Covid-19 and energy efficiency

Even before the crisis, action on energy efficiency was urgently needed

In recent years, the IEA has been highlighting the need for urgent action to counteract the slowing rate of energy efficiency improvement1 observed since 2015.

In 2019, it seemed the downwards trend in global energy efficiency improvements could begin to flatten. Global primary energy intensity improved by 2% in 2019, compared with 1.1% in 2018.

Average annual change in primary energy intensity improvement, historically and in the Sustainable Development Scenario, 2010-2040

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Three main factors contributed to this rate of improvement. First, technical energy efficiency improvements were crucial, offsetting almost half of the potential increase in global energy demand that would have occurred due to economic growth. Second, global economic growth itself was significantly lower in 2019, at 2.9% compared with 3.6% in 2018. This reduced the size of the “activity effect” – the increase in energy demand due to economic activity – by nearly a fifth. Third, more temperate weather in key parts of the world reduced the need for coal, gas and electricity for heating and cooling, which so energy demand was over 10% lower than would have been expected from economic activity. 

Change in global primary energy demand and causes, 2018 compared to 2019

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This final factor – weather – is critical to properly interpreting what first appears to be an improvement in global energy intensity in 2019. Correcting for the weather, the energy intensity improvement rate in 2019 (1.6%) was almost identical to 2018 (1.5%).


Key terms used in this report

Activity: An action that creates demand for energy. A change in activity that effects a change in energy use is referred to as the “activity effect”.

Structure: The mix of activities within an economy or sector. A change in structure that effects a change in energy use is referred to as the “structural effect”.

Energy intensity: Energy use per unit of activity. Lower/higher energy intensity could indicate that energy is being used efficiently/inefficiently but not always. For example, making steel is an energy-intensive process, but energy intensity varies between steel factories for a range of reasons.

Technical energy efficiency (technical efficiency): The ratio of energy use per unit of activity or services provided by energy-using technologies, such as buildings, appliances and equipment, industrial equipment and processes, and vehicles. For example, a car that uses 1 litre of fuel to travel 20 kilometres is more technically efficient than one that uses 2 litres of fuel to travel 20 kilometres.


The Covid-19 crisis adds a new layer of uncertainty for global efficiency efforts

Against a backdrop of slow energy efficiency improvements, the Covid-19 crisis adds a new layer of uncertainty. First, the current economic crisis threatens to delay investments by businesses and households in more efficient technologies. While investments may not have changed significantly yet (particularly as projects are often agreed years in advance), the resilience of investments will be tested in the coming years, particularly if the crisis deepens.

Second, the crisis has triggered changes to behaviour and markets that are also adding uncertainty about energy efficiency progress. For example, the unprecedented drop in aviation transport demand could change the energy intensity of international travel and freight forever, depending on how the aviation industry recovers after the pandemic. Meanwhile, increased rates of teleworking are changing the way we move around cities. Such changes could reduce energy intensity in some instances but increase it in others.

Third, the shape of government policy responses to the economic crisis will have a strong bearing on energy efficiency progress, for better or worse. In industry, for example, stimulus funding in the past has sometimes resulted in ageing, inefficient facilities operating for longer. If governments do not consider the energy system in the design of Covid-19 stimulus packages, similar results could ensue.

On the other hand, the socio-economic benefits of energy efficiency are now becoming widely recognised. Governments are starting to rise to the challenge of “building back better” from this crisis, announcing billions of dollars in stimulus spending to increase energy efficiency, particularly in buildings and transport.

Thus, while the full impact of the Covid-19 crisis may take years to properly understand, the crisis clearly poses both risks and opportunities for global energy efficiency.

2020: An atypical year for tracking changes in energy efficiency

Overall, the IEA expects global primary energy demand in 2020 to decrease by 5.3% from 2019. With global GDP falling by 4.6%, primary energy intensity improvement is projected to increase by only 0.8%, the lowest rate since just after the last global economic crisis in 2010. This is well below the average annual improvement of more than 3% which would be consistent with meeting international climate and sustainability goals. 

However, exogenous shocks like the Covid-19 pandemic make it difficult to measure progress on energy efficiency accurately using metrics such as primary energy intensity2 because they have such large effects on both the numerator and denominator.

In the current crisis, primary energy intensity mainly reflects the pandemic’s impacts on the economy rather than efforts to use energy more efficiently. For example, OECD analysis of five European economies shows that the crisis is likely to affect each economic sector directly and indirectly to varying degrees, with the largest impacts in the services sector. While these changes could increase energy intensity overall in these economies – as a higher share of output comes from energy-intensive industry than from less energy-intensive services –they reveal nothing about changes in energy efficiency in these economies.

Structural impact on economic sectors as a direct and indirect result of lockdowns in selected countries

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For the reasons above, and to maximise its relevance for policy makers given the current, unique circumstances, Energy Efficiency 2020 differs from previous editions in focusing more on current market trends with possible implications for energy efficiency.

To do so, it draws heavily on a range of frequently updated data from smart meters, smartphones and web searches, in addition to official energy statistics from governments.

This report does not provide quantitative projections of future energy demand, intensity or technical efficiency. For scenario modelling of the pandemic’s possible impacts on energy demand and efficiency over the next 10 years, readers are directed to the World Energy Outlook 2020.

Economic crises can increase energy intensity

Although energy intensity may not be a reliable indicator of energy efficiency progress during the current crisis, historical energy intensity data, in concert with historical economic data, are useful in projecting trends in the years immediately following the crisis.

Historical GDP and energy intensity data suggest that large falls in GDP, like those occurring in 2020, tend to be followed by falls in the future energy intensity improvement rate. For example, global GDP in 2006 and 2007 was increasing at over 5% per annum, fell to 3% in 2008 then to zero in 2009. Energy intensity data show corresponding falls in energy intensity improvements not only in 2008 and 2009, but also in 2010, when global GDP growth returned to pre-crisis levels of around 5%. This lag between falls in GDP and changes in energy intensity improvements suggests that economic recessions can push down energy intensity beyond the immediate period of the economic downturn. 

GDP relationship with energy intensity improvements, 2000-2020

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One reason for the longer-lasting impact of recessions on energy intensity is that investment in technical efficiency improvements, as with investment in general, tends to slow in recessions, as business and household incomes become more uncertain. In 2020, the IEA estimates energy efficiency investment is likely to fall by around 9%, suggesting the slow rate of energy intensity improvement will continue into 2021. Lower energy prices during recessions (due to lower demand) compound this effect by making energy efficiency investments a lower priority, as energy comprises a lower share of household and business costs.

A weaker economy also lowers government tax revenues, which may prompt changes in government spending priorities, reducing public funding available for energy efficiency programmes. 

Unless governments intervene to support energy efficiency improvements, therefore, the adverse impacts of the current recession on global energy intensity could linger, at least during the 12-month period after the economy bounces back.

Data gathered by the end of the third quarter of 2020 and presented below suggest that while the impacts on technical efficiency have been relatively minor in the short term, a deepening recession may jeopardise technical efficiency improvements in coming years. In addition, although governments in some parts of the world appear to be recognising the need for energy efficiency measures by including them in stimulus spending, in other parts of the world, energy efficiency has yet to be prioritised. 

This crisis presents an opportunity to shift to a more efficient energy system, with multiple benefits

Although economic crises can hinder energy intensity progress, there are several reasons why this crisis presents an opportunity for accelerating the shift to a more efficient energy system.

First, unlike past recessions, the current one is the result of a health crisis that is forcing changes to workplaces and travel patterns. It is too early to predict the permanence of such changes; if efforts to manage the pandemic are successful, behaviour may quickly revert to pre-crisis patterns, or become even more energy-intensive. However, some responses to the crisis – such as public investment in active transport infrastructure in cities – could reinforce behaviour that is more energy efficient, leading to permanent change.

Second, this crisis is occurring against a backdrop of huge changes to the energy system that provide opportunities to boost efficiency. The electrification of the energy system is continuing, and large- and small-scale renewable energy is growing rapidly. Solar power, in particular, has remained resilient during the pandemic and is set to increase its share of power under all IEA scenarios.

A greater share of variable renewables connected to grids requires new technologies, policies and regulatory approaches to manage electricity security and minimise overall investment requirements. In this context, the demand side of energy systems is becoming increasingly important, in terms of overall efficiency and as a provider of demand flexibility. Efficient end-use technologies lower overall system size requirements and hence grid investment needs. Efficient technologies that modulate energy use depending on when renewables are available are becoming more widespread, offering the possibility of improving both end-use and system efficiency.

Third, investing in energy efficiency offers a wide range of benefits, including reducing greenhouse gas emissions and improving air quality. These benefits are particularly relevant given increasing evidence linking air quality and health, including evidence from the current crisis. Efficiency also delivers socio-economic benefits that directly contribute to economic recovery, such as job creation and industrial productivity, as outlined in the IEA Sustainable Recovery Plan. Energy-efficient economies are not only more productive but also more resilient in times of crisis. For example, energy-efficient social housing can help cap energy costs for the most vulnerable, while also reducing costs for public health budgets. 

References
  1. In this report, energy intensity is said to “improve” when less energy is needed for a given activity. An energy intensity improvement is expressed as a positive number, while a worsening of energy intensity is expressed as a negative number.

  2. Primary energy intensity is useful as a high-level indicator of global energy efficiency progress, reflecting how efficiently the world uses energy for economic growth. However, it is not appropriate for tracking demand-side or sectoral energy efficiency because it includes changes to the energy supply mix. It also includes the impact of structural changes in the economy (for example, shifts to more or less energy-intensive industries) so is not able to measure improvements in technical energy efficiency. Therefore, it is important to examine other metrics to assess energy efficiency progress, including metrics involving final energy demand. See Energy Efficiency Indicators: Fundamentals on Statistics.