IEA Urges Portugal to Consistently Maintain its Oil Stockholding Obligation and Commends Initiatives to Develop Competitive Regional Energy Markets

(Lisbon) — 11 October 2004

"The Portuguese government is to be commended for having taken steps towards achieving greater competition in the electricity and gas markets, such as implementing the EU Electricity Directive and launching an Iberian gas and electricity market. These first steps must be followed by others," said Claude Mandil, Executive Director of the International Energy Agency (IEA) at the launch today in Lisbon of Energy Policies of IEA Countries – Portugal 2004 Review. He stressed the importance of implementing the Iberian electricity market (Mibel) without further delay and noted that, while natural gas has been successfully introduced into the Portuguese energy mix, the next steps will be market reform and creating an Iberian gas market. Portugal also faces the challenges of maintaining its compliance with the IEA oil stockholding obligation and reaching the Kyoto target.

Security of Supply
Since oil accounts for 62% of Portugal’s total primary energy supply, a reliable oil supply is key to its energy security. However, since 1992, Portugal has frequently not complied with its IEA obligation of holding emergency reserve oil stocks equivalent to 90 days of net imports. Recent information indicates that Portugal is now complying, which the IEA highly commends. The next challenge is to take steps to ensure sustained compliance. This requires effective enforcement of the regulation of industry-held emergency stocks.
Natural gas reduces Portugal’s high dependence on imported oil and will further diversify energy supply. Whereas the country had formerly been dependent on imports from Algeria, the new LNG terminal at Sines creates potential for supply diversification. The new underground storage facility at Carriço also enhances security of supply.

Portugal needs new power generation capacity since electricity demand is growing rapidly. However, the capacity payments proposed for the Iberian market have not proved to be effective elsewhere to secure adequate supply and alternative options should be considered. Better demand response would reduce the need to invest in new capacity, especially peak capacity.

Energy Market Reform
Portugal’s electricity market is still dominated by one company, Electricidade de Portugal (EDP). The planned full liberalisation of the domestic market will be a major step forward. The project to create Mibel is also important, but is behind schedule and new, fully compatible legislation must be finalised in both Spain and Portugal. Installing more interconnections between the two countries would improve competition and security of supply.

Unwinding the long-term power purchase agreements between the transmission system operator (REN) and main suppliers would create an important opportunity to enhance competition. It is also a prerequisite for the creation of Mibel. Nonetheless, EDP’s high market share warrants attention until interconnection capacity has been increased.

The incumbent gas supplier, GALP Energia, currently dominates the gas market from upstream to retail. It is commendable that the government brought forward the beginning of the gas sector liberalisation from 2008. For effective market opening, it is essential to finalise legislation and the regulatory framework. It should guarantee fair, non-discriminatory and transparent third-party access to the infrastructures, as well as effective unbundling of the supply and network operations. The regulator ERSE - which has been functioning well in the electricity sector - is now preparing gas sector regulation. The Portuguese and Spanish governments are working to create an Iberian gas market, but the project is at a very early stage and the details of its implementation are not yet known.

Since the remaining price ceilings were removed in January 2004, the oil sector has been fully liberalised; this is a welcome development. Yet, despite the decline in GALP Energia’s share of the retail market, it still dominates the domestic market and this situation warrants attention.

Climate Change Mitigation
Portugal’s Kyoto target is to limit the increase of its greenhouse gas emissions to 27% between 1990 and the first Kyoto commitment period of 2008-2012. However, in 2001, total greenhouse gas emissions were already 9.4 percentage points above the target. This requires the rapid implementation of effective policies and measures as well as careful monitoring of energy and emission trends. Attention must also be paid to the cost-effectiveness of the policies and measures deployed. Since domestic measures will not be enough to meet the target, the use of Kyoto mechanisms should be explored. The recent introduction of the Climate Change National Programme (PNAC) is a positive step.

The promotion of renewable energies and co-generation are Portugal’s key policies for climate change mitigation and supply diversification. However, more effort is needed to ensure that the targeted extra renewable energy capacity will be built in time before the first commitment period. For example, the government must continue its efforts to reduce the time needed for licensing procedures. While ensuring predictability of the feed-in tariffs to maintain investor confidence, cost-effectiveness should be improved by reducing the tariffs progressively, as well as the length of the buy-back period. Expanding the use of co-generation will be challenging because it is increasingly difficult to find suitable large heat consumers in the industrial sector.

Demand-side measures should be stepped up because energy demand in Portugal is growing faster than GDP, thus leading to greater energy intensity. This contrasts with the trend in most other IEA countries. Although this increase is partly attributable to rising living standards, Portugal has the potential to improve energy efficiency. Action has been taken recently to strengthen the policies, but a more solid energy efficiency strategy with measurable targets and thorough monitoring is necessary.

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