Energy efficiency is essential for achieving global energy transition goals, particularly the targets of net zero emissions. Improving energy efficiency in end uses like heating, cooling, lighting, appliances, transport and industry can significantly reduce energy demand. Investments in energy efficiency provide multiple socio-economic benefits like lower energy costs, improved competitiveness, greater energy security, and reduced environmental impacts. To realize the full potential of energy efficiency, policy makers need to put in place supportive policies and regulatory frameworks, and mobilize public and private sector financing. According to the IEA, global investments in energy efficiency will need to increase by 30% from current levels in 2023 to around $560 billion in 2030 to keep pace with increasing demand. This article summarizes key information and conclusions on the importance of scaling up investments in energy efficiency measures and technologies to accelerate clean energy transition.
Energy efficiency critical for meeting climate goals
Multiple studies by the IEA and other organizations highlight that energy efficiency improvements will need to account for over 40% of the greenhouse gas emission reductions required to achieve net zero emissions by 2050. For example, the IEA’s Net Zero Emissions by 2050 Scenario envisions extensive energy efficiency adoption across all sectors, which helps limit growth in final energy demand to around 10% between 2020 and 2050, compared to over 30% growth under current policies. Significant efficiency gains in industry, transport, buildings and energy supply are needed. Buildings offer the largest potential energy savings – the IEA estimates efficiency could curb building-related emissions by 60% in 2030 compared to current policies. Hence energy efficiency is indispensable for reaching global climate stabilization goals in a cost-effective manner.
Investments in efficiency create multiple benefits
In addition to emissions reductions, energy efficiency delivers substantial economic and social welfare benefits. For example, the IEA finds that pushing efficiency to its realistic maximum potential could boost global GDP by 4% in 2040. Households and businesses can reduce energy costs through more efficient appliances, equipment, building envelopes and industrial processes – every dollar invested in efficiency returns about $3 in cost savings. Energy security is enhanced as imports of fossil fuels decline. Health and productivity improve as indoor and outdoor air pollution decrease. Furthermore, energy efficiency investments are labor intensive which creates jobs and economic opportunities. McKinsey estimates that ambitious energy productivity improvements could create over 15 million net new jobs globally by 2030. Hence rapidly scaling up energy efficiency financing is a win-win for climate, economy and society.
Policy and regulations key to drive investments
Governments have a critical role in creating enabling conditions for energy efficiency investments through appropriate policies, regulations, incentives and engagement programs. For example, mandatory energy performance standards, labeling schemes, and building codes drive the market for efficient products and services. Utility obligations, white certificate schemes and emissions trading programs incentivize end use efficiency. Tax breaks, subsidies and concessional financing motivate businesses and consumers to invest in efficiency. Information campaigns, energy audits and technical assistance address awareness and capability barriers. According to the IEA, efficiency policy coverage expanded from 17% of global final energy use in 2000 to 28% in 2021 but needs to reach 51% by 2030. Hence policy makers need to urgently develop comprehensive policy packages to drive energy efficiency uptake and financing at the necessary pace and scale.
Mobilizing public and private capital critical
IEA analysis shows that 70% of the financing for energy efficiency investments between 2021 and 2030 will need to come from private sources – households, businesses, banks and institutional investors. But the public sector also has a key role through development banks, green banks, revolving funds and green bonds. For example, the green municipal bond market reached $88 billion in 2021, with energy efficiency projects accounting for about 30% of proceeds. To accelerate capital flows, financial institutions need to properly account for energy efficiency in lending decisions and integrate climate-related risks. Governments can help by providing credit guarantees, subsidized interest rates and tax relief. New business models like energy service companies (ESCOs) also unlock efficiency investments by removing upfront costs. Public-private partnerships, blended finance schemes and aggregators can effectively pool small distributed projects to access institutional capital. Thus concerted efforts are required from all stakeholders to rapidly scale up energy efficiency financing.
Improving energy efficiency across sectors through appropriate policies, business models and investments is indispensable for achieving net zero goals and realizing the multiple benefits of clean energy transitions. Realizing the full potential of energy efficiency requires urgently scaling up implementation and financing globally.