A compendium on the many benefits of energy efficiency
By Denzil Walton
Traditionally the benefits of energy efficiency have been focused on energy demand reduction and lower greenhouse gas emissions. However, there are many other areas in which clear benefits of energy efficiency have been documented.
Energy efficiency is in fact a major energy resource. Macroeconomists have stated that energy efficiency is the surest energy supply that exists. It could even be described as the largest or “first” fuel. Such a view is backed up by a remarkable statistic provided by International Energy Agency (IEA) member countries. It indicates that in 2010, the energy use avoided by these countries was larger than actual demand met by any other single supply-side resource, including oil, gas, coal and electricity. The statement appears in a unique and far-reaching report published by the IEA entitled “Capturing the Multiple Benefits of Energy Efficiency”
But what are the specific benefits of energy efficiency beyond the obvious ones of reducing energy demand and greenhouse gas emissions? Clear benefits of energy efficiency have been documented in five areas, which then break down into 13 further sub-topics, as illustrated in the figure:
- Enhancing energy system security – Energy security, delivery and prices.
- Economic development – Macroeconomic development and industrial productivity.
- Social development – Poverty alleviation, health & well-being, and employment.
- Environmental sustainability – Local air pollution and resource management.
- Increasing prosperity – Public budgets, disposable income, and asset values.
Enhancing Energy System Security
Energy efficiency measures have been considered as the surest source of energy supply that exists, and a means to ensuring energy security. They would do more than simply improve the trade balance; they would also provide security against disruptions, as many of the countries supplying fossil fuels have a tendency to conflict. Energy efficiency improvements that result in reduced demand can improve the security of energy systems across the four dimensions of risk. These are the availability, accessibility, affordability and acceptability of fuel.
In the area of energy delivery, utilities and other energy providers gain in a variety of ways from energy efficiency measures. Direct benefits include lower costs for energy generation, transmission and distribution, improved system reliability, dampened price volatility in wholesale markets, and the possibility of delaying or deferring costly system upgrades. Providers can also benefit indirectly through benefits that accrue to customers from improved affordability of energy services, which in turn can reduce arrears and the associated administrative costs for utilities.
If energy efficiency activities are sufficiently widespread and of a large enough scale, reduced energy consumption and costs can cut energy prices. Some energy sources (such as oil) are global commodities; change in demand in only one region may not significantly impact energy prices. However, local supply constraints may translate into changes in energy prices locally if energy efficiency measures improve the security of energy supply. As a general rule, decreased demand for energy services across several markets should prompt a reduction in energy prices. Lower energy prices can influence the economic competitiveness of industry and commerce and reduce the burden of energy costs for individuals.
Economic Development
Energy efficiency improvements can deliver macroeconomic impacts across the whole economy, with direct and indirect impacts on economic activity, employment, trade balance and energy prices. In general, analysis of GDP changes due to large-scale energy efficiency policies show positive outcomes with economic growth ranging from 0.25% to 1.1% per year. The potential for job creation is huge too. Estimates range from 8 to 27 job years per EUR 1 million invested in energy efficiency measures.
Energy is often viewed by industry as an operational cost; energy savings are perceived as incidental benefits of other investments rather than as a central value-generating proposition. Yet industrial productivity will be enhanced through energy efficiency measures that deliver substantial benefits in addition to energy cost savings. They enhance competitiveness, profitability, production and product quality, and improve the working environment. They can reduce costs for operation and maintenance, and for environmental compliance. The value of the productivity and operational benefits derived can be up to 2.5 times (250%) the value of energy savings. This can substantially reduce the payback period for energy efficiency investment, in some cases from four years to one year.
Social Development
Poverty alleviation continues to be an urgent global focus, with recent estimates indicating that 1.2 billion people, primarily in developing countries, are still without access to electricity. As energy suppliers improve their own efficiency, they can provide electricity to more households, thereby supporting increased access to energy. In both developed and developing countries, the poor are more likely to live in inefficient housing and are less able to afford the up-front cost of energy efficiency goods and services; thus, they face higher energy costs than the wealthy. As energy bills are reduced, poorer households have the ability to acquire more and better energy services; they can also spend the freed up income on satisfying other critical needs.
By improving the quality of indoor environments and reducing energy bills, energy efficiency measures in buildings have the potential to significantly improve the health and well-being of occupants. In the residential sector, health and well-being benefits from insulation and heating system improvements have, in many cases, been shown to significantly outweigh energy savings, with benefit-cost ratios as high as 4:1. Health and well-being benefits are consistently strongest among vulnerable groups, including children, the elderly and those with existing illnesses. Realised health improvements generate downstream social and economic impacts, including lower public health spending. Addressing indoor air quality through energy efficiency measures could, in a high energy efficiency scenario, save the European Union’s economy as much as EUR 190 billion annually.
Investment in energy efficiency can generate a net gain in employment rates both directly and indirectly. Reduced unemployment provides a variety of social benefits, in addition to monetary ones. These include improved household incomes and reduced budgetary outlays for unemployment payments. While the value of jobs created can be complicated by various factors, estimates have ranged as high as 27 job years created for every EUR 1 million spent on energy efficiency regulation measures in the residential sector.
Environmental Sustainability
Energy efficiency in all sectors can play a major role in reducing local air pollution, and particularly outdoor concentrations of air pollutants such as sulphur dioxide, particulate matter, unburned hydrocarbons and nitrogen oxides. In doing so, it can drive a range of associated economic, environmental and health benefits. Measures that support public transport planning, lower-emission motor vehicles and active travel can have particularly strong impacts. In China, for example, the problem of air pollution is particularly acute, due to the rapid increase in the number of motor vehicles and large share of coal-based electricity generation. The total health costs associated with outdoor air pollution in China’s urban areas in 2003 was estimated at between USD 25 billion and 83 billion, accounting for 1.2% to 3.3% of national GDP.
Nationally and internationally, lowered energy demand can optimize resource management and reduce pressure on scarce natural resources, reducing the need to explore increasingly challenging contexts for extraction (such as ultra-deep offshore, arctic and shale). This can also minimise the related incremental investment costs and environmental uncertainties. Reducing energy consumption and emissions through energy efficiency also plays a role in reducing waste and associated pollution of land and water, thereby contributing to efforts to combat ocean acidification and limit negative impacts on biodiversity.
Increasing Prosperity
Energy efficiency improvements can have a significant impact on public budgets. This could be through reducing government expenditures on energy or by generating increased tax revenues through greater economic activity and increased spending on energy efficiency-related and other goods and services. Countries that rely on fuel imports are likely to benefit from improved currency reserves. Domestic energy efficiency in exporting countries can free up additional fuel for export, thereby leading to increased revenue. For countries with energy consumption subsidies, lower consumption reduces government budgetary outlays to finance the subsidies.
Across all income levels, energy efficiency improvements that reduce energy bills will increase disposable income for individuals, households and enterprises. A simple example is the increase in disposable income for households through owning a more fuel-efficient vehicle.
In the area of asset values, recent evidence suggests that individuals and businesses are willing to pay a rental and/or sales premium for property with better energy performance. A study of the value of this premium for commercial property indicates that every USD 1 saved in energy costs translates, on average, to acceptance of a 3.5% increase in rent and a 4.9% premium in market valuation.
Conclusion
Looking at the multiple benefits possible as a result of energy efficiency enables a fuller understanding of the potential of energy efficiency to generate tangible improvements in economic and social development. It signals a shift away from the traditional view of energy efficiency as simply delivering invisible energy demand reductions. Instead, it recognises its important role within the portfolio of mainstream economic policies for economic and social development. In this respect a multiple benefits approach could help to shift energy efficiency from its status as the “hidden fuel” to a recognition of its role as the “first fuel”.
