The multiple benefits of energy efficiency capture and communicate the broader value energy efficiency measures can deliver. Revealing the potential of energy efficiency to support economic growth, enhance social development, advance environmental sustainability, ensure energy-system security and help build prosperity, repositions energy efficiency as an effective tool for economic and social development.
Cost-effective energy efficiency improvements can have positive macroeconomic impacts, boosting economic activity and often leading to increased employment. Energy efficiency reduces the amount of energy needed to deliver services, such as mobility, lighting, heating and cooling. Lowering the cost of energy services frees up resources for households, businesses and governments.
The conventional relationship between energy and economic growth poses a challenge to measuring efficiency gains
Macroeconomic assessment is a mainstream branch of economic analysis that has built up a large body of knowledge and evidence over many years; however, the impact of energy efficiency policies on macroeconomic performance still needs to be better understood and systematically measured. Energy efficiency improvements can deliver benefits across the whole economy, with direct and indirect impacts on economic activity (measured through gross domestic product [GDP]), employment, trade balances and energy prices.
Energy efficiency’s potential positive impact on GDP
In 2017, the European Commission modelled four different scenarios that assess increased targets for the EU’s 2030 energy efficiency target. The analysis estimates the impacts of improvements in energy efficiency at various levels of ambition by 2030 compared to a 2007 baseline. In terms of GDP impact, each scenario modelled resulted in a positive change, ranging from 0.1% increase in GDP in the least ambitious scenario, up to 2.0% increase in most ambitious scenario of increased energy efficiency (European Commission, 2017).
Energy efficiency jobs and employment impacts
Energy efficiency can induce job creation by (1) redirecting energy cost savings toward expanding the labour force, and (2) by creating jobs directly or indirectly to implement efficiency measures. Studies suggest that a USD 1 million annual investment in building renovation and installation of equipment designed to improve the energy efficiency of the building would support 10-20 direct jobs and an additional 10-20 indirect jobs.
The energy efficiency services sector plays a relatively small role in energy efficiency investment but is the only area where units of energy efficiency are bought and sold directly. The main actors are energy service companies (ESCOs) that are contracted to provide energy efficiency benefits to customers on a continuing basis and energy utilities that are obligated to deliver energy efficiency by policy makers. More than 1 million people are employed within the global ESCO market.
Fuel economy standards and employment
Two recent studies consider the employment impact of the corporate average fuel efficiency (CAFE) standards in the US automotive industry. They estimate that nearly 500 000 employees are working on component parts that increase the fuel economy of vehicles out of a total of 1.1 million workers in the component parts sector (US DOE, 2017), and that 288 000 employees are working with automotive components and technologies that contribute to improved fuel efficiency (IEA, 2017).
Energy efficiency and employee productivity in all sectors
Employee productivity is largely affected by the physical work environment – specifically, temperature, air quality, and lighting. Energy efficiency measures can positively affect each of these categories. A healthier, more comfortable work environment improves productivity and decreases employee absenteeism. A study from the US Department of Labour reported that in the private sector the rate of employee absenteeism annually is 3% (62.4 hours a year), and 4% in the public sector (83 hours). Financially, an employer could lose up to USD 2 500 per employee annually. In an organization of 50 employees, this could mean a loss of over USD 125 000 (Terrapin Bright Green, 2012).
Energy efficiency measures can deliver financial benefits to public budgets through both increased income and decreased expenses. Local governments can directly reduce operational costs by implementing energy efficiency measures, which lead to energy savings, and therefore less spent on energy bills. Furthermore, Governments can achieve increased income through sales tax on more valuable energy efficient products and services, as well as increased real estate tax on more valuable energy efficient buildings. Governments also receive indirect financial savings through reduced social welfare expenses spent on energy subsidies.
Studies from countries including Germany, Mexico and United States demonstrate the benefits and costs to public budgets of energy efficiency policy. Whether by reducing government expenditures on energy or by generating increased tax revenues through greater economic activity and/or increased spending on energy efficiency-related goods and services, energy efficiency improvements can have important impacts on the budgetary position of national and sub-sovereign entities. An important impact on public budget is on reduced fuel costs for heating, cooling and lighting, a budget line that is expected to increase over time as energy prices rise.
Figure 1. Energy efficiency policy influence on public budgets
Accounting for financial benefits can achieve macroeconomic impacts
One of the greatest impacts overall is the reduced budget for unemployment payments when energy efficiency policies lead to job creation. Public budget impacts are thus closely linked to macroeconomic impacts. Although most governments have developed methodologies to estimate the costs and benefits of a policy to the public budget, the full range of public budget benefits are rarely estimated. This broader range of benefits can multiply the calculated value to the public budget by two or three times.
An initial evaluation of the value of energy efficiency in buildings to the European public budget, estimates USD 41 billion to USD 55 billion (EUR 30 billion to EUR 40 billion) in benefit excluding tax and unemployment savings. Adding tax revenues and reduced unemployment payments increased the benefit of energy efficiency in buildings to USD 91 billion to USD 175 billion (EUR 67 billion to EUR 128 billion) for European public budgets.
Reduced energy demand can create long-term savings for governments
Mexico, for example, is undergoing a market transformation from an analogue to a digital signal for television broadcast in approximately 12.6 million households. The existing, less efficient analogue cathode ray tube (CRT) televisions would need a new digital set top box (STB) to continue to work with the new digital signal. To address this situation, the Mexican government decided that instead of subsidising digital STBs and adding a new source of energy demand (18 kWh annually per STB), it will be giving away 14 million new LED televisions to low-income households. The LED televisions are on average 60% more efficient than standard CRT television models.
The Mexican government projects that the USD 102.4 million (MXN 1.76 billion) spent on new LED televisions is expected to be recovered through avoided electricity consumption worth USD 93.1 million and federal government saving in energy subsidies of USD 216.9 million (IEA, 2015) (Figure 2).
Figure 2. - Comparison of annual expenses by households and Mexican government with analogue television and decoder versus digital television
Governments can achieve their own benefits leading by example
In Massachusetts, the “Leading by Example” programme was developed to ensure that state-owned and operated facilities would provide leadership to the market by implementing energy efficiency, practicing energy conservation, reducing greenhouse gas emissions, using renewable energy, and practicing water conservation. The programme sets aggressive targets for facilities owned and operated by Massachusetts and provides technical assistance, guidance and grant funding to achieve the targets. The programme has been tracking progress in improvements with a state portfolio of over 3 000 vehicles and 8 million square metres of buildings, and has seen an annual reduction of public energy expenditures alone of USD 42 to 59 million compared to business as usual in 2014.
Reducing public sector energy costs
In 2006 the city of Lviv (Ukraine) launched a monitoring and targeting programme for energy, including natural gas, district heating, electricity and water consumption in 530 public buildings. Targets for monthly utility consumption are determined annually, based on historical consumption (with the possibility to negotiate an adjustment in cases of foreseeable change in consumption patterns).
Utility use is reported monthly and reviewed against the target; deviations spotted are acted upon immediately. An interesting feature is that the performance of buildings is communicated to the public through a display campaign.
The programme reduced annual energy consumption in Lviv public buildings by about 10% and tap water consumption by about 12%, translating to an estimated net savings of USD 1.2 million (UAH 9.5 million) as of 2010. These significant savings have been achieved with minimal investment and recurring programme costs. A crucial initial condition for the programme was that most of the city’s public buildings were already metered for energy and water consumption. Also, the city had beencollaborating with international aid programmes for municipal energy since the late1990s.
Energy efficiency measures in industrial facilities can enable improved productivity, for example through improving overall process performance and quality. Productivity gains resulting in energy savings can enable further benefits such as enhanced competitiveness and profitability through cost savings, improved product quality and the working environment. For energy utilities, energy efficiency measures can reduce operating and investment costs, enabling cost savings to be passed onto customers.
Energy efficiency productivity benefits
In addition to reducing energy use, energy efficiency measures create productivity benefits such as lower maintenance costs and increased production yields, thereby increasing overall productivity.
Improved operation and process reliability leads to reduced equipment downtime, reduced number of shutdowns or system failures and can result in reduced process time (which can contribute to increased productivity), process optimisation can also reduce staff time required to enhance operations, scheduling, and reduce errors.
Investment in efficiency creates jobs in manufacturing, particularly in the short run
Energy efficiency can induce job creation by (1) redirecting energy cost savings toward expanding the labour force, and (2) by creating jobs directly or indirectly to implement efficiency measures.
In the industrial sector, counting the portion of industrial employees that are dedicated to making an efficient product, such as a hybrid car or an efficient refrigerator can be difficult. The manufacturing of inefficient cars and refrigerators may involve just as many workers as producing efficient ones. Also a person building the hybrid drivetrain has a genuine efficiency job, whereas a person installing seat belts into the hybrid car arguably has a car industry job with no direct connection to energy efficiency.
In some cases the transition to more efficient products can initiate manufacturing changes that reduce labour intensity. This is the case with light-emitting diode (LED) lighting, which require fewer employees to produce products that each last much longer than their predecessors.
Energy efficiency delivers increased profits for industry
Between 2000 and 2016, energy intensity – final energy consumption per unit of gross value added (GVA) – in the industrial sector decreased by 30%. At the same time, energy productivity – GVA per unit of final energy use – increased by 43%. Improvements in emerging economies have been most evident since 2006, largely as a result of industrial energy efficiency programmes in the People’s Republic of China (hereafter “China”).
Figure 1. Industrial energy intensity and productivity trends in IEA member countries and major emerging economies, 2000-16
Note: Industry includes ISIC divisions 10-18, 20-23, and 25-32 and excludes mining and quarrying, manufacture of coke and refined petroleum products and construction. Energy use related to blast furnaces, coke ovensand petrochemicals feedstocks are included. Major emerging economies covers Brazil, China, India, Indonesia, Mexico and the Russian Federation (hereafter, “Russia”).
Energy management systems enable productivity benefits for industry
Energy management systems (EMS) create a structure to monitor energy consumption and improve efficiency in an industrial operation. The adoption of an EMS can lead to industrial productivity gains in addition to energy savings.
Implementing an energy management system improves energy performance and overall system efficiency. Additional productivity benefits for companies using energy management systems can include enhanced production and capacity utilisation, reduced resource use and pollution, and lower operation and maintenance costs – all of which result in increased value generation and thus improved competitiveness for the company.
Industrial case studies in France, Germany, the United Kingdom and other countries that have implemented ISO 50001, the global energy management standard, show average energy savings of 26% with savings extending to beyond 60% in some cases. Additionally, industry case studies have also shown financial savings from implementing energy management systems averaging around USD 1.2 million per year (Waide Strategic Efficiency, 2016).
Energy efficiency delivers better service and reduces the cost of energy supply
Improving efficiency within the energy supply sector can help energy providers deliver better service for their customers while reducing their own operating costs, improving profit margins and mitigating risk. Utilities that encourage energy efficiency amongst their customers can generate significant cost savings for themselves through avoided infrastructural investment in energy generation and transmission and distribution infrastructure through delaying or deferring costly system upgrades. Other benefits include improved system reliability and dampened price volatility in wholesale markets. Providers can also benefit indirectly through benefits that accrue for customers from improved affordability of energy services, which in turn can reduce arrears and associated administrative costs for utilities.
To maximise the benefits of energy efficiency, utilities can adopt programmes that reduce energy consumption and target load reduction and load shifting and can include the provision of advice to customers on relevant energy efficiency measures or assistance with accessing financial incentives. Other initiatives could include the bulk procurement and/or the distribution and installation of energy efficiency products. Encouraging the use of information and communication technology (ICT) tools on the end-user side can support the shift towards more efficient use of energy for both energy providers and their customers, enabling consumers to more actively control their energy use and energy providers to better monitor, aggregate and control end-use loads.
The additional multiple benefits of energy efficiency for industry
Energy efficiency provides numerous benefits to industrial companies beyond increased productivity and energy savings, including improvements in worker comfort, product quality, overall flexibility and reductions in maintenance cost, risk, production time and waste. However, translating these benefits into strategic and financial outcomes is challenging, so the full benefits of industrial energy efficiency are not fully recognised.
However, an audit of a Swiss surface treatment company that identified an opportunity to replace ageing rectifiers used for electronic galvanising with new rectifiers with improved cooling and control was able to examine the multiple benefits. Alongside energy cost savings the audit assessed the reductions in maintenance costs, cooling water use, rejection rate, legal and commercial risks, and increases in product quality, attractiveness and customer loyalty. By translating these benefits into financial outcomes, the total value of the energy efficiency opportunity could be determined.
When energy savings alone were considered, the simple payback for energy efficiency measures was calculated at 6 years (internal rate of return of 6.9%). However, when the financial outcomes derived from the multiple benefits of the opportunity were considered, the simple payback reduced significantly to 0.85 years (internal rate of return of 118%), greatly improving the case for implementing the energy efficiency project.
Energy efficiency can increase asset values for homeowners, businesses and utilities. Building owners can see increased property value from energy efficiency measures that lower energy consumption and reduce operating costs. Furthermore, studies have shown highly rated energy efficiency properties sell at a premium.
Energy efficiency increases building property values and ease of selling
Evidence suggests that individuals and businesses are willing to pay a higher rent and/or sales premium for property with improved energy performance (Eichholtz et al, 2011). A report conducted by the Australian Property Institute summarising the key findings of six studies on US green office buildings and concluded that, although there was variation among studies, overall property values were higher in green certified buildings (the Australian Property Institute, 2011). The possibility of higher property values and other benefits such as improved productivity of commercial building occupants is therefore a key motivation for investors to undertake deep energy retrofits, something supported by research conducted for the IEA Demand Side Management TCP.
In Massachusetts studies have found that property value increases from energy efficiency improvements were as high as USD 2 000 per utility programme participant, while on average in the United States the property value benefit is estimated at 10% of the value of the energy savings (NEEP, 2017). The National Australian Built Environment Rating System (NABERS) found that in addition to high energy rated NABERS buildings outperforming lower rated projects, demand by government tenants was stronger for these properties.
Mandatory energy performance ratings influencing sale and rental prices in Denmark
Denmark introduced energy performance ratings for buildings in 1997 – one of the first countries to introduce ratings. However, a study conducted by Jensen et al in 2016 concluded that these ratings did not make an impression on the real estate market until 2011 (Jensen et al, 2016). In 2011 real estate agents in Denmark started to report that highly rated energy efficient homes were easier to sell. One key factor leading to this increased value in highly rated homes was the introduction of Article 13 in the EU Directive on mandatory advertisement of energy performance on buildings during building sales.
A study conducted in Ireland also in response to the EU Directive’s Energy Performance of Buildings implementation locally showed similar results, that ultimately a higher energy efficiency rating had a positive effect in both rental prices and sale price of properties (Hyland et al, 2013).
While these are positive impacts for building owners, it is important to consider the effect energy efficiency improvements have on building occupants or renters. While renters may benefit from lower energy bills and prefer a highly efficient building, occupants may not be able to afford an increase in rent in their current property.
Energy efficiency reduces vacancy and tenant turnover
Increasing the quality of a rented space through energy efficiency can achieve increased thermal, noise and light comfort, improved health, safety and security, and reduced energy bills and operational costs. These benefits to the tenant can result in improved tenant satisfaction and improved ability to rent the space. In the United States, property value increases from energy efficiency measures resulting in reduced vacancy and tenant turnover have been found to equal the value of the utility bill savings achieved from the energy efficiency improvements (ACEEE, 2015).
A landlord may be hesitant to invest in new energy efficiency equipment, as they are responsible for the capital cost, while the tenant is the one benefiting from lower energy bills. This is often known as a “split incentive.” Evidence proving reduced vacancy and tenant turnover in energy efficient properties addresses this issue and provides an incentive for landlords to invest in energy efficiency measures in their buildings.
Energy efficiency increases commercial and industrial asset values
Manufacturing businesses can achieve increased asset values for equipment and facilities through energy efficiency that improve productivity and capacity utilisation. Increased asset values can also be achieved through measures that extend the useful life of the assets, with new technologies that reduce wear on energy consuming mechanical assets and that delay capital expenditures to replace equipment (ACEEE, 2015).
Energy efficiency increases utility asset values
Utilities can increase the value of their existing assets through strategic energy efficiency improvements that reduce the demand and increase the life of the utility assets. Utility investment in energy efficiency to reduce energy demand can also increase the value of current assets by reducing the need for future investment in increased energy capacity or backup generation (ACEEE).
Energy efficiency can enable a higher disposable income by lowering energy bills and other costs to benefit individuals, households and businesses. Less energy consumed leads to lower energy bills, therefore, customers spend less of their disposable income on energy. In many countries, citizens have avoided hundreds of dollars on their bills due to energy efficiency improvements over the past few decades, with savings typically higher in countries with long established energy efficiency policies and higher energy prices.
Energy efficiency benefits household disposable income/savings
Household disposable income is the income after taxes and social security contributions. Energy is a consumption good, although for many people it is perceived as a monthly expenditure. Hence, reducing the energy bill by becoming more energy efficient is effectively an increase in disposable income. Likewise, reducing other costs such as maintenance and operational costs, results in an effective increase in disposable income. For example, purchasing an LED lightbulb with a longer life means the lightbulb needs to be replaced less frequently and less resources go into the lifecycle of the bulb.
Energy prices effect energy efficiency impacts on disposable income
Savings on household energy bills due to efficiency vary significantly by country (Figure 1), due to variations in energy prices and the effectiveness of the energy efficiency policies. For example, France, Germany and the United States have comparable policy coverage and yet absolute energy bill savings due to efficiency gains since 2000 are much lower in the United States, where energy prices are half of those in Germany and almost 60% of those in France.
Figure 1. Average energy expenditure savings per capita in 2016 due to efficiency gains since 2000
The IEA found that without efficiency gains since 2000, average household expenditures on energy in Germany would have been USD 450 per capita, or 27% higher than actual spending in 2016. Energy efficiency saved German households USD 37 billion in 2016.
Figure 2. Decomposition of household energy bills in Germany, 2000-16
One of the most persistent challenges in energy efficiency policy is accounting for the phenomenon known as the “rebound effect” – where improved efficiency is used to access more goods and services rather than to achieve energy demand reductions.
The rebound effect is generally driven by one of three things:
The take-back effect, where energy users increase their consumption of the energy-using service, rather than accepting the same service at a lower energy or financial cost.
The spending effect, where energy users opt to spend their financial savings from reduced energy consumption in the purchase of other energy-consuming activities.
The investment effect, where investment in energy efficiency goods and services, stimulated by a policy, lead to an indirect increase in economic activity and energy consumption.
A higher disposable income can result in a rebound effect due to the spending effect; the availability of more income allows for spending on other energy-consuming activities. For example, if a family saves significantly on gas due to a more fuel-efficient car, they may use those savings to take a long car trip.