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25 Mar 2026
Insight
London
Political risk in the global energy sector is not new. Investors across Europe, the US and other OECD and emerging markets have long faced governments revising or reversing the regulatory frameworks underpinning investment decisions. Reform UK’s proposals, perhaps more than three years from an election, to “strike down” Contracts for Difference awarded under renewables Allocation Round 7 are a timely reminder that political risk persists in the UK and other advanced economies, and that the assessment and management of such risk remains a routine part of long‑term energy investment. This article considers the relevant legal landscape and what protections and safeguards may be available to investors.
Moreover, political risk is often portrayed as an emerging-market concern, relevant only where rule of law is fragile and property rights uncertain. That characterisation was always simplistic, and it has never properly held true for energy. In the UK, Brexit provided a clear illustration of how profound political change can reshape the legal, regulatory and economic assumptions underpinning long‑term investment, even in a mature market. The energy transition has since sharpened, rather than displaced, these risks in the UK, many EU Member States and the United States amongst others.
Energy infrastructure involves large upfront capital, long term assets, and returns dependent on regulatory frameworks spanning decades. This creates an acute “time-consistency problem”: governments must credibly commit to stable future terms to attract investment, yet once capital is deployed those governments can face strong incentives to renege through price caps, tax changes or other intervention. In the EU and the UK, this problem is mitigated through independent regulators, long-term contracts and other measures designed to make reversal costly and difficult enough to serve as a credible commitment device.
Politicians considering retrospective action against ideologically objectionable investments may realise that some of their own priority projects depend on similar commitment devices. Relitigating the past consumes political capital that cannot be spent on delivery, and the resulting harm to affordability and deliverability may ultimately put those future projects at risk.
Paul Butcher, Director of Public Policy
Drivers of political risk
In advanced economies, political risk arises from two (often blurring) drivers. The first is values-driven: governments withdraw commitments on ideological grounds. Germany’s nuclear phase-out is the classic example.
The second is opportunistic reversal of a regulatory commitment on the basis that governments might feel that once investments are locked in, fiscal costs can outweigh reputational ones. Bulgaria, Czechia, Italy, Romania and Spain each reduced or restructured solar subsidies affecting existing installations. The main drivers were greater-than-expected uptake, falling technology costs (creating windfall profits for some) and post-2008 fiscal pressure.
In the context of the energy transition these drivers increasingly merge, with affordability arguments embedded in ideological debates. In the US, the Biden administration cancelled the Keystone XL permit on day one (triggering claims) while then enacting the Inflation Reduction Act’s long-term clean-energy incentives. The current Trump administration has since taken multiple executive and other actions against the Inflation Reduction Act framework before many projects reached financial close.
Energy investors have always had to navigate political risk, but the pace and scale of policy change in mature markets is reshaping how they think about long term protection mechanisms
Lewis McDonald, Global Energy Sector Leader
Regardless of jurisdiction, each reversal risks stranding costs for investors who relied on the relevant prior policy.
The UK exhibits a parallel dynamic. After Russia’s 2022 invasion of Ukraine, investors faced conflicting North Sea signals: encouragement for new oil and gas licensing alongside taxation measures that eroded project economics. By contrast, the 2024 Labour government’s position is to transition more decisively from hydrocarbons towards net zero, creating stranded-asset risk for those who responded to earlier policy cues.
Reform UK, currently leading in the opinion polls with over three years until the next election, advocates reviving full North Sea production, repealing the Energy Profits Levy while striking down any CfDs from Allocation Round 7 or future rounds. Its 2024 manifesto, amongst other ideas at that time, also proposed 50% nationalisation of utilities, with the remainder to be owned by UK pension funds. Other parties also polling well in several EU Member States have similarly radical proposals for the energy sector.
Across every major UK greenfield energy model that we have advised on, from the Thames Tideway Tunnel to nuclear and CCUS, the common thread has been the use of long‑term contractual and regulatory mechanisms to manage political risk. Whether through RABs, bespoke CfDs or tailored government support packages, these frameworks are designed to make future policy reversal legally and economically costly. That logic underpins investor confidence across the energy transition.
Professor Dr Silke Goldberg, Partner and Global Head of ESG/Sustainability
Public and human rights law
Investors facing adverse UK government action have potential recourse under public and human rights law, including potential damages.
Key protections include Article 1 of the First Protocol to the European Convention on Human Rights (A1P1), given effect through the Human Rights Act, which protects peaceful enjoyment of possessions (including licences, contractual rights, legitimate expectations and physical assets). Interference must be lawful, pursue a legitimate aim and be proportionate. A1P1 litigation has delivered success for investors in the UK renewables context and provides a route to challenge sudden, retrospective or inadequately compensated regulatory or legislative changes.
Such claims are technically demanding, with short time limits, so early advice is essential. Any move to withdraw the UK from the ECHR, as proposed by Reform UK, would also have to be considered, triggering deeper analysis of common law protections.
UK courts will look closely at the lawfulness of Government decisions which adversely affect investors' established rights. Public law and human rights claims can provide effective redress for those affected, and we have recently helped organisations to deploy these tools in the face of adverse sectoral changes.
James Wood, Partner
Investment treaty protection
The UK has agreed bilateral investment treaties with many jurisdictions, including the Hong Kong Special Administrative Region, China, Singapore and the UAE. Protection also exists for certain investments in the UK under the Energy Charter Treaty, a multilateral treaty protecting investments in the energy sector. For qualifying foreign investors, investment treaties can deliver broader protections than domestic law, enforceable through international arbitration.
Key protections include fair and equitable treatment (usually encompassing the protection of legitimate expectations, transparency and due process), non-discrimination, and fair market-value compensation for expropriation or equivalent measures. No direct government contract is required.
The track record is well-established: numerous successful claims followed retrospective investor renewables changes against Spain, Italy and Bulgaria.
As the Spanish renewables cases have shown, investment treaties can be highly valuable to mitigate against the impacts of significant changes in the energy sector. More broadly, we have worked with investors across various sectors and regions who have looked to these international law protections in their risk planning at investment stage, or as a route to protection in response to anticipated government action, such as legislative change, licence cancellation or nationalisation.
Hannah Ambrose, Partner
Investments can be structured, or existing ones restructured, proactively, to bring the investment within scope of a treaty coverage, but early action is critical. Treaty analysis should therefore form part of routine risk management. In our experience, the credible threat of a treaty claim often provides significant leverage in discussions with government, serving as a practical tool for value protection rather than merely a litigation remedy of last resort.
Please get in touch if you would like to explore any of these issues.
Key contacts
Paul Butcher
Director of Public Policy, London
James Wood
Partner, London
Hannah Ambrose
Partner, London
Dr Silke Goldberg
Partner, London and Israel Group
Lewis McDonald
Partner, London
Sarah Pollock
Partner, Head of Energy Sector, London
Tom Marshall
Partner, London
Andrew Cannon
Partner, Head of International Arbitration, London and Paris
Legal Notice
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills Kramer 2026