Saving energy: bringing down Europe's enery prices

Abstract

In June 2011 the European Commission proposed a new Directive on Energy Efficiency. Its purpose is to put forward a framework to deliver the EU’s target of reducing its energy consumption by 20% by 2020. Currently, the EU is only on track to achieve half of those savings. Apart from the environmental benefits -notably, reducing greenhouse gas emissions- energy savings have significant economic benefits for European economies: (1) they reduce the amount of money businesses and consumers need to spend on energy, (2) they have positive effects on employment and (3) they decrease dependency on fossil fuel imports. But the actual scale of the benefits is often underestimated. In this paper, we show that energy savings do not only bring direct cost savings; they also indirectly reduce energy prices. Real cost savings resulting from meeting the 20% savings target are likely to be considerably higher than figures commonly cited. In other words, consumers would use fewer units of energy, and the price of the units they do use would be lower than they would otherwise be. Energy savings can reduce energy prices in the following ways: 1. Decreasing fossil fuel prices: international fossil fuel markets are under pressure because there is little reserve production capacity. This means prices are very sensitive to changes in energy demand. Because energy savings in Europe and the spillover effects of this action in other world regions will reduce global demand, we expect significant reductions in future energy prices. 2. Decreasing electricity prices: cheaper fossil fuel prices will reduce electricity prices (because roughly 50% of the EU’s electricity is produced from fossil fuels). In addition, a lower demand will impact the fuel mix in electricity production: it will occur more often that lower-priced fuels determine the marginal costs.This will have an additional reduction effect on electricity prices. 3. Decreasing energy prices in the longer term: meeting the EU’s 20% by 2020 energy saving target is expected to save tens of billions of Euros per year due to avoided investments in energy infrastructure (power generation and transmission, fuel import and storage facilities). Since it is usual practice to pass on investment costs to energy consumers, a reduction in these investments will lead to an additional cost saving. On the basis of the evidence examined in this report, we estimate that the indirect impact on energy prices will be of the same order as the direct impact of the energy savings. Put simply, for every €1 of energy cost saving, an additional €1 could be saved due to lower energy prices.