Following two years of negotiations, the UK has reached a “landmark” agreement to modernise the terms of the Energy Charter Treaty (ECT).

The treaty – which provides the framework for international trade and investment in energy – was drafted and first published in 1994 when fossil fuels dominated power generation. As such, as the UK increasingly transitions its energy sector to net zero, it had become outdated, leaving the country vulnerable.

Announced today (24 June), the modernised treaty is designed to maintain the current benefits but add new legal protections for taxpayers and investors, as well as reduce the risk of potential costly legal challenges.

It follows several EU countries facing such challenges over reducing reliance on fossil fuels and growing their renewable industries, the government noted. For example, the Netherlands is currently facing a challenge over its phase out of coal, which could cost its citizens £1.1 billion (US$1.4 billion) as they cover the cost of stranded coal assets. Similar challenges have arisen in Italy, Poland and Slovenia.

The modernised treaty has been agreed following negotiations between 53 contracting parties, and is set to be signed in November 2022. It has a much stronger focus on promoting clean, affordable energy, protecting the government’s right to change the energy system in the pursuit of decarbonisation.

“The UK cannot support an outdated treaty which holds back investment in clean energy and puts British taxpayers at increased risk from costly legal challenges,” said Energy Minister Greg Hands.

“Our success in negotiating a modernised treaty will boost our move to cheaper and cleaner energy by providing greater confidence to the private sector investors and risk takers we need for this transition.”

The treaty includes legal protections for overseas investment into the UK in green technologies including carbon capture, utilisation and storage and low-carbon hydrogen production, alongside renewables for the first time. This is designed to give private investors increased confidence as the technologies develop.

Renewables now account for around 40% of the UK’s electricity generation, up from just 1.3% when the original treaty was drafted. The cost of renewables has also dropped significantly over this period, with wind power halving in cost since 2012 while gas prices have increased almost four-fold.

The new treaty follows the release of the Prime Minister’s recent Energy Security Strategy, which was published in response to the current energy crisis driven by record high gas prices that were exacerbated by the impact of the Russian invasion of Ukraine.

It includes plans for a new licensing round for North Sea oil and gas in the autumn, to increase domestic production. The UK is continuing to protect investments in abated gas power, the government noted, but overseas investors in new North Sea oil and gas will not be able to make a legal claim against the UK under the new treaty from the point it comes into effect.

Coal meanwhile will lose its protections from 1 October 2024, when it is set to finish contributing to the country’s generation mix. All of the country’s coal-fired power plants are on track to have been decommissioned by then, although EDF recently announced it will keep its West Burton A coal fired plant running an extra six months so it shutters in 2023, following a request from the government due to the current energy crisis, opening the door for speculation as to the role of coal over the coming years.

“Any measure that encourages investment in renewable energy and supports the transition to net zero is a welcome development,” said Frank Gordon, director of policy at the Association for Renewable Energy and Clean Technology in response to the modernised treaty.

“We need to urgently move to clean, green energy, and renewables are the quickest and cheapest way to achieve this. We hope this modernised treaty will help boost investment in the sector, both here in the UK and around the world.”