energy Charter Treaty

On 22 February 2024, the UK Government announced that the UK will withdraw from the Energy Charter Treaty (ECT). The withdrawal will take effect one year after the formal receipt of notice by the ECT depositary, which transmits withdrawal notifications to the ECT Secretariat.

The ECT modernisation process and the UK's withdrawal decision

The ECT sets out a multilateral framework covering the energy sector which, according to the ECT itself, aims to ensure energy security and facilitate reliable cross-border energy flows amongst its Contracting Parties. The ECT also contains investment protection provisions, which permit qualifying investors to bring claims for breach of such protections before international arbitration tribunals.

In 2019, a series of negotiations commenced among the Contracting Parties towards a "modernisation" of the ECT to reflect contemporary energy challenges. By late 2022, proposed revisions to the ECT and related texts were prepared, with proponents arguing that the proposed changes would better align the ECT with global energy transition goals and safeguard States' right to regulate.

However, this process has faltered, with a number of EU Member States now having signalled their intention to withdraw from the ECT. The European Commission issued a formal proposal in July 2023 for a coordinated EU withdrawal from the ECT (see our previous post here).

In light of the stalled modernisation process, the UK commenced a review of its own ECT membership in September 2023, which culminated in the UK Government's decision to withdraw. Upon formal receipt of the UK's withdrawal notification, the UK will join those EU Member States which have already taken steps to unilaterally withdraw from the ECT.

The withdrawals of France, Germany and Poland all became effective in December 2023, and those of Luxembourg and Slovenia are to follow in the coming months of 2024. Italy had already withdrawn from the ECT, effective from the start of 2016 (see our previous post here), while other EU Member States including Spain, the Netherlands, and Denmark have also announced an intention to withdraw.

In announcing the UK's decision to withdraw, Minister for Energy Security and Net Zero, Graham Stuart, noted the UK Government's view that modernisation negotiations "have stalled and sensible renewal looks increasingly unlikely".

On 1 March 2024, the European Commission tabled a new proposal (see here and here) for a Council Decision to the effect that the EU would not obstruct the adoption of a modernised ECT framework. However, the proposal states that the draft Decision for the EU itself to withdraw remains under consideration within the Council, and that if the EU withdraws then all remaining EU Member States must also do so within a reasonable period.

Comment

The UK's decision to withdraw from the ECT continues the trend of Contracting Party exits evident in recent years.

It should be noted that the UK's withdrawal will not take immediate effect – the withdrawal will only become effective one year after the ECT depositary's formal receipt of the UK's withdrawal notification. Moreover, Article 47(3) of the ECT (the so-called "sunset clause") also states that the ECT's provisions continue to apply to qualifying investments hosted by a withdrawing Contracting Party, or made by qualifying investors of that Contracting Party, for a period of 20 years from the effective date of withdrawal.

If you would like to discuss the impact of the UK's withdrawal decision on your business or investment plans, please contact Andrew Cannon, Partner Hannah Ambrose, Partner, Jefferi Hamzah Sendut, Associate, or your usual HSF contact.

The authors would like to thank Marcus Aklaghi Monfared for his assistance with this post.