Multiple Benefits of Energy Efficiency

Disposable Income

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

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

Source: IEA, Energy Efficiency 2017

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

Source: IEA, Energy Efficiency 2017

 

The rebound effect

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.