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Energy efficiency would be the primary driver of this change and account for around 45% of the 112 Gt cumulative CO₂ emissions savings in transport between the 66% 2°C Scenario and the New Policies Scenario. The deep transformation of the transport sector in the 66% 2°C Scenario, taking into account alternative powertrains, would require an average annual additional investment of almost USD 260 billion compared to the New Policies Scenario. |
Three-quarters of the cumulative investment in energy efficiency would be allocated to road transport and the remainder would be evenly split between aviation and shipping. In road transport, energy efficiency investment in both ICEs and hybrid vehicles would actually be lower in the 66% 2°C Scenario than in the New Policies Scenario, although their specific investment cost is higher, because of the significantly lower market share of conventional engine technologies. |
Similarly to other energy end-uses, the investment numbers alone conceal the benefits of energy efficiency improvements in terms of annual fuel expenditure reductions for consumers. To consider the costs and benefits from a consumer perspective, we calculate the payback period of investing in a recent vehicle relative to a reference vehicle, i.e. the incremental investment cost divided by the savings in fuel expenses over the lifetime of the vehicle. |
The results show strong variations in payback periods for road vehicle s, depending on the region and the powertrain type. In general, further energy efficiency investments in conventional and hybrid vehicles would tend to pay back more slowly over time as a result of the combined effect of an increase of the incremental cost of additional energy savings and a slowdown of the rise in fuel prices in the 66% 2 °C Scenario. |
The impact of these opposing trends is that the economic rationale for choice between technologies would change markedly over time in the 66% 2 °C Scenario. In 2030, for example, efficiency investment for a conventional gasoline PLDV would have a payback period between five to ten years, and even longer for hybrid gasoline vehicles. |
Perspectives for the Energy Transition: The Role of Energy Efficiency In 2030, investing in energy efficiency is economically rational since payback periods are lower than vehicle lifetime. Important opportunities remain in the freight sector. |
Although not always as obvious as supply-side options, energy efficiency is an essential component of the transition to a clean and sustainable energy system and the impact of energy efficiency measures can go far beyond energy savings. Energy efficiency improvements can be a key contributor to economic growth and social development. The avoidance of energy demand, due to efficiency gains, can result in lower energy expenditure, higher levels of energy security and avoided investment in new energy supply assets. |
Reduced fossil fuel use, stemming from energy efficiency (as well as electrification and renewable energy), delivers lower GHG emissions, lower fuel import bills for importing countries, better buildings and associated health improvements. Improving energy efficiency requires wider deployment of more efficient technologies that are usually associated with higher upfront investment cost. |
There are other factors not considered in this outlook that would increase the projected energy efficiency potential: for example, this analysis does not fully take into account the impact of digitalization and other breakthrough technologies in improving energy efficiency. |
Improvements in energy efficiency which lead to reduced fossil fuel energy consumption result in a reduction in GHG emissions. Energy efficiency measures would contribute 35% of the carbon abatement needed by 2050 for attaining the 66% 2°C Scenario. |
Energy efficiency can play a crucial role in ensuring long- and short-term energy security in a cost-effective manner. One way in which energy efficiency can benefit a country’s energy security is by reducing its reliance on imported energy. Energy efficiency also reduces the likelihood of supply interruptions. |
Alongside energy efficiency, renewables and electrification also have a very important role to play in the clean energy transition and many energy strategies being developed today are increasingly integrating efficiency and renewable energy along with electrification (IEA, 2017a). |
Electrification does not necessarily mean higher electricity demand; under the assumptions of the 66% 2°C Scenario, electricity demand would reach about the same level as in the New Policies Scenario. |
Scenario as stringent efficiency policies for appliances, lighting or electric motors and widespread adoption of efficient heat pumps would constrain electricity demand growth. |
But electrification means that electricity takes a higher share in final energy demand as its efficient use becomes pervasive across many more areas of energy demand while energy efficiency measures dampens the use of other fuels. |
Such electrification introduces new, more flexible sources of electricity demand that can be adjusted to more readily match the availability of renewables-based electricity generation, thereby enabling the indirect use of renewables in many sectors. |
Electrification can also improve overall energy efficiency where new technologies, such as heat pumps and electric vehicles, have better energy performance than existing technologies. |
Investment in energy efficiency reduces overall demand thereby enabling renewables to capture a higher proportion of supply. |
Energy efficiency, renewables and electrification could each contribute to a solution or simultaneously influence the realisation of more than one objective. |
Energy efficiency is a critical component of the energy transition. It has been demonstrated that energy efficiency can reduce greenhouse gas emissions by up to 75% compared with traditional fossil fuel-based systems. |
The concept of energy efficiency is often misunderstood as simply using less energy. However, this oversimplifies the complex interplay between energy supply and demand. |
Energy efficiency can be achieved through a range of measures including improvements in building design, better appliances and equipment, and changes in behavior. |
To achieve the required level of energy efficiency, new technologies, innovative solutions, and smart grids will be needed. |
Incentives and financial support mechanisms are necessary to encourage the adoption of energy-efficient technologies and practices. |
Energy efficiency can provide significant economic benefits, including job creation, cost savings, and increased competitiveness. |
Furthermore, energy efficiency can contribute to a more sustainable and resilient energy system by reducing dependence on fossil fuels and improving energy security. |
More effective energy efficiency policies are needed. Without rapid expansion of policy coverage and strengthening of existing policies and programmes, the efficiency gains needed to meet established environment and development goals will not be achieved. Energy efficiency should be a cornerstone of government efforts and well integrated in policy actions in all sectors. |
A strategic mix of policies is important if energy efficiency is to fulfil its fundamental role in the transition to a clean energy system. Committing to a long-term policy strategy for improving efficiency (e.g. setting targets, establishing sectoral pathways), is an important complement to appropriate energy pricing policy, such as removing fossil fuel subsidies. |
Policies need to be designed to be appropriate to national and sectoral circumstances, and properly implemented. There is a wealth of experience to learn from best practice in policy design and execution to maximise impact at least cost. |
Policies and programmes should focus on unlocking investment. Many sources of capital, both public and private, are available to address particular market needs for efficiency improvements. In addition to ambitious and well-designed policy measures, a range of economic measures should be used to deliver the required investment, such as fiscal measures (e.g. taxes), financial measures (e.g. loans and grants) and market-based instruments (e.g. utility obligations and auction schemes). |
Building the capacity needed to deliver energy efficiency is critical. Governments need to make significant investment in developing adequate capacity with a focus on effective policy design, governance, compliance and market development. |
Perspectives for the Energy Transition: The Role of Energy Efficiency consider efficiency measures before pursuing expensive supply -side options to ensure that energy strategies are undertaken at the lowest cost to society. Setting an ambitious energy efficiency target is also a way of maintaining high -level focus on improving efficiency. |
For investors, important elements of a n energy efficiency strategy would relate to the objectives, timelines and policy frameworks. An agreed long -term overarching target also gives confidence to businesses and consumers that the government is serious about maintaining policy measures over a timeframe long enough to influence investment strategies. Providing clarity on ambition levels and the way in which policy is likely to evolve is essential for both energy consumers and the manufacturers of energy -using products in order to plan their investment decisions. |
National energy efficiency targets can drive action towards improved efficiency by providing a high -level focal point for the development of the policies required to meet them. There is not one prescription for how to set a target for energy efficiency. Various approaches have been taken across the world, which have their pros and cons. |
Successful energy efficiency provides numerous benefits for households, businesses and society (Figure 3.1). For example, energy efficiency measures can: improve energy security and trade balances by reducing reliance on fuel imports or freeing up fuel for export; support economic growth, such as by boosting household disposable income through lower energy bills; and improve industrial productivity. In the power sector, energy efficiency improvements can reduce the costs of providing energy system adequacy by limiting the infrastructure required to transmit and distribute energy. |
Efficiency gains are beneficial to address energy poverty by enabling limited energy resources to provide more energy services and they can lead to better health conditions, through improvements in outdoor and indoor air quality. A detailed analysis of the multiple benefits of energy efficiency has been documented by the IEA (IEA, 2014a). |
Improvements in energy efficiency can also contribute to reaching UN Sustainable Development Goal targets. For example, reduced energy consumption from improved energy efficiency would allow a higher number of people in developing economies access to electricity and energy services (contributing to the delivery of SDG7 target 7.1 – to ensure universal access to affordable, reliable and modern energy services by 2030). |
Making a strong, credible commitment to improving energy efficiency can be explicitly linked to tackling climate change and other policy objectives. Energy efficiency targets are already the cornerstone of many economies’ climate policy and feature in many countries’ Nationally Determined Contributions (NDCs). The UN Sustainable Development Goals (SDGs) recognise the importance of energy efficiency; SDG7 includes a target to double the rate of energy efficiency progress by 2030 (Target 7.3). |
Energy efficiency brings multiple benefits. It is characterised by its cost-effectiveness relative both to other actions needed to achieve climate objectives and, in many cases, to taking no action at all. This means that well-designed policies can boost economic growth by improving productivity in the commercial sector, increasing disposable income by cutting energy bills in households and providing employment in regions with slack labour markets. |
Linking the co-benefits of energy efficiency with the large levels of investment required should provide greater political capital to support the implementation of the wide range of policy measures that will be needed to achieve a clean energy transition scenario. |
Successfully harvesting the efficiency potential of the energy sector requires policies that align with long-term vision and targets, and signal ambitious and concrete actions to be taken at the sector and subsector levels. A range of policy measures can be used to increase the amount of investment for improved energy efficiency of goods and services. |
Decisive and well-directed policy can affect the amount of investment required to deliver energy efficiency, the speed and scale of its uptake and even who bears the cost. A mixture of regulations, market-based incentives and information-based policies, supported by cost-reflective energy pricing is needed to create the right conditions for investment, innovation and the development of new business models. |
Regulatory approaches are key policy tools in many sectors. For buildings, appliances, equipment, and lighting building codes and minimum energy performance standards (MEPS) are the most important measures in efficiency policies, mostly as regulations, but sometimes as voluntary agreements with product manufacturers. |
Regulations, information and incentives to improve energy efficiency need to be signalled in advance and underpinned by robust institutional capacity. |
Information and incentive-based policies also play an important role in the transformation of markets where regulations are in place. Labels raise awareness among consumers and provide the infrastructure for incentives and procurement campaigns aimed at increasing the average efficiency of new products and expanding the market for the most efficient products, making it easier to strengthen MEPS in future. An example is in the passenger vehicle market, where both market-based incentives, such as tax credits at the point of purchase, and other incentives such as priority access to special lanes and parking facilities, support the uptake of electric vehicles (EVs). Some of these measures do not significantly affect the overall efficiency of the new vehicle fleet at the time, but do move markets closer to the large-scale uptake of EVs, enabling a faster transition in future rounds of standard setting. |
Incentives include fiscal measures, which have been successfully used to penalise inefficient goods and services and to provide advantages such as lower taxes on favoured goods and services. For example in the transport sector, fiscal measures have been used to incentivise the purchase of efficient vehicles (through vehicle registration taxes and differentiated taxes on vehicle use) and fuels (through fuel taxes). In the buildings sector, taxes levied at the point-of-sale or annual property taxes can be linked to improving energy efficiency in commercial and residential buildings. In industry, companies that adopt efficient equipment or energy management systems can be rewarded through reduced energy or environmental taxes (as in Germany) or through enhanced capital allowances (as in the United Kingdom) that reduce a profitable company's tax bill. |
A combination of regulatory, information and incentive-based policies can lead to transformative impacts on markets. In the appliances sector, for example, regulation (e.g. MEPS) act to remove the least efficient products from the market, information (e.g. appliance labels) help to differentiate product quality to consumers as well as within the supply chain, and incentives can help target and accelerate the uptake of the most efficient products. |
Where appliance standards have become more stringent over time, manufacturers have usually been able to produce models to meet the enhanced standards. There appears to be a continuing “supply” of energy efficiency for appliances, even if some of the energy savings may be shifted to increased size or additional features. |
Energy prices have a significant influence on investment and behaviour related to energy consumption. Energy efficiency measures are best supported by energy prices that reflect the true costs of production, including the external costs associated with the greenhouse gas (GHG) emissions and removing fossil fuel subsidies (Box 3.3). |
Ambitious policy measures require support from a range of other economic measures to underpin energy efficiency investment. |
Fossil-fuel subsidies are prevalent around the world. The rationale for the subsidies often has been to achieve particular political, economic and social objectives; for example, to reduce energy poverty, ensure energy access and redistribute wealth stemming from the exploitation of indigenous resources. |
Many economies have taken advantage of lower fuel prices, as they allow governments to reduce subsidies without raising end-user prices too steeply, thereby reducing the political sensitivity. Fossil-fuel subsidy reform can be accompanied by supporting policies and measures, notably by efficiency policies, which can in fact enhance the impact of the efficiency policy. |
Buildings sector policy insights Today around two-thirds of energy consumed by equipment in residential buildings is not covered by mandatory energy efficiency standards. |
Moreover, a significant share of the global residential buildings stock in 2050 will have been built within the next 10-15 years, indicating the need for early action to avoid lock-in of inefficient buildings and energy demand from these long-lived assets. |
perspectives for the energy transition the role of energy efficiency such as solar thermal chapter 2 also highlighted that in the buildings sector with the exception of lighting where leds are cost competitive investments in improving energy efficiency generally have a payback period of more than five years to deliver the required levels of investment for the clean energy system transition carefully designed policy packages are needed to address the sometimes lengthy payback periods and other market failures and barriers that affect the buildings sector |
to deliver the required levels of investment for the clean energy system transition carefully designed policy packages are needed to address the sometimes lengthy payback periods and other market failures and barriers that affect the buildings sector building codes and standards are the most important measures for the construction of new buildings improving the efficiency of new buildings is easier and more cost effective than renovating existing buildings given the long lived nature of most heating and cooling measures failure to tackle the thermal properties the building envelope at the time of construction risks the loss of a significant proportion of the most cost effective energy efficiency potential for example there is the risk of locking in inefficient heating and cooling systems in new buildings that have relatively poor insulation |
This means that policy makers need to urgently prioritise the coverage of codes and standards and progressively strengthen them towards near-zero emissions levels. Technology neutral standards that specify energy- or climate-related performance levels allow developers to be innovative and choose least-cost solutions. Ensuring compliance with new building codes and monitoring performance once completed is particularly important in buildings, and policy design should explicitly include these elements. Third-party accreditation of building professionals and service installers can improve compliance. Demonstration buildings and temporary financial incentives for best available technologies can also give a boost to the market and can help raise the bar on efficiency in subsequent building code revisions. |
Unlocking the investment required to renovate the existing building stock would be key to achieving the 66% 2°C Scenario. Over half of the residential buildings that will exist in cold climates in 2050 have already been built and in warm climates 27% of the 2050 stock already exists (Figure 3.4). In the 66% 2°C Scenario, most of these buildings would need to have some form of deep renovation over the period to 2050. This is a tremendous challenge for policy makers, investors and energy efficiency market players. |
In contrast to new buildings, codes and standards generally have a more limited role in improving the efficiency of the existing building stock. There are examples however, such as in England and Wales, where MEPS have been introduced recently for rental properties (UK Government, 2017). The efficiency levels of buildings can also be linked to incentive measures, such as variations in annual property and point-of-sale taxes. Even though the impact of such measures may be low initially, it is important to send signals to the market, setting expectations of increased future performance requirements. Mandatory regular energy audits play a key part in ensuring compliance and accuracy of these kinds of policy measures. |
For renovating existing buildings non regulatory measures will need to be employed for example in Italy fiscal measures have been used to successfully drive energy efficient building renovations in residential and non residential buildings under the scheme building owners can reduce up to 75% of the taxes paid on a diverse range of eligible technologies up to a maximum spend of EUR 100000 Euro the reward for building owners has been two fold improvement in energy efficiency and reduction in personal or corporate income taxes |
The nature of energy efficiency investments for renovating buildings upfront investments to deliver long term financial savings and other benefits means that there is significant scope for innovative business models to increase the flow of investment and finance financial innovation has been underway for some time and some financial products already are considered mature such as dedicated credit lines energy performance contracting covered bonds and leasing |
Increasing requirements on existing homes may help to drive the mortgage market for example if non renovated homes become a resale risk as a result of not meeting resale requirements banks may be enticed to provide greater access to preferential rates to reach new performance requirements |
There are other emerging financial products and business models that may provide additional funds and investment for energy efficiency such as Energy service agreements e g with ESCOs pay for performance service contracts between a third party investor and an asset owner to deliver energy savings as a service On bill financing and repayment e g California utilities that pay the upfront efficiency investment which are then repaid via utility bills On tax finance where upfront financing by private capital is repaid via long term tax bills Community energy finance usually a local community using a co operative structure |
Both on bill repayment and on tax finance utility and tax bills have the potential to significantly grow the energy efficiency investment markets in commercial and residential buildings the improvement and additional certainty around the default risks together with their resolution of the split incentives between owner and occupant and over time and their successful initial use in the United States make them key emerging financial instruments to improve finance flows to energy efficiency investments to private sector buildings |
Progressively higher levels of incentives as the efficiency improvement increases. Ultimately, the challenge is to stimulate a renovation market that leads to broad-scale, deep interventions across the existing building stock. |
Energy audits can play an important part in helping to build an accurate picture of the performance of existing buildings, which can in turn inform roadmaps for achieving deep renovations. Innovative financing and incentives, accompanied by training and accreditation measures to ensure consistency and quality of interventions, are further key policy ingredients for policymakers to consider. |
The main policy approach for delivering more efficient equipment under the 66% 2°C Scenario would be to set stringent MEPS supported by energy labels, which would be ratcheted up over time. Currently, more than 80 countries have implemented mandatory MEPS and labels for major energy-using equipment. |
Improvements in efficiency can be obtained without significant increases in consumer purchase prices. There are many well-known market barriers which hamper the accelerated uptake of energy efficiency lighting and appliances. |
A market transformation approach – beginning with policy intervening early in the supply chain (e.g., at the point of manufacture and/or sale) – is more cost-effective than forcing early replacement or removing equipment after it has been purchased. |
can deliver significant energy savings Minimum energy performance standards (MEPS), reinforced by energy labelling, is a strategic policy combination that has proven to be highly effective at improving efficiency of new appliances. These policies have provided multiple other benefits such as improved comfort levels, reduced water consumption and lower emissions (IEA -4E, 2016). |
In Australia, a significant reduction in the average energy consumption of new refrigerators has been driven largely by MEPS (Figure 3.5). In two successive rounds of MEPS, the average consumption of new refrigerators declined by around 40%. In 2001 at the time of announcing the MEPS to become effective in 2005, no products on the market could meet the standards. Over the same period the average consumer purchase price fell. In the absence of MEPS, the efficiency of the products on the market would not have improved (E3, 2017; Harrington, 2017). |
Similar findings are evidenced in other markets. In the United States, for example, four rounds of MEPS for refrigerators (1990, 1993, 2001 and 2014) drove average efficiency improvements of 4% per year and average purchase price reductions of 2.5% per year from 1989 to 2010 (Van Buskirk et al., 2014). |
Other approaches can be used to support MEPS by helping to “pull” the market, i.e. voluntary measures to encourage the more efficient offering on the market. They include information and targeted incentives to promote the best available equipment and practices. Measures that support very high efficiency also bring forward innovation and lower future costs of increased efficiency. |
Government support can be effective, as seen in Bangladesh's initiative to procure and distribute over 10 million energy-efficient compact fluorescent lamps, which avoided the need for 300 megawatts of generating capacity. |
United for Efficiency (U4E) provides extensive guides and tools to inform policy makers as they develop their approaches to MEPS. |
In general, support measures should not be used to subsidise technologies that only offer average efficiency levels. |
Japan uses an approach known as “Top Runner” where the current best practice performance levels become the future minimum standards, which has delivered outcomes similar to MEPS in other countries. |
The cost of increased efficiency may include additional costs upfront, but these are offset by lower consumer energy bills over the life cycle. |
Recent research suggests that ex-ante engineering cost estimates are overestimating the actual cost of incremental efficiency gains following regulation. |
Such analysis is not new: other researchers have observed a robust long-term decline in both specific price and specific energy consumption of large appliances, e.g. IEA 4E mapping and benchmarking studies. |
Their results demonstrate that technological learning leads to substantial price decline, thus indicating that the introduction of novel and initially expensive energy efficiency technologies does not necessarily imply adverse price effects in the long term. |
Their analysis suggests that effective energy policy might be able to bend down energy experience curves, which would mean investment costs are lower than projected. |
The energy savings and investment analyses undertaken in this report are also based on engineering costs, with costs declining over time. |
To achieve this reduction in energy intensity, cumulative additional investment to 2050 would be just under USD 2.7 trillion, relative to the New Policies Scenario. |
Much of the additional investment in industry required to meet the 66% 2 °C Scenario would pay back within three to five years in the energy-intensive sectors and in less than three years in the light industry sector, as shown in Chapter 2. |
The combination of carbon pricing and reductions in technology costs with deployment are significant factors in bringing down payback periods and imply that most policy effort should be focused on removing traditional market barriers for energy efficiency in the industry sector in order to: |
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The importance of electric motor-driven systems in light industry is that they are responsible for over 50% of global electricity consumption with even higher levels of electricity consumption in the industry sector over 70% in some countries and regions. |
China is responsible for the majority of global electricity demand in industrial motor-driven systems - 42% in 2014 - and will continue to be responsible for the majority of future electricity demand though there is strong growth in India and other emerging economies. |
Policy measures to ensure that inefficient motors are replaced at the end of their operational life or to encourage early replacement can unlock efficiency benefits such measures may include third-party finance to support the cost of upgrading motor units and support for energy service companies ESCOs. |
Continued adoption and strengthening of MEPS for motor units is an important policy measure however efficiency gains become more marginal due to the already high efficiency levels of existing motors therefore further gains must be obtained through improvements to the entire motor-driven system. |
The introduction and strengthening of standards can drive an uptake of VSDs and more efficient end-use devices however given that a VSD can be installed into an existing motor system with relative ease wider deployment could potentially be achieved through the expanded use of ESCOs. |
Despite technological improvements the majority of energy efficiency improvements associated with electric motor-driven systems in the 66% 2°C Scenario would need to come from system-wide measures including reducing leaks and unnecessary use and improving operation and maintenance practices. |
The key to unlocking the efficiency gains from these system-wide measures is the increased adoption of energy management systems use of electric heat pumps is a good example of how an electric motor-driven system in light industry can contribute to efficiency improvements. |
Perspectives for the Energy Transition: The Role of Energy Efficiency Making equipment such as VSDs for electric motors or electric heat pumps eligible on the product would provide stimulus for their adoption. Installing VSDs for electric motors and electric heat pumps are opportunities for industrial energy efficiency that can be replicated at scale and as part of smart energy management systems. |
Energy management systems provide the procedures and practices for an industrial firm to ensure the systematic planning, analysis, control and monitoring of energy use in order to continuously improve efficiency. An EMS can take many forms, but since its launch in 2011, the global standard is ISO 50001. By the end of 2016, there were around 20,000 ISO 50001 certifications worldwide, covering nearly 24,000 sites. |
More than 20,000 ISO 50001 certificates for industries were in place in 2016, 40% of which were in Germany. ISO 50001 has become a central focus of energy management programmes in industry in many countries, including Germany, Indonesia, Korea and the United States. So far in China, the adoption of ISO 50001 has been limited as the major industrial energy efficiency policy, where the Top 10,000 Programme, incorporates an equivalent Chinese energy management standard (GB/T 23331). |
Successful energy management systems have been implemented in various countries, including Germany where it is projected that nearly half of the global total ISO 50001 certifications by the end of 2020 will be held. |
All energy management programmes have challenging aspects. As implementation of an EMS does not guarantee efficiency improvements, some incentive schemes have coupled their implementation with agreed targets for improvement of energy efficiency (e.g. the Long-term Agreements in the Netherlands). |
Several countries including Canada, China, Germany and Mexico are seeking to increase the adoption of EMS by establishing energy efficiency learning networks. |