What is demand restraint?

Traditionally, energy demand restraint has been realised through a range of regulatory measures and interventions to reduce energy demand in the short term to help manage energy system imbalances.

Utilities typically deploy demand restraint measures along with supply-side measures to help address unanticipated and pervasive imbalances in energy production and consumption caused by chronic supply shortages or emergency events. Demand restraint has also been deployed in regulated energy systems to help manage daily, weekly and seasonal periods of peak consumption that create tight supply-demand conditions that could threaten energy system security.

Key methods for harnessing energy demand restraint include:

  • Peak shaving, which seeks to reduce power demand during emergency events or peak consumption periods within a day, over a week or across seasons, depending on the nature and duration of the event.
  • Load shifting, which involves taking pressure off energy systems by moving a portion of load to an off‑peak period of the day, week or season.
  • Conservation and energy efficiency, which aims to reduce the overall level of energy consumption on a permanent basis over time.

Demand restraint measures have proven effective in helping to raise the operational flexibility and resilience of energy systems in response to emergency events or short periods of tight supply-demand balances.

Opportunities exist to apply the principles and practices of demand restraint in a broader policy context to help achieve strategic energy policy goals. In Ukraine, for example, the notion of energy demand restraint could be expanded to include policies to reduce energy imports by diversifying energy consumption away from energy imports and towards domestic energy sources.

Combining traditional forms of demand restraint and import diversification would encourage a more integrated and holistic approach to demand restraint policy in Ukraine, incorporating the entire energy value chain. This would increase the coverage and effectiveness of demand restraint policies to
improve energy sector flexibility and resilience while also making their contribution to energy security broader and deeper.

A policy-relevant definition of energy demand restraint

For the purposes of this project, energy demand restraint includes policies and practices to increase energy efficiency, reduce energy imports and improve operational flexibility and resilience throughout Ukraine’s energy sector, particularly in the short term. 

Why pursue demand restraint?

International experience suggests that implementing a comprehensive demand restraint policy can deliver a range of potential benefits, including:

  • Energy security. Demand restraint can substantially improve energy system flexibility and resilience, with the potential to greatly increase overall energy sector reliability and energy security at least cost. At the same time, ongoing energy savings resulting from demand restraint can reduce reliance on energy imports, helping to minimise exposure to external energy security supply risks.1 Demand restraint measures that support switching consumption from imports to domestic energy sources can strengthen energy security by further reducing reliance on energy imports.
  • Better economic performance. Energy savings associated with ongoing demand restraint generally have positive macroeconomic effects, including greater economic activity, productivity and employment. Other indirect benefits may also accrue from lower energy expenditures. For instance, when energy efficiency improvements reduce energy demand and costs, the increased disposable income for individuals and the higher profits for businesses can be used to boost consumption, fund investments and reduce output prices, together driving additional economic growth. Lower energy costs also improve competitiveness, especially for energy‑intensive export industries.2
  • Environmental sustainability. More efficient energy consumption can help reduce waste, improve energy resource management and reduce carbon emissions, which together can substantially improve environmental sustainability and provide strong support for the decarbonisation transition.3
  • Community wellbeing. Demand restraint leads to lower energy consumption, which can result in lower energy costs and higher household disposable income. At the same time, cleaner and more efficient energy use can deliver benefits such as better air quality, which can improve health and wellbeing.4 

Not only could implementing an energy demand restraint programme greatly improve the flexibility and resilience of Ukraine’s energy sector, it could also reduce its energy imports, exert downward pressure on energy prices and offer a range of socioeconomic and environmental benefits.

What are the key challenges for delivering demand restraint?

Stakeholders identified several potential barriers during the course of consultations:5

  • The financial incentives created by the combination of regulated prices set below production costs and cross-subsidies are insufficient to encourage demand restraint.
  • Low awareness of energy-saving opportunities and benefits can limit support for demand restraint among some stakeholders and consumers.
  • Access to accurate, timely and comprehensive data to inform demand restraint decision-making and effective policy development, implementation and evaluation is limited.
  • Existing infrastructure imposes restrictions: its fragility reduces service reliability; bottlenecks restrict service access; incomplete metering and end-user control weakens potential demand responsiveness; while the nature of existing infrastructure may limit the deployment of innovative technologies to improve demand restraint.
  • High upfront costs, extended payback periods due to price distortions, and underdeveloped supply chains limit access to key demand restraint technologies.
  • Access to affordable financing is constrained by perceptions of risk and uncertainty among potential financiers, regulatory and market distortions, and the limited capacity of some energy consumers to fund and pay.
  • Regulatory uncertainty and risks reflecting a lack of transparency in administrative and regulatory decision-making; inadequate resourcing; inadequate monitoring, verification and enforcement; insufficient institutional capacity and knowledge; and a lack of predictability and accountability in administration and decision-making, exacerbated by frequent changes to institutional and governance arrangements.

Most of these challenges are not unique to Ukraine. International experience suggests that the combination of these barriers can create considerable risk and uncertainty from a financing perspective, which is often reflected in reluctance on the part of lenders to finance energy-saving activities. This reticence can substantially reduce access to financing and raise the cost of borrowing considerably, potentially delaying and deferring timely, cost-effective actions to reduce energy consumption.

Significant transaction costs are incurred to overcome these barriers, either through direct payments or indirectly through time spent gathering information. When these costs are included, the payback period for energy-saving measures can increase to the point where options that would otherwise be cost-effective become unattractive. Transaction costs for households are typically higher than for industry, reflecting the additional costs they incur to acquire relevant information. Such costs can be another important obstacle to behavioural changes that favour energy-saving and demand restraint.

What are the key enablers of demand restraint?

An integrated and comprehensive policy response incorporating a portfolio of measures tailored to specific development and deployment challenges will be needed to overcome barriers and constraints. International experience suggests several key principles to develop and implement effective policy responses to advance demand restraint and energy-saving.6

Energy performance needs to be made visible so that all decision makers can make well-informed decisions relating to energy-saving and purchasing options. This will require greater transparency, based on easy access to comprehensive, reliable, accurate and timely information presented in a way that facilitates comparison of various energy products and services.

Economic measures to overcome financial, commercial and investment barriers to demand restraint may be required, at least initially, to improve affordability and help kick-start deployment. For instance, the options proven to address financing‑access challenges include utility‑operated or funded energy efficiency finance schemes, typically tied to demand-side management or utility energy efficiency obligations; pay‑as‑you‑save schemes; supportive frameworks for the energy services industry; soft loans; grants; and loan guarantees.

Perceptions of financial risk can also be addressed through measures to lower the risk premiums applied to lending for energy efficiency projects. These may include risk guarantees; credit lines; mechanisms to standardise and bundle energy efficiency projects; and awareness- and capacity-building efforts among the finance community.

Price distortions associated with cross-subsidies in the energy sector are a key barrier to efficient and timely demand restraint deployment. Removing energy subsidies would not only encourage more efficient energy use but can also improve the viability of energy businesses and reduce energy security risks.

Deployment costs and risks can be further reduced once the benefits from lessons learnt and economies of scale begin to drive widespread adoption. Policies can provide a crucial catalyst for this process: for instance, policies mandating minimum energy performance standards for equipment, vehicles, buildings and power plants have proven particularly effective. In some cases, regulatory mandates have also required industry to develop, implement, monitor and report on effective energy-saving programmes.

All these measures need to be underpinned by effective monitoring, verification and enforcement. Verification builds confidence in policy performance and outcomes, while enforcement is necessary to secure compliance. Monitoring provides a foundation for evaluation, which is essential to ensure the ongoing relevance and effectiveness of demand restraint and energy-saving programmes.

Implementation also needs to be supported by a skilled body of government and industry practitioners. Capacity-building may be required for a range of issues: policy development and implementation; product and service development; supervision and regulation, especially in relation to monitoring, verification and enforcement; the fostering of innovative business models; and the implementation of quality assurance.

A supportive policy, legal, regulatory, institutional and economic environment is necessary to realise the benefits of demand restraint and energy-saving. Any significant gaps or limitations in these foundational arrangements could fundamentally restrict the nature and scope of the demand restraint policies that can be implemented. Key governance and structural enablers to successfully develop and deliver demand restraint policies and programmes include:

  • An effective policy framework that establishes the goals, priorities and incentives to address the various challenges of promoting demand restraint. Policies need to set clear objectives; address key challenges in an integrated, holistic way; and be flexible enough to adapt to rapid technological development, market innovation and changing community expectations. Demand restraint policy implementation in Ukraine is likely to face a range of evolving risks and challenges that will require ongoing flexibility and adaptability to resolve. International experience suggests that the most effective way to respond is to adopt an incremental and evolving approach to policy development and implementation, reflecting the principles of continual improvement.
  • Legal arrangements that establish a framework of laws, regulations and rules that help create appropriate behavioural incentives and penalties to promote demand restraint. Ideally, the legal regime should clearly identify the rights, responsibilities and accountabilities of the various parties involved in delivering demand restraint policies and programmes, and it should provide a means to codify those responsibilities and accountabilities. Legal regimes should also clearly delineate the nature and scope of each stakeholder’s authority. Furthermore, they need to provide an effective monitoring, verification and enforcement mechanism, especially when other incentives for appropriate action may be relatively weak.
  • Regulatory arrangements that provide clarity and predictability through consistent interpretation and application of policy and legislation, consistent with achieving the government’s demand restraint goals. Ideally, regulatory decision-making should be independent, transparent, objective and consistent to ensure effective monitoring, verification and enforcement of demand restraint and energy-saving activities, building credibility and confidence in the regulatory framework among stakeholders and the community.
  • Institutional arrangements that reinforce and complement legal and regulatory provisions by lending a high degree of certainty to the roles and functions of policy institutions, regulators and stakeholders in relation to demand restraint policy development and implementation. Responsibility and accountability for policy development and implementation must be aligned with each institution’s roles and functions so that the institution best suited to undertake a particular function has clear responsibility to do so and is transparently held accountable for delivery. Institutions need to possess the appropriate policy and legal authority, resources, coverage and enforcement capacity for timely and effective administration of their duties.
  • Well-functioning energy markets that respond to cost-reflective prices in a way that delivers more efficient energy consumption and offers opportunities for innovative arrangements to harness demand restraint. Effective markets can especially help harness the power of independent, decentralised decision-making to stimulate experimentation, learning, innovation and the timely development and deployment of initiatives to harness demand restraint at least cost. Furthermore, well-functioning markets provide clear, cost-reflective price signals for efficient energy investment, operation and end use, which are essential to promote ongoing demand restraint and more efficient energy consumption.
  1. The IEA reports that energy savings resulting from improved energy efficiency reduced the energy imports of major energy-consuming countries by over 11 EJ between 2000 and 2017 ­– a reduction of around 20% over the period. Similarly, the IEA reports gas import reductions of 11% in Germany and 29% in the United Kingdom between 2000 and 2015 owing to energy efficiency-related savings. See IEA (2019a), pp. 1-3 for details. 

  2. See IEA (2019a) and IEA (2014) for further discussion of the economic benefits associated with energy efficiency and saving.

  3. According to the IEA, energy savings achieved since 2000 had effectively reduced carbon emissions by nearly 4 Gt CO2‑eq in 2017, equivalent to a 12% reduction in emissions in that year. The IEA projects that energy efficiency and energy savings could reduce energy-related emissions by up to 3.5 GT CO2-eq per year compared with 2017 levels, delivering up to 40% of the carbon abatement required to achieve the Paris Agreement goals. See IEA (2019a) and IEA (2018a) for further details.

  4. See IEA (2019a) and IEA (2014) for further discussion of the health, wellbeing, income and access benefits associated with energy efficiency.

  5. Consultations to support this project were undertaken during October-December 2020 with a range of stakeholders, including representatives of the Ukrainian government, Ukrainian energy industry, European Commission, international financial institutions and international donor organisations.

  6. See IEA (2018a), UNECE (2017) and IEA (2012a) for further discussion of policy enablers for demand restraint and energy-saving.