Last week Luxembourg’s statistics agency reported that electricity costs could soar by 60% next year, with an increase of up to 17% predicted for gas prices if the energy price cap is not maintained.
The price caps were agreed upon in the autumn of 2022 by the former government, amid rising prices due to the post-pandemic economic recovery and the Russian war in Ukraine.
Following an extension, the price caps are in place until the end of 2024. But what comes next? Economy minister Lex Delles (DP) said last week he would make proposals on the next steps.
For a single-family household with a gas consumption of 2,500 cubic metres per year, last year’s gas bill without the subsidy would have risen to 5,010 euros. Thanks to the cap, the state covered 2,510 euros.
This year, this household’s gas bill subsidy is significantly lower, totaling 720 euros. The decrease is attributed to the lower cost of gas, resulting in a reduced overall bill amounting to 3,250 euros.
A household that consumes 5,000 kilowatt hours of electricity would receive an electricity bill of 1,710 euros at this year’s prices without subsidies. The state covers 610 euros.
The energy price cap costs the Luxembourgish government a lot of money.
Last year, the government spent 311 million euros on gas and electricity together, with gas being the largest share at over 200 million. Another 289 million euros are projected for 2024, a year in which electricity is expected to be the biggest cost factor.
Other subsidies, such as heating costs, are not included.
In practice, the electricity price cap on a household’s bill is implemented via the so-called ‘equalisation mechanism’.
In addition, consumers usually pay money into the climate fund, which is needed to pay the guaranteed tariffs for the consumption of renewable energy sources.
As energy suppliers do not have insight into the income of a household, no staggered price cap can be implemented from the provider’s side. This is why it needs to be done through taxation.
Doing so, however, would have an impact on the inflation rate. The consumer price index would go up, triggering further index tranches. As a result, wage costs for companies increase, reducing their competitiveness.
It would also mean that all consumers would have to pay their large energy bills first before getting anything back from the tax office.
On top of that, the new CSV-DP coalition, with one of its first measures, further adjusted the tax scale to inflation in order to give back more purchasing power to citizens.
Some suppliers offer customers fixed rates for electricity and gas over several years. However, these contracts do not fully protect against the price increases announced by Statec.
The suppliers only guarantee the energy component on the bill, i.e. the electricity or gas, but do not guarantee the other items on the bill, such as network costs, taxes or even the equalisation mechanism.
If the government does not set a new price cap and money is added to the electricity bill via the equalisation mechanism, instead of being distributed, then this also affects people with a fixed tariff.
When the energy price caps were introduced, among other things, the environmental movement criticised that they did not offer an incentive to save energy.
There are other models. For example, in neighbouring countries, the subsidy only applies to a part of energy consumption, motivating people to save more.
Technically, it would be possible for the suppliers to make such a differentiation. But according to Enovos, residents have already saved without these incentives: Between 8-12% in electricity were saved between 2021 and the end of 2023, and between 10-20% for gas.
Video report in Luxembourgish:
