IEA Commends Luxembourg’s Energy Policy, but Calls for Stronger Action on Climate Change and Oil Reserves

“There have been commendable developments in energy policies in Luxembourg since the last In-depth Review. More than half of Luxembourg’s electricity and gas markets have been opened for competition. It has successfully diversified its fuel use, and reduced energy consumption through industrial restructuring” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Luxembourg at the launch of "Energy Policies of IEA Countries – Luxembourg 2004 Review."

Mr. Mandil added: “In the coming years, the government must focus on complying with its emergency stocks requirements under the IEA treaty, on its Kyoto commitments and on profiting from competition. More human resources would be necessary to address these challenges”.

Emergency Stocks
When the IEA was founded more than thirty years ago, its Member countries agreed to establish adequate oil stocks. Although Luxembourg was one of the original signatories, it has been compliant with the IEA oil stockholding obligations for not even three years in total since then. Luxembourg thus compromises its solidarity with other IEA Member countries. The IEA strongly urges that the Luxembourg Administration build a centralized stockholding agency to increase the level of oil stocks held on national territory and to rely less on stocks held under short-term leased contracts in other countries. Alternatively, Luxembourg should explore the possibility to co-operate with its neighbours in establishing a joint agency. Luxembourg would also better ensure domestic oil security by such a move.

Climate Change, Energy Efficiency and Renewables
One of the main challenges for Luxembourg is how to achieve its Kyoto target of -28% compared to 1990 levels. In 2002 greenhouse gas emissions (GHG) stood at 21% below the 1990 level. However, this was due to a unique 70% emissions reduction in the industrial sector after restructuring the iron and steel industry. Because of Luxembourg’s small size, any change in emissions sources (e.g. the start of the new power plant in Esch-sur-Alzette, replacing imported electricity) may result in significant increases of emissions due to them occurring in Luxembourg, thus endangering the Kyoto target. The National Allocation Plan anticipates that the bulk of reductions will be achieved through emissions trading and other Kyoto mechanisms. Nevertheless, Luxembourg should explore other possibilities to reduce GHG emissions at home.

Luxembourg’s energy demand per capita remains among the highest in IEA member countries. More emphasis should be placed on energy efficiency, e.g. enhance building standards and introduce economic and regulatory measures to curb the rapid increase of passenger transport.

The promotion scheme for renewables should become more cost-effective. The current buy-back system could become too costly for the economy. For example: Generous support to photovoltaic installations may not be the most cost-effective option given Luxembourg’s natural resource endowment.

Energy Markets
Luxembourg has liberalized its gas markets up to 76% and its electricity markets up to 57% of demand. Both markets will be opened for full competition in 2007. While few customers have switched suppliers so far, many existing contracts have been renegotiated, leading to lower prices overall. Luxembourg’s gas and electricity markets are quite unusual. Its domestic market is very small and demand comes mainly from a few energy-intensive manufacturing sites, supplied over a private grid. The number of players in energy supply is thus limited. Nevertheless, the government should promote competition as much as possible. Even with ongoing state ownership of companies in the gas and electricity sectors, it should continue to refrain from interfering in the daily management and strategic decisions of the companies.

Due to its size and location, competition in Luxembourg’s gas and electricity markets is very much affected by the market conditions in neighbouring countries and could benefit from closer integration. The regulator should work closely together with its counterparts in neighbouring countries. One possibility to increase market integration across borders would be to further explore the potential benefits of connecting the two electricity grids owned by CEGEDEL (linked to RWE in Germany) and SOTEL (linked to ELIA in Belgium). Such a connection would increase the size of Luxembourg’s markets and enable suppliers to choose either German or Belgian networks for the transmission of electricity to all consumers in Luxembourg.

Road Fuel Taxation
A large number of foreign drivers are refuelling in Luxembourg due to the low taxation on automotive fuels and Luxembourg’s location as the crossroad of Europe. This makes it extremely challenging for Luxembourg to achieve its Kyoto target, and to comply with IEA stockholding requirements. While the tax differential needs to be addressed in the EU context, further efforts by Luxembourg are needed to resolve this issue.

The limited number of staff in the Energy Directorate and the Institut Luxembourgeois de Régulation could hamper the capacity of Luxembourg to address the challenges outlined above. Increasing resources at both institutions should be considered.