A Bulwark Removed

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James Rogers, International Arbitration Partner, Jenner & Block, explains why the UK’s withdrawal from the Energy Charter Treaty may not benefit investors in renewable energy.

Much has been written about the UK’s recently announced withdrawal from the Energy Charter Treaty (ECT), but are the campaigners and commentators celebrating this as a success missing the point?

What is the ECT?

The ECT is a multi-nation treaty designed to protect foreign investments in the energy sector. This includes through its promotion, protection and treatment of Investment provisions, which, inter alia, oblige member states to provide fair and equitable treatment to investments, prohibit expropriation, and provide a means for investors to make claims against member states for breach of those obligations. Until recent withdrawals, members included the European Union and the European member states, the UK, Japan, and the former Soviet States of the Commonwealth of Independent States.

In layman terms, the ECT protects investors from arbitrary and/or discriminatory state legislation made at the expense of investments in the energy sector. Let’s assume State A passed legislation reducing the tariff for electricity produced from the burning of coal despite having until recently encouraged investment in that sector. Investors, who were initially encouraged by the state’s support to invest in the first place, may well have a claim against it under the ECT. Similarly, if State B were, for example, to take a North Sea oil and gas production well into national ownership, the investors in that asset might have a claim.

Importantly though, the ECT applies to all investment in the energy sector. The same would be true if we were talking about a wind farm or a solar panel project or a carbon capture and storage project. The treaty was a child of 1990s globalisation and efforts at the time to foster east/west trade in oil and gas. It is therefore closely associated with fossil fuels but it applies equally to investments in traditional energy sources and renewables.

What is the impact of the UK’s withdrawal?

The UK’s withdrawal from the ECT is not immediate. It only becomes effective 12 months from the announcement, made on 22 February, 2024. Moreover, there is a sunset clause such that existing investments enjoy protection for another 20 years, until 22 February, 2045.

The immediate impact is that investment in the UK energy sector made after 22 February, 2025 by investors from other ECT member states will no longer enjoy, for example, a right to fair and equitable treatment from the UK government. The UK can legislate more freely, and arbitrarily to the detriment of such investments even in circumstances where it encouraged and promoted the investment in the first place. This is true also of energy investments made by UK investors in other ECT countries – those investments made after 22 February, 2025 will no longer enjoy protection from arbitrary and discriminatory foreign state intervention.

However, perversely, existing investments are protected until 2045. In other words, the UK’s withdrawal from the ECT has entrenched the protections already afforded to existing investments, including those in the fossil fuel sector, while removing protections for impending and future investments.

What this really means

Those who hail the UK’s withdrawal a success will argue that the ECT had a chilling effect on regulation and was a major obstacle to climate-friendly policymaking. They will argue that legislators were not free to tackle climate change in the best interests of the country, constrained as they were by the strictures of the ECT.

Investors will however see it very differently than Graham Stuart, the UK Minister of State for Energy Security and Net Zero, who argues that the UK will nonetheless “… continue to lead the world in cutting emissions, attracting international investment and providing the strongest legal protections for those who invest here”.  To the contrary, the UK government is removing the “strongest legal protections” that exist for those who invest in the energy sector in this country. Given the UK’s withdrawal, investments in the UK energy sector and by UK investors abroad, including also investments in renewable and green technologies (i.e., the very type of investment that campaigners wish to encourage), are no longer protected against arbitrary state action.

All commentators agree that huge investment is required into renewables and related technology in the immediate future. The need is pressing. However, the financial resources are finite. The UK is one small player in a global economy competing for dollars. And, against a background of Brexit and recent political uncertainty, investors will now look at the country as less politically stable. It makes the country less inviting for investment, whether you are investing in fossil fuel or renewables. Withdrawing from the treaty may therefore not bring the benefits that the UK government hopes and may actually make the UK a less attractive option for international investment in our renewable energy sector, as well as jeopardising UK investments abroad.

A lesson from the recent past

Precedent abounds for why this may not be a good thing. As reported here previously, in the late 2000s, in an effort to meet EU renewable energy targets, the Spanish government introduced a scheme to encourage investment in its renewables sector. The scheme generated a surge in investment; however, following the 2008 economic crisis, the Spanish government reduced the premiums being paid to investors, who in turn sought to recover their lost returns by invoking the arbitration provisions of the ECT. In other words, Spain was legislating to the detriment of renewable infrastructure investment, was not pursuing an agenda in support of climate change objectives, and the ECT provided a remedy for investors.

The ECT was the bulwark against arbitrary state action undermining climate change objectives, which would have otherwise destroyed billions of dollars’ worth of investment in the European renewable energy sector. The UK is removing that bulwark.

And the other high profile ECT offender notable for distancing itself from the Treaty because it saw it as a means of securing Europe’s energy supply? Russia.

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