Luxembourg 2020

Energy Policy Review
In this report

The IEA regularly conducts in-depth peer reviews of the energy policies of its member countries. This process supports energy policy development and encourages the exchange of best practices and experiences.

Luxembourg experienced strong economic and population growth between 2008 and 2018. For most of that decade, energy demand and carbon dioxide emissions fell significantly, but they started to increase again in 2016. The government has adopted ambitious energy sector targets, including a 50-55% reduction of greenhouse gas emissions by 2030. Luxembourg faces challenges achieving those targets. Low energy prices for consumers are creating a barrier to the investments needed in energy efficiency and renewables. And the country has a fossil fuel-intensive energy mix driven by a high demand for transportation fuels, notably from transiting freight trucks.

Luxembourg is embedded in the European electricity market, a sector that is transforming swiftly as rising shares of variable renewable generation, such as wind and solar PV, put increased attention on security of supply. In this context, Luxembourg plans to expand and upgrade its electricity grids, but the country would benefit further from the deployment of measures to increase energy storage and demand-side response in its power system. It is also important to ensure competitive markets that foster innovation and new energy services.

In this report, the IEA provides a range of energy policy recommendations to help Luxembourg smoothly manage the transition to a smart, flexible and sustainable energy system.

Executive summary

Since the 2014 IEA review of Luxembourg’s energy policies, the country has made progress on its energy sector priorities of ensuring security of supply, promoting energy efficiency, increasing the use of renewable energy and reducing greenhouse gas (GHG) emissions. From 2007 to 2017, Luxembourg’s gross domestic product (GDP) grew by 18% and its population increased by 24%, the fastest population growth among IEA member countries. Over the same period, total final consumption declined by 7%, indicating a decoupling of energy demand from GDP and population growth. The country also achieved notable reductions in GHG emissions. In 2017, total GHG emissions were down 20% from 1990 and 21% from 2005. From 2008 to 2018, Luxembourg’s share of renewables in total primary energy supply (TPES) more than doubled, from 3.3% to 7.5%.

The government has adopted ambitious energy sector targets for 2020 and 2030. However, it is unclear if existing policies and support schemes adequately address the challenges presented by rapid population growth, an expanding economy and the current dependence on fossil fuels. This is especially true for the transport sector, which in 2017 accounted for 54% of energy demand and 65% of non-ETS GHG emissions. 1 Luxembourg’s low cost of energy and the high purchasing power of its consumers are also a barrier, as they limit interest to invest in renewables and energy efficiency. Current policies and support schemes should be analysed, monitored and adjusted as needed to ensure a cost-effective achievement of Luxembourg’s energy sector targets. Luxembourg’s plan to gradually introduce carbon pricing that takes into account socio-economic impacts could provide a simple and more direct method to drive the transition to a clean, flexible and sustainable energy system.

Luxembourg’s energy system is characterised by high import dependence and reliance on fossil fuels. In 2018, 95% of its energy supply (100% of oil, natural gas and biofuels and 86% of electricity) were imported. It had the fourth-highest share of fossils fuels in TPES (78%) and the highest share of oil in TPES (60%) among IEA member countries. Oil is by far the dominant energy source, covering most transportation demand, but also notable shares of heating demand in the residential and commercial sectors. Natural gas is the second-largest energy source, covering large shares of industrial, residential and commercial demand.  

In 2018, renewable energy covered 7.5% of TPES and came primarily from imported biofuels used in transport and biomass used in combined heat and power plants, along with small but growing contributions from electricity generated by wind and solar photovoltaics (PV). Hydropower contributes to the renewable energy share, but is not expected to grow. District heating is mainly limited to the commercial sector, but could play a more important role in meeting heating demand in the growing residential sector. Coal use has been almost eliminated with just a small share of non-energy use in industry.

European Union (EU) directives are a key driver of Luxembourg’s energy sector targets and policy. The government is also committed to international climate targets of the Kyoto Protocol and the Paris Climate Agreement. Luxembourg is pushing for a more aggressive approach on energy transition at the EU level and in some cases has adopted national targets that exceed the requirements of EU directives.

Luxembourg’s renewable energy share is growing; it reached 6.4% of gross final energy consumption in 2017. Renewable energy statistical transfers from Estonia and Lithuania will be used to cover any gap to reach the 2020 target of 11% renewable energy in gross final energy consumption. Without a significant effort to reduce diesel sales in 2020, Luxembourg is running a high risk to miss its 2020 target of reducing non-ETS CO2 emissions by 20% compared to 2005 levels. In 2017, Luxembourg’s energy consumption was 48.4 terawatt hours (TWh), in line with the 2020 energy efficiency target of not surpassing 49.3 TWh in final energy consumption. However, energy consumption has been increasing since 2016, especially in the transport sector. This continued growth will challenge the country’s ability to meet the 2020 energy efficiency target.

Luxembourg’s draft National Energy and Climate Plan (NECP) defines its 2030 energy sector targets. The government has adopted a 2030 target to reduce non-ETS emissions by 50-55% versus 2005 levels, which exceeds the 40% reduction required by the EU and is in line with a below 2°/1.5° global temperature target. The draft NECP contains a 2030 renewable energy target of 23-25% of gross final consumption and a 2030 energy efficiency target of not surpassing 35.6 TWh of final energy consumption. Luxembourg must submit a finalised NECP to the European Commission by the end of 2019. Luxembourg is pushing for net-zero GHG emissions and 100% renewable electricity by 2050. Its ambitious energy sector targets (especially the 50-55% GHG reduction by 2030) will require a significant shift in its carbon-intensive energy mix, particularly in relation to the heavy reliance on oil in the transport sector.

Luxembourg has numerous support schemes to achieve its energy sector targets and long-term energy sector goals. The government currently provides support for renewables through a feed-in tariff and premium tariff for electricity generated from renewables, as well as investment subsidies supporting deployment of renewable energy projects. In 2018, Luxembourg introduced a tender system for PV projects and prepared legislation to support self-consumption of renewable electricity and encourage consumers to be active market participants (prosumers). Under the new law, which is supposed to enter into force in early 2020, electricity from renewable energy directly consumed at the generation site will be exempt from grid fees.

Prime House is Luxembourg’s main scheme to support energy efficiency renovations and building integrated renewable energy. In January 2017, the government reformed the scheme to provide more generous investment subsidies and also established the Climate Bank programme, which provides low-rate climate loans to encourage residents and companies to undertake energy efficiency renovations.

In 2015, Luxembourg introduced an energy efficiency obligation scheme, which requires electricity and gas suppliers to realise cumulative annual energy savings of 1.5% for end users through 2020. To encourage energy efficiency in the transport sector, annual vehicle registration fees are higher for less efficient vehicles. The Climate Pact programme, created in 2012, provides technical advice and funding to help municipalities implement measures on climate, renewables and energy efficiency. Municipalities receive certifications based on the number of measures they implement. The pact has been signed by all 102 municipalities and as of 2018, 88 had received certifications.

Luxembourg has embraced an e-mobility initiative aimed at electrification of the transport sector to reduce GHG emissions and fuel imports. The draft NECP contains a goal for 49% of all vehicles registered in Luxembourg to be electric vehicles (EVs) by 2030. Luxembourg is supporting e-mobility with subsidies for purchasing EVs, investment in a national EV charging network and by encouraging a shift from private vehicles to electrified public transportation. The Modu 2.0 Sustainable Mobility Strategy includes a goal to increase the use of public transportation by 50% from 2017 to 2025 and defines measures to improve the quality of electrified public transportation, including investment in park and ride centres linked to a major reworking of bus and train infrastructure.

Luxembourg expects sustained growth in electricity demand driven by increasing population and economic activity and by demand from e-mobility, heat pumps and large data centres. Luxembourg aims to cover over a third of 2030 electricity demand with renewables, mostly through variable renewable energy (VRE) from PV and wind generation. The share of VRE generation in imported electricity is also expected to increase significantly. Taken together, these factors will require substantial investment in electricity infrastructure. As approval processes for new transmission lines can take several years and grid projects could lag behind demand increases, the expansion of VRE generation could potentially result in network congestion and curtailment of VRE generation. There are, however, no rules for VRE curtailment or its compensation.

The government should examine relevant planning processes and regulations to synchronise grid infrastructure construction with renewables deployment and electricity demand growth. Building early-stage consensus between the different ministries, involved parties, local authorities and the public would enable fast and co-ordinated deployment of renewables and supporting infrastructure. Infrastructure plans and processes should also facilitate the deployment of smart grid technologies such as demand‑side response, batteries and other energy storage options.

Luxembourg has targets for at least 95% of all electricity meters to be smart meters by the end of 2019 and at least 90% of all gas meters to be smart meters by the end of 2020. One key objective of the smart meter deployment is to allow consumers to become active market participants (prosumers) through self-generation and self-consumption of electricity. A draft law presented in 2019 aims to establish a national energy data platform with the objective to simplify, standardise and manage market processes, including market communication, and to improve the management of electricity generation from renewable energy sources. 

Luxembourg’s smart meter deployment and the development of a national database for smart meter data lays the groundwork for time-of-use pricing, a wide range of demand‑side response measures and energy services that could support VRE integration, smart EV charging and system flexibility. Luxembourg is planning to investigate options for time-of-use pricing once the smart meter deployment is completed. The regulations for smart meter data collection and management should establish a clear legal framework ensuring fair and transparent data access that supports innovation and creation of new energy sector services while ensuring data privacy.

Luxembourg has low electricity, natural gas and oil fuel prices, primarily due to low energy taxes. Low fuel prices encourage transiting freight trucks and the 200 000 daily foreign commuters to fuel their vehicles in Luxembourg. These non-resident drivers are responsible for around two-thirds of Luxembourg’s transportation fuel consumption. The government has a policy priority to reduce this fuel consumption in line with GHG emissions reduction targets, and in May 2019 it modestly increased excise duties on diesel by EUR 0.02 per litre and on gasoline by EUR 0.01 per litre. The government is considering another increase in excise duties between February and April 2020 of up to EUR 0.05 per litre for diesel and up to EUR 0.03 per litre for gasoline. Total fuel tax revenues, including sales to residents and non-residents, amounted to about EUR 1 billion in 2017, roughly 5% of government revenues.

The low costs of energy in Luxembourg and the high purchasing power of its residents represent a significant barrier to achieving the energy sector targets. Low taxes result in low electricity, natural gas and heating oil prices providing little incentive to invest in renewables and energy efficiency. Low fuel prices decrease the advantage of EVs and higher efficiency vehicles and encourage non-residents to fuel in Luxembourg. Carbon pricing could offer a simple mechanism to drive behaviour that supports the government’s policy goals and allow a recalibration of the various energy sector subsidy schemes to target areas where subsidies are most effective. In December 2019, the government announced that it will introduce a carbon tax of EUR 20 per tonne starting in 2021. The tax would increase to EUR 25 per tonne in 2022 and EUR 30 per tonne in 2023.

References
  1. Under the European Union Emissions Trading System (ETS), non-ETS sectors include agriculture, residential, commercial, waste, non-energy intensive industry and transport excluding aviation within the European Economic Area.