IEA Encourages Luxembourg Energy Market Reforms Recommends Strengthening Efforts to Imporve Energy Efficiency

The International Energy Agency released today a report on the energy policies of Luxembourg. Robert Priddle, Executive Director of the IEA, launched the book – entitled Energy Policies of IEA Countries: Luxembourg 2000 Review – at a press conference in Luxembourg City.

Energy Market Reforms
The Government of Luxembourg rightly regards liberalisation of Europe’s energy market as a valuable opportunity for corporate and domestic consumers. The country imports nearly all the energy it consumes and liberalisation of European energy markets will allow consumers in Luxembourg to benefit from reduced energy prices.

Luxembourg implemented the European Directive on the Internal Electricity Market in May 2000. The commissioning of a combined cycle gas turbine (CCGT) in 2001 will reduce Luxembourg’s high dependence on electricity imports and the government expects that it will foster competition in electricity markets.

The IEA report states that due to the small size of Luxembourg, eligible consumers will have a large choice among supplies in and outside the country. So, the proper functioning of competition will also depend on regulations outside the country such as those governing conditions of access to the grid. In addition, the government expects to pass a law implementing the European Directive on the Internal Gas Market before the end of 2000.

Although state and municipal ownership in energy companies is declining in Luxembourg, it remains significant. Some municipalities are directly engaged in electricity and natural gas distribution activities. The IEA report recommends, as a first step for market liberalisation, separating these activities from municipal/communal administration to ensure that all companies compete on a level playing field.

Energy Taxes
Energy taxes are among the lowest of all IEA countries, leading to low energy prices in comparison with neighbouring countries. This is particularly the case for automotive fuels. As a consequence, car and truck drivers from these countries refuel in Luxembourg, leading to distortions in the automotive fuels market. The IEA comments the proposal, in the 1998 National Plan on Sustainable Development, to levy an energy tax is an opportunity to better internalise the full cost of using energy and to reduce market distortions.

Oil Sector
Luxembourg’s oil sector is strictly retail and is totally dependent on oil products imports which have increased rapidly due to sales to foreign consumers. The government sets price ceilings on the most important oil products to avoid inflation. This system may also prevent abuses of dominant position if competition does not work properly. Since effective competition encourages companies to decrease supply costs, allowing them to reduce sale prices, the IEA advises the government to rely on market forces to keep oil product prices low.

Energy Efficiency and the Kyoto Target
Energy intensity in Luxembourg has decreased substantially, mostly because the restructuring of the iron and steel industry has substantially reduced domestic energy consumption. However, energy intensity remains high due to the wealth of the country, the sales of oil products to foreign drivers and the continued importance of the steel industry.

Energy efficiency policy in Luxembourg was given a welcome boost in 1993 with the adoption of a new framework law. The IEA report recommends that the government should assess the cost-benefit of the measures taken to improve energy efficiency. The results of these assessments are necessary to allow policy makers to concentrate on the most cost-effective measures.

Luxembourg’s energy-related CO2 emissions decreased dramatically thanks to the restructuring of the iron and steel sector. Therefore, emissions in 2000 are expected to be below their 1990 level, in accordance with the goals set under the UNFCCC in 1992. However, emissions from other sectors, especially transport, have been increasing continuously. This will result in an increase in the country’s emissions upon completion of its iron and steel restructuring programme. So, increased efforts will be required if the country is to achieve a 28 percent reduction in greenhouse gas emissions from 1990 levels between 2008 and 2012, as agreed in the EU burden-sharing agreement. The IEA recommends that the government should implement the 1998 National Plan on Sustainable Development through concrete measures and that it should reform the energy tax system.