More efficient and flexible buildings are key to clean energy transitions

People spend the vast majority of their time in buildings, from houses to offices, stores and schools. And while these buildings serve different purposes, they all have at least one thing in common: To keep the lights on, run heating and cooling systems, and use appliances and equipment, they require substantial amounts of energy. Buildings today account for about 30% of final energy consumption globally and more than half of final electricity demand.

The sector is growing rapidly, especially in developing economies. Expanding electricity access and rising incomes mean that more people are buying appliances such as air conditioners – and as temperatures rise, they’re running them more often. However, with a greater focus on well-tested energy efficiency policies, energy consumption from the sector could be significantly reduced, all while maintaining – or even improving – the quality of energy services delivered. This would not only lower the building sector’s emissions, but also save money for energy consumers.

Leveraging technologies that allow buildings to use energy more flexibly throughout the day could unlock even greater benefits. When buildings and grids can communicate with each other, stress during peak times can be mitigated and peaks in energy demand can be smoothed out. As global floor area booms, prioritising both efficiency and flexibility is crucial to the security and sustainability of the world’s energy system.

Buildings are consuming more energy as economic activity increases and electrification expands, with more heat pumps running in homes and electric vehicles charging in garages. Between 2015 and 2022, residential heat pump sales tripled, and in 2023, electric cars accounted for one in five vehicle sales globally. Currently, most of electric vehicle charging takes place at residences and workplaces.

Adoption of these technologies is crucial to achieve net zero emissions from the energy sector by 2050 and limit global warming to the Paris Agreement target of 1.5 °C, however, it is also driving up electricity demand. Under the IEA’s Stated Policies Scenario, which is based on today's policy settings, peak electricity demand in buildings increases in all regions of the world in the coming decades. In China, it doubles by mid-century, while in the European Union, it increases by two‑thirds.

The rise is even more pronounced in countries with significant and expanding space cooling needs. By 2050, ownership of air conditioners in India is estimated to increase tenfold, leading to a sixfold jump in peak electricity demand in buildings. This increase could be cut in half with widespread adoption of more efficient building designs and tougher minimum energy performance standards for appliances, as envisioned by the IEA's Announced Pledges Scenario, which sees countries meeting national energy and climate targets in full and on time. In India, for example, these measures are projected to more than halve the contribution to peak demand from cooling and related stress on electricity networks.

At the same time, the deployment of wind and solar PV is accelerating globally as countries look to boost energy security and decarbonise their energy systems, making electricity supply much more weather-dependent. System-level surpluses and periods of lower generation are set to become more frequent due to daily and seasonal variations in renewable energy generation. Greater flexibility will be essential to manage these fluctuations.

Taken together, these developments will require major shifts in the way power systems are operated. For energy systems to function smoothly and efficiently, total energy demand from buildings will need to be reduced, while mechanisms for adjusting electricity demand throughout a day or season will become necessary to better match renewable generation patterns.

Buildings themselves can also be part of the solution. They can host various distributed energy resources, such as on-site renewable energy generation and storage, smart charging for electric cars, and other connected devices. And they can use energy flexibly if they are enabled to receive signals from the grid and can adjust their energy demand accordingly.

To realise this potential, buildings need to become both more efficient and more interactive with the grid. Energy efficiency should come first, reducing overall energy demand through high-performing building envelopes and efficient equipment. Next, buildings can be equipped with solar PV systems to produce renewable electricity and energy storage so they can retain excess supply until it is needed. Then, to facilitate interaction with grids, smart sensors, controls, intelligent analytics and other digital solutions can be integrated with building energy management systems or directly with the equipment.

Consumers stand to benefit from greater flexibility. By taking advantage of time-of-use electricity tariffs, for example, they can shift energy use to off-peak times when electricity is cheaper – flexibly operating electric vehicle chargers, water heaters and other appliances in line with the needs of the grid and price signals. As greater volumes of solar PV are incorporated into the grid, this might mean using more power during daytime hours. Such demand response measures can reduce household electricity bills by 7% to 12% by 2050 in advanced economies, and by almost 20% in emerging market and developing economies, according to IEA analysis.

Interoperability is key to ensure that grids and buildings can communicate with each other effectively. To support this dialogue, appliances can be equipped with special devices that can respond automatically to signals from the grid. By 2030, the number of smart meters and other connected devices with automated controls and sensors in buildings is estimated to almost double from current levels.

There are signs these technologies are starting to become more widespread. The United Kingdom has developed standards for smart communications interfaces for appliances that can receive instructions related to energy use from other connected devices across networks. Australia has introduced a demand response enabling device, an interface for adjusting the energy usage of appliances based on signals from the grid.

Special certifications, like the EcoPort mark, indicate that a certified device is equipped with a dedicated control module capable of communicating with the grid. The US states of Washington, Oregon and Colorado now require new electric water heaters to be equipped with such an interface so they can participate in demand response programmes initiated by utilities. Australia and New Zealand, meanwhile, now mandate that energy labels for certain types of air conditioners include information on their demand response capability.

At the building level, energy management and automation systems can also provide supervisory control of smart appliances, smart chargers for electric vehicles, on-site solar electricity generation and storage. Open communication protocols – or universally accessible rules and standards that govern how different devices and systems exchange information – can help establish interoperability and automated control, helping to manage the voltage and quality fluctuations that can be triggered by the integration of distributed energy resources.

Greater interaction between buildings and grids could result in meaningful reductions in energy demand, carbon dioxide (CO₂) emissions and power system costs. In the United States, a government analysis found that widely adopting efficient, grid-interactive buildings nationally could cut energy demand by 116 gigawatts (GW) during peak hours – equivalent to the output of more than 200 large power plants. It would also reduce CO₂ emissions by 80 million tonnes per year by 2030 and save power systems between USD 100 billion and USD 200 billion over the next two decades.

While countries around the world are exploring opportunities to bolster interactions between buildings and grids, progress so far has been limited on the whole to relatively small-scale projects and programmes.

A demonstration project in an apartment block in Scotland in 2020 and 2021 harnessed flexibility to deliver CO₂ emissions reductions by interrupting space heating across participating households for five- to 10-minute intervals. Participants did not report any impact to their thermal comfort. In a smart neighbourhood in the US state of Alabama, a local microgrid communicates with heating and air conditioning systems in efficient homes to determine the optimised way to use, generate and store solar-generated electricity. The combination of greater efficiency and this flexibility has resulted in energy savings of 35% to 45% compared with similar homes that do not have this capacity.

There are also opportunities for grid operators to communicate not only with individual devices, but also with smart aggregators such as virtual power plants, which can enhance grid stability by dynamically balancing electricity supply and demand, while also leveraging a diverse mix of distributed energy resources to mitigate fluctuations and optimise grid operations in real-time. A number of virtual power plants are already in operation, with several in Southeast Asia (including in Malaysia, the Philippines, Singapore, Thailand and Viet Nam).

Furthermore, new buildings can be designed in ways that prepare them to interact more closely with grids in future. Building regulations could include mandatory requirements for sufficient space and adequate pre-wiring to accommodate installations of heat pumps, electric vehicle charging stations, solar PV systems and battery storage, such as in California’s 2022 Energy Code.

Unlocking efficiency and flexibility in buildings to support the energy systems of the future is not an easy task. Effectively developing and implementing the right packages of policies is crucial – and incorporating energy efficiency requirements, flexibility considerations and demand-response features into building and appliance regulations is key to fostering the adoption of efficient, grid-interactive buildings.

It is also essential to enact policy provisions that support the integration of smart sensors and controls into building energy management and automation systems. Requiring manufacturers to enable appliances to participate in demand response, like in Washington State, or mandating that equipment installed in new buildings use open communication protocols, such as in California, are just two examples.

To support this process, the IEA has developed an analytical framework to assess a country’s building sector and provide recommendations to accelerate the adoption of policy- and technology-related solutions for efficient grid-interactive buildings. The IEA’s initiative on Digital Demand-Driven Electricity Networks (3DEN) also provides policy advice on how digital tools can support power system decarbonisation and modernisation. 

The 3DEN report Unlocking Smart Grid Opportunities in Emerging Markets and Developing Economies offers guidance for energy policy makers on ways to enable and drive investments in smart and resilient electricity grids. And an upcoming report, Managing the Seasonal Variability of Electricity Demand and Supply, will offer tools and strategies for managing both demand- and supply-side variability, taking into account weather-related impacts on system operations and flexibility needs.