Energy efficiency can enable higher disposable income by lowering energy bills and other costs to benefit individuals and households. Less energy consumed leads to lower energy bills, which means that households spend less of their disposable income on energy. In many countries, citizens have avoided hundreds of dollars on their bills due to energy efficiency improvements over the past few decades, with savings typically higher in countries with long established energy efficiency policies.

Household disposable income is the income after taxes, bill payments and social security contributions. Therefore, when consumers reduce energy use by making their cars and homes more energy efficient, they avoid additional spending on energy for gasoline, electricity, natural gas and other fuels, increasing disposal income. The ability for energy efficiency improvements to also reduce operation and maintenance costs can also benefit disposable income. For example, purchasing an LED lightbulb with a longer life means the lightbulb needs to be replaced less frequently and less resources go into the lifecycle of the bulb.

In 2017, household energy expenditure increased in several countries. In the United Kingdom (UK), for example, energy’s share of total expenditure increased from 4.9% in 2016 to 5.3% in 2017. The rise in expenditure would have been worse were it not for energy efficiency improvements. In 2017, the cumulative efficiency improvements made since 2000 saved UK households over USD 300 on average, around 20% of their yearly energy expenditure (Figure 1). German households saved an average of over USD 370 per household due to energy efficiency, primarily from reductions in gas use. Japanese households were on average USD 300 better off, with benefits attributable to energy savings made equally between car and home energy use. These savings meant that Japanese energy bills were 26% lower than they would have been without efficiency.

If the world was to implement the cost-effective energy efficiency opportunities available today, in 2040 households globally could save USD 201 billion in avoided expenditure on fuels such as electricity and gas, and USD 365 billion in avoided expenditure on transport fuels.

One of the most persistent challenges in energy efficiency policy is accounting for the phenomenon known as the “rebound effect” – where improved efficiency is used to access more goods and services rather than to achieve energy demand reductions.

The rebound effect is generally driven by one of three things:

• The take-back effect, where energy users increase their consumption of the energy-using service, rather than accepting the same service at a lower energy or financial cost.
• The spending effect, where energy users opt to spend their financial savings from reduced energy consumption in the purchase of other energy-consuming activities.
• The investment effect, where investment in energy efficiency goods and services, stimulated by a policy, lead to an indirect increase in economic activity and energy consumption.

Regarding disposable income, the rebound effect (in particular the spending effect portion) takes place due to higher disposable income available to spend on other energy-consuming activities. For example, if a family saves significantly on gas due to a more fuel efficient car, they may use those savings to take a long car trip. However, in cases where spending on energy increases access to vital energy services that improve households’ quality of life, some rebound in energy use is not necessarily negative. In addition, the extent to which rebound has negative impacts – such as increased GHG emissions – depends on other factors, such as the energy supply mix at the time.