UK Energy Charter Treaty exit – navigating investment protections in the energy sector

Introduction

Last year, the UK Government gave written notification of its withdrawal from the Energy Charter Treaty (ECT), citing an alleged "failure of efforts to align [the ECT] with net zero"¹ as the key reason for its withdrawal. The UK's withdrawal from the ECT took effect on 27 April 2025.

This serves as an important reminder for energy sector investors to reassess protections for their current and future investments in the UK, Europe, and beyond.

Background: the modernisation process

The ECT is a multilateral treaty offering protections for energy sector investments made in the territory of contracting parties. The ECT also gives qualifying investors a direct avenue to commence arbitration against contracting states for alleged breach of those protections.

As we have written previously (here and here), since 2019, efforts have been made to 'modernise' the ECT. A key focus of this process has been to limit its application with respect to investments in fossil fuels while still protecting other energy sector investments. However, several states, including the UK, France, Germany, and Poland, have walked away from the modernisation process and withdrawn altogether from the ECT, arguing that the treaty inhibits the transition to 'net zero'². The EU and Euratom will also withdraw on 28 June 2025³.

On 3 December 2024, the Energy Charter Conference – the decision-making body for the Energy Charter process – adopted a modernised version of the treaty⁴. The amendments to the ECT⁵ were largely negotiated and agreed in principle in June 2022. They include clarifications concerning support for the energy transition, such as a provision in which the contracting parties reaffirm their commitments under the United Nations Framework Convention on Climate Change and the Paris Agreement 2015. They also include a mechanism whereby contracting parties can exclude investment protections for fossil fuels, with a final cut-off date of 31 December 2040. While this mechanism has only limited application to date (the EU and UK agreed to apply this provision but both have since withdrawn) it could potentially bear significant implications for fossil fuel investments as these may lose protection under the ECT in the future.

The modernised ECT will provisionally apply from 3 September 2025 (subject to a number of signatory parties having opted out of its provisional application, including among others Estonia, Japan and Belgium) and will enter into force 90 days after ratification or approval of at least three quarters of the contracting parties. Accordingly, it may be a while before we see the impact of these changes play out. Moreover, any such impact may be significantly limited in light of the withdrawals from the EU, Euratom and a large number of other contracting states.

Implications for energy sector investors

Energy sector investors with operations in withdrawing states (and investors from withdrawing states investing in the territory of another ECT contracting party) should consider the following:

• Post-withdrawal Investments: Investments made after withdrawal takes effect (both in, and by investors from, a withdrawing contracting party) will not be protected under the ECT. For the UK, this means new investments will not be protected under the ECT after 27 April 2025 – that is the position whether those investments are made in the UK by a foreign investor from another ECT contracting party, or they are made in the territory of a contracting party by an investor from the UK.
• Pre-Withdrawal Investments: Qualifying investments made before the withdrawal date (both in, and by investors from, the withdrawing contracting party) could enjoy 20 years of continued protection under the ECT's 'sunset provision'. For the UK, it is anticipated that the provisions of the 'modernised' treaty will not apply (including the fossil fuels final cut-off date of 31 December 2040 mentioned above) and instead the ECT in its old form will govern the protection of those investments. There is a risk that withdrawing states might seek to abandon the sunset provision (whether this is possible under international law remains uncertain), but the UK's stance on this is unclear.

In either circumstance, energy sector investors will need to consider carefully how to maximise protection for both current and future investments. We highlight below some key considerations:

1. Review international investment treaties: Investors should consider the availability of other treaties, such as bilateral investment treaties (BITs), which typically include similar protections to those contained in the ECT, including an obligation to accord fair and equitable treatment to foreign investors, and not to expropriate their investments without effective compensation. The UK has over 80 BITs currently in force. Ideally, investors would look to rely on BITs entered into between the relevant withdrawing state and a non-EU Member State (given that many intra-EU BITs have also recently been terminated). Where BITs are not available under the current corporate structure of the investment, investors should consider whether restructuring is an option. If such restructuring is done before a dispute arises, it is typically considered permissible.
2. Negotiate contractual protections: It will be prudent for investors to seek robust contractual protections in any new contractual agreements with host states. For example, so-called 'freezing' or 'stabilisation' clauses can be used. These clauses specify key regulatory parameters for the foreign operations that would otherwise be subject to changes of the domestic regulatory framework, or taxation, and guarantee them for the life of the investment. Having robust contractual protections will likely become even more important in the absence of ECT protection.
3. Don't delay in respect of existing disputes: Investors with existing disputes should promptly accept a host state's offer to arbitrate that is by default included in the ECT. This will ensure access to a neutral dispute resolution forum if the dispute further escalates, even in cases of withdrawal and termination of the sunset provision. At least as a first step, it is not necessary to initiate a full arbitration to preserve the corresponding rights, but relevant notices must be given to start cooling-off periods running and preserve the investor's right to commence arbitration. In our experience, that first step alone can be enough to avoid formal legal proceedings.

Conclusion

Energy sector investors must stay informed about these developments and obtain early legal advice to maximise investment protection and pursue available legal action promptly.

Notwithstanding the 'modernisation' process, the withdrawal of the UK, the EU and other states from the ECT has marked a significant shift in the landscape of international energy investment protection. Investors should not only focus on the immediate implications of state withdrawals from the ECT but also consider long-term strategies to safeguard their investments. This includes exploring alternative legal frameworks, such as BITs, and ensuring that contractual agreements with host states are robust and comprehensive. By staying proactive, investors can navigate this complex landscape and continue to secure the protection of their energy sector investments regardless of their location.

Authors: Amy Cable, Senior Expertise Lawyer; Emma Johnson, Partner; Arne Fuchs, Global Head of International Arbitration and Charlotte Cattaneo, Trainee.

1. Department for Energy Security and Net Zero and The Rt Hon Graham Stuart MP press release, 22 February 2024.
2. Contracting parties which have withdrawn or have given notice of their intention to withdraw include: Italy (withdrew in 2016 prior to 'modernisation' talks), France, Germany, Poland, Luxembourg, Slovenia, Portugal, Spain, the UK, the Netherlands, Denmark and Ireland.
3. On 30 May 2024, the Council of the EU gave the "final green light" for the EU and Euratom to withdraw following an EU Parliament vote approving the exit.
4. Decision of the Energy Charter Conference, 3 December 2024.
5. The amendments to the treaty in full are set out in the Decision of the Energy Charter Conference, 3 December 2024 and amendments to the annexures are set out here.