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 4.1 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. 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 2015.2

Indices of average residential retail energy prices in OECD countries

Improving efficiency within the energy supply sector can help energy providers deliver better service for their customers while reducing their own operating costs, improving profit margins and mitigating risk. Utilities that encourage energy efficiency amongst their customers can generate significant cost savings for themselves through avoided infrastructural investment in energy generation and transmission and distribution infrastructure through delaying or deferring costly system upgrades. Other benefits include improved system reliability and dampened price volatility in wholesale markets. Providers can also benefit indirectly through benefits that accrue for customers from improved affordability of energy services, which in turn can reduce arrears and associated administrative costs for utilities.

To maximise the benefits of energy efficiency, utilities can adopt programmes that reduce energy consumption and target load reduction and load shifting and can include the provision of advice to customers on relevant energy efficiency measures or assistance with accessing financial incentives. Other initiatives could include the bulk procurement and/or the distribution and installation of energy efficiency products. Encouraging the use of information and communication technology (ICT) tools on the end-user side can support the shift towards more efficient use of energy for both energy providers and their customers, enabling consumers to more actively control their energy use and energy providers to better monitor, aggregate and control end-use loads.