Energy efficiency can enable lower energy prices by reducing the need to add expensive new power generation or transmission capacity and by reducing pressure on energy resources. Decreased demand for energy services across several markets can prompt a reduction in energy prices.
When energy efficiency results in reduced consumption, it can reduce prices. This is the case especially if energy efficiency activities are sufficiently widespread and of a large enough scale, for example, fuel economy standards for vehicles. Some energy sources (such as oil) are global commodities; change in demand in only one region may not have a significant impact on energy prices. Local supply constraints may, however, translate into changes in energy prices locally if energy efficiency measures free the supply of the energy sources and lead to improved security of energy supply. In time, global energy markets may be more closely linked, at which point if energy efficiency measures could reduce energy commodity prices across all countries.
Economic models use price elasticities to represent how people and businesses respond to changes in the price of energy and goods. Policy makers need to be aware of the key price elasticities and assumptions included in a model, as these can be important determinants of macroeconomic analysis results.
The duration of energy price changes strongly influences behaviour, especially if revenues and return to capital changes – reducing the incentives to invest in or to replace stock. Several studies show that the long-term effects of higher energy prices or taxes may exceed the short-term effects by a factor of 3 to 4. Consumers of these services are less likely to respond to short-term changes in price.
In 2016, while energy efficiency continued to have gains, retail energy prices declined (Figure 1). Natural gas prices dropped 5 percentage points in 2016 after falling 6 percentage points in 2015; prices are expected to continue to weaken further in 2017 due to shale gas production in the United States and LNG exports from Australia. Electricity prices remained stable or declined slightly, and composite prices for oil products dropped 9 percentage points in 2016 after a 20 percentage point fall in 2015.
Figure 1. Indices of average residential retail energy prices in OECD countries
Source: Energy Efficiency 2017
Since the sharp drop in oil prices after 2014, residential transport fuel use has decreased in some countries, notably in Japan (3%), has remained flat in others, including France, the United Kingdom and Mexico, and has increased in some of the strongest economies, including China (12%), Germany (1%) and the United States. In the United States, where fuel taxes are low and retail prices dropped by more than 30%, there has been a 6% increase in gasoline consumption since 2014. Fuel prices dropped by a quarter in China since 2014, but there was a 12% increase in fuel use due almost entirely to people driving more kilometres every year, fewer people taking public transport and vehicle occupancy rates decreasing (IEA, Energy Efficiency 2017).
Despite recent decreases in energy prices, improvements in household energy efficiency continued in 2016. For example, in Germany, even though residential energy prices have fallen since 2014, the intensity of household energy consumption continued to improve in line with the trend since 2000.