Luxembourg

Though Luxembourg is a small country, energy strategies appear to be considered by topic and undertaken in a siloed rather than a unified approach. While the NECP provides a broader system-level view to 2030, the government should also consider translating this into a long-term energy strategy to guide the development of various energy sub‑sectors in a co-ordinated way.

The future energy system will become increasingly interconnected. For example, electricity network development plans (including both transmission and distribution networks) will need visibility on the development and implementation of battery storage and behind-the-meter systems, and aggregation services and corresponding regulatory frameworks. Meanwhile, the development of hydrogen will hinge on industrial decarbonisation plans, electricity availability and the use of the existing gas grid.

Therefore, Luxembourg would benefit from an overarching system-wide plan that is underpinned by robust scenario analysis to provide investment guidance on what energy assets are required in which locations and within which time frames. Given Luxembourg’s high import dependency, it is important to assess this within the broader context of the country’s integration into the European internal energy market. Such system-wide planning would also provide more clarity on the future of the gas grid and could inform measures to prevent depreciation and decommissioning costs falling on other ratepayers or taxpayers (such as a decommissioning fund that is financed by fees levied on current gas users). It could also offer an important opportunity to assess contingency plans (such as CCUS or process heat from biomass) if the hydrogen supply is not available on time or at a reasonable cost to meet decarbonisation demand from industry.

Apart from Luxembourg’s NECP, the TSO’s network development plans and scenario reports for the electricity system already offer a good foundation in this regard. The increased use of scenario-based assessments throughout the energy system planning would further allow for updates to modelling assumptions and cost comparisons of different pathways to course-correct for new developments and technological breakthroughs.

A comprehensive, long-term energy strategy that integrates the different existing planning tools would additionally help communicate government policies and their rationale to the general public more clearly. It would also be of important added value in anticipating and organising cross-border interdependencies. Luxembourg could look to examples in Germany or Sweden, where future energy policy planning is taking a broad, system-wide view.

Luxembourg has made considerable progress on its energy transition in recent years, underpinned by a stable policymaking environment. The government has a number of policy measures in place across sectors to incentivise energy efficiency and decarbonisation solutions in buildings, transport and industry. However, increased uptake requires effectively motivating behavioural change in consumers and mobilising citizens to take action. While financial incentives certainly help, the government should supplement these with a ramped-up communication. This would not only include clear communication on the policy measures available and ways to use them, but it would also delineate the concrete benefits to consumers. While decarbonisation to address climate change is one important objective, the government should equally emphasise the long-term benefits for energy security (by reducing dependence on fossil fuel imports that are vulnerable to geopolitical disruptions) and affordability that the measures can deliver.

The Luxembourgish government has a track record of providing information on political decisions to its citizens through, for example, interviews, press releases and social media, and its Klima-Agence is already doing good work to offer households and small businesses information and advice on energy upgrades, complemented by Klimabonus incentives. The government could build upon these efforts to pursue broader and more system-wide communication to help shift consumer behaviour and increase the uptake of available fiscal measures in support of energy transition goals across sectors.

Beyond fiscal measures, increased communication could also support more active consumer participation in electricity markets using Luxembourg’s highly successful roll-out of smart meters. Targeted communication campaigns to promote increased home renovations for different categories of households would also help, as would efforts to dispel false narratives about heat pumps. Likewise, clear communication to households on the benefits of heat pumps, notably cost savings based on efficiency gains even considering a variance between electricity and natural gas prices, might also support increased uptake.

Highly visible one-stop shops (OSS) that offer guidance to consumers through a personalised approach can increase the number of people reached, build trust and ultimately strengthen the effectiveness of policies. In many European countries, the role of OSS is growing. The communication and outreach dimension is thereby becoming increasingly important, as seen, for example, in the HORIS initiative taking place in Spain, Italy and Portugal that focuses on consumer-centred digital communication. Luxembourg can learn from these established best practices to set up its own OSS.

Energy sector stakeholders also seem to need better information on the available policy support measures and long-term energy policy goals. At present, there appears to be considerable unease on the part of stakeholders and the general public about the longer term outlook for electricity prices. However, considering annually rising CO2 taxes that will progressively increase the prices of natural gas and oil, the business case for electrification might already be stronger than the average citizen assumes. Clear communication from the government could put these developments into perspective and guide the general public toward the most suitable solutions.

Luxembourg’s transport sector is an outsized contributor to total energy consumption (more than half) and emissions (nearly 60% in 2024). Fuel sales to commuters and freight from neighbouring countries refuelling in Luxembourg is a major driver of energy demand in the transport sector, as is a high reliance on private cars for passenger travel.

Though transport has seen more notable emissions reductions compared to other sectors in recent years, sharper drops will be required to meet Luxembourg’s climate targets in the future. To address the high rates of vehicle ownership among citizens, the government could consider higher taxes on vehicles. Luxembourg presently has relatively low vehicle taxes compared to its neighbouring European countries.

Additional measures could be considered relative to those already implemented to encourage the adoption of alternative modes of transport over high‑emission vehicles. These include, among others, a potential revision of ownership or registration taxes for internal combustion engine vehicles and further lowering benefits for company cars (to encourage alternative modes of transport), complementing the existing purchase subsidies for electric vehicles (EVs).

To address the high fuel consumption stemming from fuel exports, the government will need a clearer long-term strategy to align retail fuel prices with those of its neighbouring countries. Its current tool for achieving this is the CO2 tax, which has reached 45 EUR/t CO2 in 2026.

From 2028, the EU ETS2 is moreover projected to introduce an increase in fuel costs across the EU countries, as all European member states are covered by this new legislation. This has an unavoidable impact on Luxembourg’s efforts to close fuel price gaps with neighbouring countries.

The future of the CO2 tax itself is uncertain as the government deliberates on whether or not to replace the tax fully with the ETS2 framework. If it does not preserve an additional CO2 tax, other tools to tackle fuel price divergences with neighbouring countries will need to be explored, keeping in mind CO2 reduction goals.

While any government decisions in this area will have notable immediate fiscal consequences for the state budget, Luxembourg in any case needs to prepare for a wind down of fuel tax revenues as passenger vehicles (both domestic and in neighbouring countries) shift toward EVs over time.

Luxembourg has robust purchase subsidies in place to promote electric light-duty vehicle sales, supporting increased electrification of the passenger vehicle fleet. However, progress on increasing the penetration of electric vehicles in the heavy-duty segment is lagging.

The government significantly strengthened its efforts to address this issue. The 2026 implementation of new policies that increase financial incentives to compensate the price difference between electric and internal combustion engine heavy-duty vehicles is expected to have a positive impact.

One of the key remaining impediments to the uptake of electric trucks is hesitation to undertake upfront investments in a context where the market is quickly evolving and models could quickly become obsolete. The government could additionally consider offering residual value guarantees for electric trucks, whereby it commits to cover the possible shortfall in an asset’s value at the end of its useful life if market conditions fall short of expectations. This would help derisk investments by companies and support increased demand for electric trucks, which would in turn accelerate market growth.

The benefit of residual value guarantees over purchase subsidies is that they avoid an immediate budgetary outlay for the government, and if market development is strong enough, the government may never need to disburse payments.

In addition, though the government has made progress on electric charging stations for EVs, electric trucks still seem to lack enough charging infrastructure to complete freight deliveries. The government should continue supporting a wider buildout of public charging points for trucks (in co-ordination with its neighbouring countries), especially along certain heavily trafficked freight corridors. Notably with high-power, heavy-duty vehicle charging, grid upgrades may be required, so the government could facilitate co-ordination among stakeholders (charge point operators and grid operators). This can also apply not only for public/highway chargers but also for truck depots, where financial support to install overnight chargers would be a useful incentive.

More broadly, the government should focus decarbonisation efforts in the heavy-duty road segment on electrification rather than hydrogen (given the scarcity of supply and the high prices for hydrogen).

As in many European countries that are expanding renewable energy generation to support rapid electrification and large loads (such as data centres and electrolysers), Luxembourg faces surging grid connection requests from renewable generation projects, not all of which will be realised. Already, according to the TSO, solar PV connection requests have breached the NECP’s 2030 target levels, while wind connection requests are quadruple the capacity projected in the NECP.

The situation has forced the TSO to delay connection requests because the grid cannot accommodate them, thwarting much-needed growth in renewables generation. Expansions and reinforcements of the grid are undoubtedly important in this regard. In addition, given the country’s limited grid capacity and cross-border interdependence, a traditional first-come, first-served approach to grid connections risks locking in projects that may not materialise while delaying more viable and mature investments.

To address this, Luxembourg should build on Creos’ ongoing efforts to update its grid connection process, including to move toward a connection process that prioritises projects based on their viability, such as the grid connection reforms recently enacted in the United Kingdom. Assessing grid connections in batches rather than individually, such as in Ireland and Italy, could also speed up connections. In the Netherlands, the regulator allows grid operators to deem certain projects as high priority and fast track their connections.

Such changes will require early engagement of the TSO in renewable energy tenders to provide inputs on project type and location that best suit grid needs and availability. The selection criteria will need to be clearly defined based on specific (and objective) metrics to demonstrate readiness and feasibility, and must be implemented with the utmost transparency to offer maximum clarity to renewable project developers. These efforts would complement those being undertaken by the TSO, which plans to publish a grid capacity map that identifies parts of the grid with extra capacity relative to congested areas.

Given recognised limitations for domestic hydrogen production, Luxembourg will need to rely heavily on imported hydrogen to meet demand. In light of the country’s smaller market size relative to neighbouring countries, a well-connected network will be imperative to ensure that hydrogen flow into and through Luxembourg to support a well-integrated system from which the country benefits. Therefore, co-ordination with its neighbouring countries will be paramount.

Toward this end, the government’s 2025 hydrogen law establishes a legal framework for developing hydrogen pipeline networks. However, private investors need a business case for pipeline investments, which is currently lacking, given that grid operators face major uncertainties on where supply or demand will come from and at what volumes. To start, investors will need clarity on how much of the existing natural gas grid would be repurposed for hydrogen (and therefore no longer used for natural gas) relative to how many new hydrogen lines would be required.

In December 2025, the government designated a system operator to take up its activities in overseeing and planning network development (as called for in the hydrogen law). Complementing these efforts, the government should also introduce pragmatic measures to partially derisk investments by pipeline developers.

One option is investment guarantees that would reduce the financial risks associated with early-stage hydrogen infrastructure projects by protecting investors from potential losses linked to demand uncertainty, technology performance or regulatory shifts, thereby attracting private capital and lowering financing costs. Luxembourg could draw inspiration from Germany’s amortisation account to derisk pipeline investments – which establishes a fund that compensates for high upfront investment costs and low initial revenues – tailoring it to Luxembourg’s unique circumstances.

Other examples of derisking investments include Denmark’s model that combines CAPEX and OPEX subsidies or the Netherlands’ model that applies a combination of CAPEX subsidies with a future tariff calculation that accounts for potential low utilisation during the early stages of market development. Denmark has also considered some alternative financing frameworks for the ramp-up period and Austria has unveiled a roadmap for hydrogen corridors to position itself as a European hub for low-emissions hydrogen. Meanwhile, the United Kingdom is combining an initial subsidy with a regulated asset base model under which the subsidy could be financed by a levy.

Heating accounts for a high share of Luxembourg’s final energy consumption, with most demand still met by fossil fuels. This makes the heating sector a roadblock for achieving net zero targets. District heating can be an attractive solution to use available heat sources (such as waste heat from industries) to efficiently connect large groups of customers and to offer households without other options a heating solution. Under the recast EU Energy Efficiency Directive, Luxembourg is required to undertake comprehensive heat planning and mapping to identify cost-effective decarbonisation pathways, including the expansion of renewable and waste heat use, district heating and cooling networks, and energy efficiency in buildings.

The government is currently working on such a framework, but it should prioritise and expedite these efforts to underpin a broader strategy to decarbonise the heating sector. Toward this end, beyond increasing the administrative capacity on heating at the national level, the government should support local governments (e.g. by defining common planning methodologies and bolstering institutional capacity to undertake assessments) in developing municipal heating plans that lay out how to make their local heating infrastructure climate-neutral over time.

These efforts would include identifying where district heating solutions can be developed economically and where gas connections will no longer be available. This will require the establishment of harmonised standards and methodologies for municipalities to collect and report on heat demand (by building type, density, sectoral use) and potential supply sources (renewables, industrial waste heat, data centres, wastewater plants, geothermal). It would likewise support the alignment of standards on equipment such as heat pumps from the national to the municipal level.

Luxembourg could look to Germany’s example (Heat Planning Act), which goes further than the EU Energy Efficiency Directive and establishes clear targets and timelines for municipalities based on a city’s size and population. Notably, given lock-in effects from investments in heating infrastructure, clarity on the optimal mix of energy efficiency, electrification and district heating for each municipality can help steer investments in the right direction. The Klimapakt offers a good basis to undertake this co-operation, supplemented with targeted sharing of knowledge and resources with municipalities to support their efforts on heat planning. As part of this, strong engagement with local citizens and clear communication to households should be emphasised.

Luxembourg takes a voluntary approach to energy performance improvements in the residential sector. However, given the relatively low rates of energy renovations and the pace required to meet its climate targets, the government might need to consider additional measures to motivate more homeowners to renovate.

One option that would not impose outsized burdens on households is broadening the criteria that trigger a minimum requirement for energy performance when a household undertakes a renovation. In a similar vein, the replacement of heating systems could be regulated to achieve a minimum level of energy performance for the new system.

For instance, replacing an old fossil boiler would need to meet a requirement to upgrade to a minimum energy efficiency level (or GHG/particulate emissions or minimum share of renewables) to ensure that replacements come with significant improvements in energy performance. Not only would this help achieve a baseline level of energy performance improvements over time, but it could also motivate more ambitious voluntary upgrades if complemented with existing information campaigns and financial incentives.

Well-embedded one-stop shops that provide guidance to citizens are driving rising renovation rates in other countries. Luxembourg can build on their lessons learned to spearhead its own infrastructure.

Likewise, the government could regulate a minimum rating when an older home is sold or rented to support the upgrading of the existing building stock. For example, France does not allow a home to be rented if its energy class is too low (G-rated), with the minimum rental class level evolving over time.

Luxembourg has a high share of fossil heating systems in its building sector, especially in the residential sector. Meeting decarbonisation targets will require turning over this fleet of fossil boilers, and in the case of newer units, before the end of their useful lives.

The government could, therefore, consider a progressive system of incentives under the existing Klimabonus scheme whereby earlier replacement of a fossil boiler receives a higher subsidy, progressively declining each year. The government could also include an option to offer higher support mechanisms for switching newer fossil systems, thereby motivating a faster turnaround toward heat pumps (compared to older units that would need to be replaced anyway). Another option could be to offer a time‑limited bonus for buildings with the worst energy efficiency ratings.

The government should also exclude subsidies for replacing new fossil units after the revised subsidy framework is in place to discourage delays in switching to heat pumps. For example, a new fossil boiler installed after the new subsidy takes effect would not receive a subsidy to switch to a heat pump 15 years later. Moreover, differentiating these subsidies by income level would support more progressive outcomes.

Luxembourg could also consider innovative support schemes to lower upfront cost barriers of heat pumps for lower income households and renters. It could, for example, explore Heat-as-a-Service business models, as piloted in the United Kingdom, Denmark and Germany.

Luxembourg has already achieved near-universal smart meter deployment, providing a valuable foundation for both consumer empowerment and system flexibility. However, to date, consumers do not appear to be using their consumption data, leaving an important opportunity to motivate behaviour change or trigger automated solutions for demand-side response untapped.

The government should, therefore, facilitate and motivate the development of services that provide households and businesses clear insights into consumption patterns, allowing them to identify cost‑effective energy savings opportunities (e.g. shifting demand to off-peak or low CO2 periods, improving appliance efficiency, or adjusting heating and cooling schedules). As part of this, the government (through Klima-Agence) could enable the development of digital tools or dashboards – potentially in partnership with utilities – that translate raw data into actionable recommendations, with an emphasis on simplicity and usability.

Moreover, the government should consider linking financial incentives for behind-the-meter equipment purchases (such as PV panels, smart appliances, batteries or EV chargers) to participation in demand-response programmes or broader flexibility services. These flexibility services include shifting electricity consumption away from peak periods, providing rapid load reductions or increases when the grid is stressed, enabling real-time optimisation through aggregators and effective use of smart meters, and allowing distributed assets to offer ancillary services such as frequency support or voltage regulation.

This approach would ensure that public subsidies deliver consumer savings and measurable system-level benefits, such as reduced peak demand, lower grid reinforcement costs and improved integration of variable renewables. Feedback mechanisms from current smart meters can also inform the next round of digital solutions.

For aggregators and service providers, the government could facilitate timely and standardised access to anonymised and consent-based data, enabling energy service companies and aggregators to offer demand-response programmes, bundled energy efficiency services and innovative tariff structures. The government should always ensure the regulatory framework supports third-party data access under strict data-protection safeguards, aligning with EU data-sharing and consumer-consent principles, and address growing cybersecurity concerns.

Communication campaigns targeted at consumers to encourage consent on data use would support these efforts. Such measures would also provide system-wide benefits. Empowering consumers and enabling aggregators to leverage smart meter data will enhance flexibility, reduce peak demand and lower system costs, thereby reducing the need for costly grid reinforcements.