About this report
Portugal’s energy and climate policies push for carbon neutrality, primarily through broad electrification of energy demand and a rapid expansion of renewable electricity generation, along with increased energy efficiency. There is a strong focus on reducing energy import dependency and maintaining affordable access to energy. In the longer-term Portugal is aiming for hydrogen to play a major role in achieving carbon neutrality.
Portugal has made notable progress on decarbonising electricity generation and on electrification of building energy demand, however, the country’s energy mix is still dominated by fossil fuels. The transport, industry and buildings sectors all have considerable work ahead of them to meet Portugal’s targets for increasing the share of renewables, lowering energy demand and reducing emissions. In this report, the IEA provides a range of energy policy recommendations to help Portugal smoothly manage the transition to an efficient and flexible carbon-neutral energy system.
Since the International Energy Agency’s (IEA) last energy policy review in 2016, Portugal has recovered from the extended economic downturn it experienced following the 2008 financial crisis. In 2019, gross domestic product (GDP) reached USD 340 billion, higher than the 2008 pre-crisis level of USD 325 billion. The unemployment rate fell from a high of 16.2% in 2013 to 6.5% in 2019 (compared to 7.6% in 2008). The economic recovery accelerated ongoing structural changes away from energy-intensive activities and Portugal is showing signs of decoupling economic growth from energy demand, with total final consumption per GDP dropping by 8% between 2014 and 2019.
Portugal was notably impacted by the Covid-19 pandemic, with GDP dropping by 8.4% in 2020, the largest annual decline since 1936. Both Portugal and the European Union (EU) have taken major steps to address the impacts of the pandemic and support a return to economic growth. In March 2020, Portugal announced a EUR 9.2 billion stimulus package consisting mainly of broad fiscal measures, state-backed credit guarantees and increased social payments. Portugal also took actions specific to the energy sector, including fast-tracking the permitting and grid connection of 220 solar photovoltaic (PV) projects, providing funding to public transportation operators, and introducing a financial support programme for building energy efficiency measures, which was highly successful and will be continued in the coming years.
The EU has approved EUR 750 billion in funding to support recovery and resilience plans being developed by each EU member state. Portugal’s plan was submitted to the EU in April 2021, requesting EUR 13.9 billion in grants and EUR 2.7 billion in loans. Portugal’s plan dedicates notable funding to the energy sector, with funding for sustainable mobility, energy efficiency, renewables, decarbonisation and bio-economy. The plan includes EUR 610 million for energy efficiency and renewable energy in buildings and EUR 185 million to support 264 megawatts (MW) of renewable gas production (hydrogen and biomethane). The EU has estimated that Portugal’s recovery and resilience plan, along with other measures taken by the government, should result in strong recovery from the pandemic, with GDP increasing by 4.1% in 2021 and 4.3% in 2022.
Portugal remains reliant on imported fossil fuels, which accounted for 76% of primary energy supply in 2019 (43% oil, 24% natural gas and 6% coal). All oil, natural gas and coal are imported. As a result of increased economic activity and the high share of fossil fuels in its energy supply, Portugal’s greenhouse gas (GHG) emissions increased by 13% from 2014 to 2018, with notable annual variations driven by the seasonal availability of generation from Portugal’s large fleet of hydropower dams. Since 2005, land use, land‑use change and forestry has, on average, reduced Portugal’s annual GHG emissions. However, in 2017, extreme wildfires caused notable GHG emissions, and in fact, Portugal is facing an increasing risk of wildfires.
Portugal has also achieved a high level of electrification. In 2019, electricity covered 25% of total final energy demand, 56% of building energy demand and 25% of industry energy demand. Portugal has also achieved high shares of renewable energy, which covered 30.6% of gross final energy demand in 2019. Thanks mainly to hydropower and wind generation, renewables covered 54% of electricity generation and there is high use of bioenergy in industry and buildings. However, there has been limited growth in renewables in recent years, but Portugal is taking steps to accelerate renewables deployment, especially for solar PV, and is completing a new 1.2 gigawatt (GW) hydropower project. From 2014 to 2019, the share or renewables in gross final energy demand increased by 3.8%. Sustained deployment of renewables is needed in all areas to meet Portugal’s 2030 targets.
In response to policy and market pressures, the private operators of Portugal’s two coal‑fired power plants announced in 2020 that both plants will permanently close in 2021. The 1.3 GW Sines coal-fired power plant closed in January 2021 and the 0.6 GW Pego coal power plant will close in November 2021.The government indicates that natural gas electricity generation will be maintained until at least 2040.
Energy research, development and demonstration (RD&D) expenditure in the country reached 0.07% of GDP in 2019 (against 0.06% in 2016). The share of energy RD&D in total R&D expenditure evolved from 4% to 5% between 2016 and 2019.
Energy and climate policy
Portugal was among the first countries in the world to set 2050 carbon neutrality goals. Portugal’s energy and climate policies push for carbon neutrality primarily through broad electrification of energy demand and a rapid expansion of renewable electricity generation, along with increased energy efficiency. There is a strong focus on reducing energy import dependency and maintaining affordable access to energy. These policy goals are supported through clear targets, detailed national strategies and a wide range of regulations, economy-wide programmes and sector-specific measures.
The European Union (EU) Emission Trading System (ETS) encourages GHG emissions reductions from Portugal’s energy-intensive industries and electricity generation. Portugal’s National Energy and Climate Plan (NECP) sets 2030 targets for a 17% reduction of non-ETS GHG emissions and a 45-55% reduction in total GHG emissions (both compared to 2005 levels), energy efficiency (primary energy demand less than 21.5 million tonnes of oil equivalent (Mtoe), compared to 22.1 Mtoe in 2019, and final energy demand less than 14.9 Mtoe, compared to 17.1 Mtoe in 2019), renewable energy (47% of gross final energy demand, 80% of electricity generation, 49% of heating and cooling demand, and 20% of transport demand), 15% cross-border electricity interconnection (compared to 10% in 2019), and 65% external energy dependency (compared to 74% in 2019).
Portugal sees a key role for hydrogen produced from renewable energy in hard-to-decarbonise sectors and for achieving carbon neutrality. The National Hydrogen Strategy (EN-H2) sets a goal for hydrogen produced from renewable energy to cover 1.5-2.0% of Portugal’s energy demand by 2030, with use in industry, domestic maritime shipping, road transport and for injection into the natural gas network. The EN-H2 indicates that achieving these goals requires deployment of 2.0-2.5 GW of electrolysis capacity along with enabling legislation, regulations and standards.
Both the NECP and the EN-H2 call for RD&D. The NECP sets 2030 targets for combined public and private spending on overall RD&D to increase to 3% of GDP and for combined public and private spending on energy RD&D and on climate and water RD&D to both increase to 0.2% of GDP. In 2019, total public and private spending on energy RD&D was 0.07% of GDP. Portugal’s energy RD&D measures and programmes support commercial deployment of products and services, pilot projects and industrial clusters focused on new technologies, and business models based on low‑carbon products and services.
The NECP and EN-H2 are intended to put Portugal on a path to achieving the goals set in the Roadmap for Carbon Neutrality 2050 (RNC2050), which calls for GHG emissions reductions of 85-90% by 2050 versus 2005 levels, complete decarbonisation of electricity generation and transport, and carbon sequestration to reach carbon neutrality. The RNC2050 envisions achieving the 2050 goals through the deployment of renewables to cover 86-88% of final energy demand, electrification (with electricity covering 66-68% of final energy demand) and major demand reductions achieved mainly through energy efficiency measures that aim to reduce primary energy demand to less than 12.5 Mtoe, compared to 22.1 Mtoe in 2019 and final energy demand to less than 11.4 Mtoe, compared to 17.1 Mtoe in 2019.
The Azores and Madeira autonomous regions set their own energy and climate policies and strategies. These islands still heavily rely on oil products, even for electricity generation. With the increasing introduction of renewable energy, oil demand is decreasing and some islands have already reached high shares of renewable electricity generation by leveraging a wide range of technologies (geothermal, wind, hydro, solar PV and energy storage). The Azores and Madeira are testing different approaches to increase the share of renewables, boost the use of electric vehicles (EVs), and improve the energy efficiency of residential and service sector buildings. The Azores’ and Madeira’s programmes to support the energy transition appear to be more ambitious than those for mainland Portugal, and these island regions can pioneer living labs to test innovative solutions, like storage, smart grids, electric mobility and integration of very high shares of renewables.
A central aspect of Portugal’s energy and climate policy is the Green Taxation Law, passed in 2014 to better align energy sector taxation with decarbonisation goals. As part of the Green Taxation Law, Portugal established a carbon tax in 2015 that covers fossil fuel demand in all non-ETS sectors. The carbon tax is charged as an additional amount on top of the energy products tax (ISP), which covers most energy demand including fossil fuels, electricity and heat. The carbon tax rate is based on historic price trends of ETS allowances and conversion factors that assign higher tax rates to fuels with higher emissions and environmental impacts. Revenue from the carbon tax and ETS allowance auctions are allocated to Portugal’s Environmental Fund, which supports a wide range of government programmes, including some decarbonisation measures.
The government has made adjustments to the carbon tax to drive decarbonisation. In 2018, a progressive elimination of the ISP and carbon tax exemptions for coal used in electricity generation was introduced. As a result of the reduced exemption and market factors, Portugal’s largest coal-fired electricity plant closed in January 2021 and the last coal-fired electricity plant will close in November 2021. Since April 2020, natural gas used for electricity generation (excluding co-generation) is subject to a progressive reduction of the ISP and carbon tax exemptions. This is intended to favour the deployment of renewable generation, although the NECP indicates that natural gas electricity generation will be maintained until at least 2040.
Portugal has several measures to drive the deployment of renewable electricity generation, including feed-in tariffs and a new system for allocating grid connection capacity that includes solar PV auctions. Since this new system was established in 2019, network capacity reserve titles have been granted to over 1.95 GW of renewable energy projects (primarily solar PV, along with some wind and battery storage). The government approved 1.16 GW of new hydropower capacity and major expansions of electricity infrastructure to support the integration of renewables and better interconnection with Spain. The government is also taking steps to increase the flexibility of the electricity system, including the deployment of smart grids and pilot projects for dynamic tariffs and demand response market participation.
In 2020, only 33% of the average household retail electricity price was energy costs, with the remaining 67% coming from tariffs and taxes. For industrial users, only 42% of the average retail price was composed of energy costs, with the remaining 58% coming from tariffs and taxes. The high level of taxes and tariffs hampers electricity from competing with other fuels and is a barrier to achieving Portugal’s goals for electrification. The government should continue its efforts to adjust energy taxation to ensure that energy prices drive consumer behaviour and investment decisions that support Portugal’s decarbonisation goals.
Strong action is needed to support Portugal’s goals for transport decarbonisation. In 2019, 94% of transport energy demand was covered by oil, and transport GHG emissions increased by 10% from 2014 to 2019. Portugal has several measures to drive transport decarbonisation. Road vehicle taxation encourages the purchase of lower emission vehicles and there is a strong focus on transitioning to EVs. The RNC2050 indicates that electricity should cover 36% of passenger vehicle demand by 2030 and 100% by 2050. To drive EV uptake, Portugal introduced monetary incentives for battery electric vehicles (BEVs) in 2015. There is also favourable tax treatment for BEVs and support for EV charging infrastructure.
Portugal is also pushing for transport decarbonisation, with over EUR 10 billion of investments in electrified passenger and freight rail, and electrified public transportation. The government has developed a National Strategy for Bicycling and Active Mobility, which aims to increase bike lanes in Portugal from 2 000 km in 2018 to 10 000 km in 2030. There are also financial incentives for purchasing electric and regular bicycles (including cargo bikes).
The System for Management of Intensive Energy Demand (SGCIE) is Portugal’s main programme to promote energy efficiency in industry. Under SGCIE, energy‑intensive industrial facilities must complete an energy audit every eight years and develop plans to implement energy efficiency measures achieving a 4-6% reduction in energy demand. Progress on the implementation of these plans is monitored by the government. Industrial facilities regulated by the SGCIE receive exemptions from the carbon tax and the ISP. The government is considering a progressive reduction of the carbon tax exemption for facilities regulated by the SGCIE, which would result in higher taxes on fossil fuels. More aggressive SGCIE efficiency targets and policy clarity on industrial decarbonisation pathways are needed to help industry achieve cost-effective decarbonisation.
Portugal has a wide range of measures to support the decarbonisation of buildings, including codes, certifications and financial support mechanisms for renovations. As of January 2019, all new buildings owned or occupied by a public entity need to satisfy nearly zero-energy buildings (NZEB) requirements. Starting in January 2021, all newly constructed or majorly renovated private buildings with an area greater than 1 000 square metres need to satisfy NZEB requirements. Under the National Buildings Energy Performance Certification System (SCE), all residential, service sector and public buildings must go through an audit to receive an energy certificate when they are constructed or deeply renovated, each time the building changes ownership or is leased, and under other conditions for service sector or public buildings. The SCE has improved insulation and heating and cooling in both new buildings and resulted in deep renovations of existing buildings.
However, around two-thirds of Portugal’s building stock was constructed before any energy performance requirements were put in place, and around two-thirds of buildings still lack SCE certificates and 75% of certified buildings do not meet requirements for thermal comfort. Major efforts are needed to accelerate building renovation to reduce building energy demand and emissions and improve thermal comfort. In February 2021, Portugal approved a Long-term Renovation Strategy that aims to rapidly increase the pace of renovations through specific public and private investments to be made in buildings until 2050.
Portugal faces challenges relating to energy poverty, with relatively high energy prices and a building stock that often lacks adequate insulation. In 2018, the EU Energy Poverty Observatory noted that 19.4% of Portugal’s population reported that they were unable to keep their homes adequately warm (the EU average was 7.3%) and also noted challenges related to cooling. The government places a strong priority on energy affordability and has established social tariffs for electricity and natural gas that provide discounts on parts of the distribution tariffs to reduce the electricity and gas bills of households that meet certain socio‑economic criteria. In December 2020, 752 965 households (14% of all households) received the electricity social tariff, while 34 709 households (2.4% of all households connected to the gas network) received the natural gas social tariff.
In 2020, the electricity social tariff reduced the bills of qualifying households by a total of around EUR 109 million, an average reduction of EUR 114 per household. The gas social tariff led to a total reduction of around EUR 1.6 million, an average reduction of EUR 45 per household. The electricity social tariff is financed by the owners of fossil fuel generation assets and large-scale hydropower plants, both in proportion to installed capacity. The gas social tariff is financed by gas network operators and gas suppliers in proportion to the amount of gas delivered or sold in the previous year. While the need to protect vulnerable households is understood, the IEA notes that the social tariffs unduly add responsibilities and costs for energy suppliers.
Portugal is developing a National Long-Term Strategy to Tackle Energy Poverty to improve vulnerable consumer protection instruments and propose measures to reduce energy poverty. Portugal is also preparing a National Strategy to Combat Poverty that is intended to address all issues that contribute to poverty, including energy poverty. The IEA recommends that the government use the development of these two strategies to examine a full range of options to address energy poverty. Especially critical are deep renovations that reduce energy demand (and consumer bills) while improving the comfort of residences, and supporting electrification and distributed renewable energy. The recently launched long-term renovation strategy gives priority to renovating the worst performing buildings to address energy poverty.
As a result of the high demand for fossil fuels (primarily oil and natural gas) and the lack of domestic fossil resources, Portugal has a high energy import dependency. In 2019, Portugal’s energy import dependency was 74%, one of the highest levels among IEA member countries. Portugal has made progress on reducing energy import dependency by increasing the share of renewables in the energy supply, especially for electricity. The NECP sets ambitious targets to reduce energy import dependency below 65% by 2030 and the RNC2050 sets ambitious targets to reduce energy import dependency below 19% by 2050. Achieving these goals will require strong and sustained measures to reduce fossil fuel demand, especially in transport, where 94% of energy demand was covered by oil in 2019, as well as in industry, where oil and natural gas together covered 51% of energy demand in 2019.
Portugal’s energy system delivers a high level of security of supply. However, susceptibility to climate impacts is emerging as a significant risk. Portugal’s transmission and distribution infrastructure face a growing threat from extreme weather events and wildfires, both of which are likely to increase in frequency and severity because of climate change. Climate impacts on rainfall pose a threat to Portugal’s hydropower generation, which is critical for secure grid operations and for meeting goals for decarbonisation, electrification and reducing energy import dependency. It is recommended that Portugal include potential climate impacts on the electricity system in the Security of Supply Monitoring Report and in the planning for climate adaptation. The government is working internationally to increase electricity interconnections with Spain and the rest of Europe, which will help to increase the security of electricity supply.
Many of Portugal’s energy sector goals rely on increasing the flexibility of the energy system, especially electricity supply and demand. This presents excellent opportunities to leverage hydropower (especially pumped storage), battery storage, smart grids, distributed generation and demand response, but will also increase cybersecurity risks. The government should ensure that all energy sector planning processes incorporate assessments of cybersecurity risks and take appropriate measures to plan for and reduce risks, and mitigate potential impacts.
The government of Portugal should:
- Establish a broad stakeholder alliance to drive rapid implementation of the measures in the Roadmap for Carbon Neutrality, the National Energy and Climate Plan and the National Hydrogen Strategy, and to provide investor certainty on policy direction.
- Accelerate the reform to align energy taxes with decarbonisation goals and ensure that the carbon tax drives emissions reductions in all sectors.
- Enhance electricity retail market competition by removing barriers to entry for new players and facilitate market innovation to incentivise demand response, distributed renewables and increased electrification while ensuring market integrity and security.
- Prioritise deep renovation of public buildings and residences owned or rented by vulnerable consumers in order to reduce energy poverty, increase thermal comfort and support the achievement of decarbonisation goals.
- Develop a clear strategy for rapid electrification and the use of sustainable biofuels and hydrogen in the transport sector. Reduce the use of private cars and promote the use of railway to transport people between major cities and for international freight.
- Continue to work with Spain on increasing electricity interconnection capacity between Portugal and Spain and between the Iberian peninsula and the rest of Europe.
- Develop a dedicated strategy for energy research, development and demonstration that aligns policy design, implementation and funding with the achievement of Portugal’s 2030 energy sector targets and 2050 decarbonisation goals, including support for commercial deployment of new energy technologies, products and services.