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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Could We Actually See A Reversal In Energy Efficiency?

Energy efficiency has become the next victim of the coronavirus pandemic, with lockdowns and a recession limiting efficiency gains now and into the future as businesses reprioritize investments to cater to the economic crisis caused by the pandemic.

This is the main outtake from a new report by the International Energy Agency, Energy Efficiency 2020. In it, the authority lists the main challenges for energy efficiency in the context of the pandemic and warns that these need to be addressed. Otherwise, we could see a reversal in energy efficiency gains at the worst possible time—as governments strive to accomplish increasingly ambitious climate-related goals.

The emission cuts driver

How relevant is energy efficiency for the Paris Agreement goals? Well, more than many might think. According to the IEA, energy efficiency improvements will account for as much as 40 percent of energy-related greenhouse gas emissions over the next two decades. This becomes even more important in light of the fact that the rate at which energy efficiency has been improving since 2015 has been slowing down.

This is neither surprising nor in itself troubling. Every technology has a finite improvement horizon, and energy efficiency is no exception. The nearer the technology—or set of technologies as is the case of energy efficiency—gets to this horizon, the more progress slows down simply because there are fewer things left to improve on.

So, in 2018, energy efficiency gains amounted to just 1.5 percent on the previous year, and in 2019, they were 1.6 percent on 2018. This year, however, efficiency gains are seen at less than one percent because of the pandemic, although there will still be some gains. Yet these, according to the IEA, would be insufficient with regard to achieving the Paris Agreement targets.

Related: Large Oil Trader Trafigura Books Strongest Trading Year Ever

The challenges

Investments in energy efficiency have fallen. It’s as simple as that. As businesses in all industries have cut their investment plans for this year—and many for next, too—this has naturally affected the energy-efficiency part of these plans. Buildings, equipment, and cars will all be affected, the IEA said in its report.

In commercial property specifically, the authority also noted that the payback period for some energy efficiency investments will become longer as demand for this space slackens amid the pandemic, making such investments less attractive in the immediate future.

In cars, sales are falling because of the economic fallout of the pandemic, and this means people will continue driving older—meaning less energy-efficient—cars rather than buy new, more energy-efficient ones. On the flip side, EV sales are projected to rise to 3.2 percent this year from 2.5 percent in 2019, so that’s some good news there, too.

Technical efficiency gains such as smart meter installation have also stumbled because of movement restrictions that have limited access of contractors to the premises where they were supposed to install the meters. However, this was among the lesser problems of energy efficiency as it only resulted in delays rather than cancellations. Related: Pandemic Crushes U.S. Refining Capacity

Industries are likely to become more energy-intensive because of the pandemic, the IEA also warned, because of the drop in energy demand that has driven prices—especially oil and gas prices—down. While demand for these is yet to recover to pre-pandemic levels, the manufacturing sector in many key regions is rebounding and with cheap oil and gas manufacturing businesses have less motivation to invest in energy efficiency than they would have has primary energy prices been higher.

Adding energy efficiency to stimulus plans

The solution to the world’s apparent energy efficiency gains problem, according to the IEA, is to include more funds targeting these gains in government stimulus plans. As of October, the authority said, governments around the world had earmarked some $66 billion for energy efficiency-related projects. Of the total, $26 billion was allocated for energy efficiency in buildings, where the most jobs are created. Another $20 billion was allocated for making EVs more popular and desirable by drivers to stimulate more sales.

According to IEA calculations, these spending plans are good news for the jobless: between 2021 and 2023, these funds could create the equivalent of 1.8 million jobs. Most of these—80 percent—will be in Europe, more than 65 percent will be in energy efficiency for buildings, and 20 percent will be in transport.

But more needs to be done to reverse or at least arrest the slowdown in energy efficiency gains. Investments in making super-efficient appliances, for instance, are one way of doing this, as suggested by the IEA. More spending on energy efficiency in internal combustion engine vehicles is another. This is particularly important because a lot of oil demand over the last few decades has been lost precisely because of improvements in ICE efficiency.

By Irina Slav for Oilprice.com

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