Evaluating the avoided generation costs of energy efficiency resources

Energy efficiency policies are traditionally evaluated based on lifetime energy savings and initial costs, often overlooking the broader benefits. This study evaluates the avoided costs of energy efficiency from a long-term system perspective to ensure a more accurate assessment of end-use electricity savings. Utilizing LEAP (Low Emissions Analysis Platform), a scenario-based energy system modeling tool, and aligning with South Korea’s 11th Basic Plan for Electricity Supply and Demand (2024 2038), we apply a 12-month, 24-hour time resolution to capture the critical impacts of peak loads and the increasing penetration of renewable energy. We construct two counterfactual scenarios where demand-side management does not take place; additional electricity demand is supplied through either solar PV or gas generation. Our findings reveal that when demand-side targets are met, the average annual generation cost in 2038 is 124.8 KRW/kWh. The average avoided cost in 2038 is 148.5 KRW/kWh and 180.8 KRW/kWh for the two counterfactuals. Analysis shows that with increasing penetration of renewables, the range of hourly avoided costs increases. Energy savings can offset expensive marginal generation costs during peak hours and avoid the costs of building new capacity needed to meet increasing demand. These results demonstrate that the economic value of efficiency resources should be evaluated based on hourly avoided generation costs. Furthermore, the rising share of renewables shifts the hours with the highest avoided cost, making granular hourly estimates essential for capturing the true value of efficiency resources in sustainable power system planning.