Lithuania 2021

Energy Policy Review

Aerial View Of Vilnius Lithuania

About this report

The International Energy Agency (IEA) regularly conducts in-depth peer reviews of the energy policies of its member, partner and accession countries. This process supports energy policy development and encourages the exchange of international best practices and experiences.

Lithuania has made strong progress towards realising its vision of a secure, competitive, sustainable and innovative energy system in the Baltic region.

The government supported major reforms of the electricity and natural gas markets, and further integrated with the EU energy system and markets. Thanks to the expansion of renewable energy sources, notably bioenergy and wind, the carbon intensity of the power and heat sector has decreased over the past decade.

Nevertheless, emissions have been on the rise, notably in the transport sector. Lithuania will need to make energy efficiency a priority, design a strong renewable strategy, and reform energy taxes to underpin its ambitious targets. This kind of clean energy leadership can drive emissions reductions up to 2050.

In this report, the IEA provides energy policy recommendations to help Lithuania to strengthen energy security and accelerate its energy transition towards its ambitious 2050 targets for climate neutrality.
Executive summary

This first review of Lithuania’s energy policies by the International Energy Agency (IEA) comes at a momentous time for the country’s energy sector, which is undergoing significant reforms and witnessing greater regional integration within the Baltic and European Union (EU) energy markets.

The review was conducted in the context of Lithuania’s process of accession to the IEA. Lithuania’s energy policy aligns sustainability goals with the objectives of boosting energy security, competitiveness and technology innovation. As such, the country’s energy policies are broadly aligned with the IEA Shared Goals (see Annex D).

Over the past decade, Lithuania has witnessed several energy transitions. With the closure of its only nuclear power plant (Ignalina’s two reactors shut down in 2004 and 2009), Lithuania switched from the position of a net exporter to one of a net importer of electricity. Since then, the shares of electricity imports, natural gas and bioenergy have increased. Today, Lithuania imports over 70% of its electricity needs, while bioenergy is taking the lead in domestic energy supply. Most of Lithuania’s co-generation (co-generation refers to the combined production of heat and power), district heating and residential heat have switched from natural gas to biomass.

Since Lithuania regained its independence in 1990, its energy policy has continuously emphasised energy security. The 2012 National Energy Independence Strategy, which was updated in 2018, reflects these fundamental goals. Lithuania is commended for its ambitious 2050 targets for emissions reductions, renewables and energy efficiency under the strategy. Lithuania supports the EU climate neutrality goal and is starting to place a greater emphasis on the mitigation of climate change, while boosting economic growth and technology innovation.

Up to 2030, policies and measures are well identified under the integrated National Energy and Climate Plan (NECP), which was adopted and submitted to the European Commission at the end of 2019. The NECP sets ambitious medium-term targets as well as the actions needed to achieve them. The Ministry of Energy, the lead co-ordinator of the NECP, will have to work closely with the Ministry of Environment and the Ministry of Transport and Communications on implementing it. This review suggests it should do so by adopting sectoral strategies, for instance for transport or the bioeconomy. Stronger co‑ordination of energy and climate policies and monitoring of progress will be critical to ensure full implementation of the planned measures in the coming years.

The NECP is being implemented at a time when the EU Green Deal promotes new action towards climate neutrality by 2050. EU leaders agreed in 2020 to reduce emissions by 55% by 2030. In 2021, the EU will review its energy and climate targets and policies for 2030. Lithuania has had a long-term vision to 2050 for a decade; however, climate change has not been a key driver of its energy policies to date. While the IEA commends Lithuania’s achievements in recent years, including the adoption of the NECP, the envisaged medium-term development should be more aligned with a development path towards achieving the long-term vision for 2050. By 2023, Lithuania, like all EU countries, will need to report progress on the implementation of its NECP and provide an updated NECP by 2024, which will have to reflect national progress and the increased climate and energy ambitions at EU level.

With regard to climate action, Lithuania has decoupled greenhouse gas emissions and economic growth, and has met its 2020 targets for the sectors outside of the EU Emissions Trading Scheme. However, meeting the 2030 target will be a challenge, as for the first time, a decrease in emissions (of 9%) is required.

There are several challenges for implementing the NECP. Progress in energy efficiency has slowed down, as in other IEA countries. Lithuania did not meet its 2020 final energy consumption target of 4.3 million tonnes of oil equivalent (Mtoe) and additional measures are needed and envisaged, notably in building renovation and the transport sector. For 2030, the target is 4.5 Mtoe of final energy consumption. All sectoral measures are well identified, but their implementation will depend on public funding and procurement, as the role of energy service companies and private renovation is small to date.

The government had achieved its 2020 renewables target as early as 2014 and sold the surplus credits to Luxembourg. Looking ahead, the government aims to reach a share of renewables of at least 45% in final energy consumption by 2030 and 80% by 2050, with 100% in the electricity mix. Such high levels of renewables will require actions to manage power system security and flexibility, as well as compliance with EU sustainability requirements. Recent auctions have confirmed the interest of investors in Lithuania, with a preference for public purchase agreements rather than subsidies.

Around 75% of all heat is produced by burning woody biomass, of which the largest share is harvested in Lithuania, with some imports coming from the regional Baltpool platform. Imports of woody biomass from Belarus have increased due to large deforestations in that country. The Baltpool platform promotes cheaper imports, which may raise concerns over the sustainability of biomass trade. Modern bioenergy can play an important role in Lithuania’s low-carbon future. Lithuania’s forests are also a major carbon sink and the government is already counting these towards EU emissions reduction targets up to 2030. Bioenergy can also balance variable electricity generation, mainly wind and solar, and will remain important to match peak load capacity, especially for cold winter days. Biofuels are also key to decrease emissions in the transport sector.

Co-generation and related district heating remain the best ways to boost energy efficiency, advance renewables and link heating with electricity for flexibility. Lithuania is well placed to make the best use of this “sector coupling”. Despite comparably low district heating prices, the role and economics of co-generation is changing, with a trend towards heat-only boilers or heat pumps. In support of the 100% renewable electricity target by 2050, the government is encouraged to design a long-term renewable energy strategy for Lithuania, which would analyse the electrification of end-uses, notably heat, and an assessment of system integration needs across sectors.

Without new policy action, emissions will continue to grow, notably in transport. The IEA encourages Lithuania to introduce an annual vehicle tax, create the Sustainable Mobility Fund and phase out tax exemptions (e.g. of agriculture operators from the environmental pollution tax) and update excise duty rates in line with carbon content. The Lithuanian government has shown leadership in the transport sector with the adoption of the Alternative Fuels Law in March 2021. A holistic approach to mobility is needed to meet its ambitious 2050 vision. The government should prepare a comprehensive strategy for improving vehicle efficiency, rolling out zero-emission vehicles and biofuels blending. Besides subsidies for the roll-out of zero-emission vehicles, a package that combines fiscal instruments and local mobility measures, based on alternative fuels, biofuels and electrification targets, could be very effective. 

Important institutional reforms have taken place in the Lithuanian energy sector since the creation of the Ministry of Energy in January 2009, and most recently under the EU Third Energy Package and the accession to the OECD in 2018. As a result of the reforms, independent system operators for gas and electricity, unbundled from supply activities, were created. Lithuania has made progress in gradually opening up its electricity and gas markets. However, amid security concerns, it has increased the level of state ownership in its energy sector in recent years. This may result in entry barriers for private players in its gas/electricity markets and implies that the state will ensure that energy companies can make the needed investments in clean energy. In this context, it is welcome that Lithuania is implementing a step-wise phase out of price regulation for residential consumers in the electricity market. However, Lithuania maintains high market concentration in the residential gas market with regulated prices.

The implementation of the NECP requires around EUR 14 billion of public and private financing in the clean energy transition. In 2021, EU and national recovery funds will be disbursed under the National Resilience and Recovery Plan. Commendably, Lithuania has deployed significant stimulus funding, amounting to around 10% of its gross domestic product. To ensure the best use of EU and national recovery funds in the medium term, policies play a critical role for scaling up private/public investments and allow the private sector to take over. The government could use an auctioning system for clean energy technologies (e.g. renewables, hydrogen and energy storage), and encourage private industry energy service companies to lead the renovation wave.

Boosting investments in clean energy technology innovation is a new and promising area. The IEA welcomes the Action Plan for an Energy Innovation Ecosystem, which is in line with the IEA’s technology and innovation framework. The IEA encourages Lithuania to establish a regular tracking process of energy innovation results and funding. In the context of Lithuania’s new Innovation Promotion Fund, created by the Ministry of Economy and Innovation, the Ministry of Finance, and the Investment and Business Guarantees (Invega), the action plan is an opportunity for boosting energy sector investments.

Amid rising geopolitical tensions in the Baltic region, energy security remains as important as ever before. At the heart of Lithuania’s security policy lies a strong renewables strategy, based on bioenergy and wind energy, as part of a move to reduce electricity imports by half in the horizon to 2030 and towards zero by 2050. Today, rather than independence alone, regional integration underpins energy security. Lithuania is part of the highly interconnected Baltic-Nordic electricity markets. An even greater integration with the EU energy system is a core policy objective, with the milestone of reaching full synchronisation with the European continental electricity grid by 2025. Lithuania also co-ordinates with regional partners on other electricity security issues, notably on the implementation of the Baltic Energy Market Interconnection Plan, and investments in new electricity and gas infrastructure, co-financed under the Connecting Europe Facility.

One of the current major challenges for Lithuania is to ensure that no electricity could enter the Baltic states’ market from Belarus, where the Astravets nuclear power plant was commissioned recently. Lithuania’s Special Law declares the plant as unsafe, as it poses serious threats to nuclear safety, the environment and national security across the Baltics and notably for Lithuania’s capital, Vilnius.

Lithuania’s liquefied natural gas (LNG) terminal in Klaipėda has significantly reduced the country’s dependence on direct gas imports from the Russian Federation, a declared policy priority for the government. The terminal has also improved the gas market integration and lowered gas prices in the region. A Baltic gas market is emerging, which connects infrastructure and countries in the region: the Klaipėda LNG terminal in Lithuania, the Baltic gas storage in Latvia (Inčukalns) with Estonia’s and Finland’s gas network through the Balticconnector pipeline, and with Poland through the Gas Interconnection Poland-Lithuania by the end of 2021. Lithuania and its neighbours have an opportunity to access global LNG and use natural gas as a transition fuel to end coal and oil use in the region. The IEA encourages the government to complete the regional gas market, based on regional gas pricing and infrastructure expansion and usage.

Oil security is a core mandate of the IEA. As an EU member state, Lithuania has a solid oil stockholding system in place for national emergencies. Lithuania’s oil stocks are well above the IEA’s 90-day minimum requirement, totalling 173 days of net imports at the end of 2020. Under the accession process to the IEA, the government has reviewed the national system and made strong progress in adopting legislation, procedures and rules for allowing the country to participate in an international crisis response through a collective IEA action and a national demand restraint programme. The Law on State Stocks of Petroleum Products and Oil was accordingly modified in June 2020. Lithuania has started efforts to update the existing oil demand restraint policy and its emergency handbook to meet the IEA requirement to be able to reduce oil demand quickly by up to 10% in a crisis.

Key recommendations

  • Mobilise public and private finance, including EU funding, by adopting robust policies such as auction schemes to strengthen Lithuania’s economy and meet energy and climate ambitions.
  • Complete the opening of the electricity and gas markets, reform energy and environmental taxes and levies, and promote energy technology innovation, with a view to boost competitiveness and accelerate the switch to clean energy technologies.
  • Enhance energy and climate governance to continuously review targets and monitor progress and implement the NECP. Update the NECP in the light of EU and national climate neutrality goals.
  • Intensify co-ordination with Baltic and Nordic neighbours on the design and implementation of climate and energy policies, including the implications for the security of electricity, gas and oil supply as well as cybersecurity.